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HomeMy WebLinkAboutRES 082625-5.D - Amending Risk Management Policy - CH.13.38RESOLUTION OF i OF i GEORGETOWN, TEXAS, ADOPTING AN UPDATED ENERGY RISK MANAGEMENT i 1 CERTAIN UPDATED ACCOMPANYING SUB -POLICIES, INCLUDINGM POLICY, POLICY, AND THE TRADING AUTHORITY POLICY UNDER CHAPTER 13.38 OF 1 OF ORDINANCES; ''CONFLICTING RESOLUTIONS;1 + SEVERABILITY DATE.ESTABLISHING AN EFFECTIVE WHEREAS, the City adopted Chapter 13.38 of the Code of Ordinances which provides that the City Council shall adopt and periodically review an electric risk management policy; and WHEREAS, WHEREAS, the City passed Resolution No121019- Y on December 10, 2019, adopting the Energy Risk Management Policy, Resolution No 011122- AB on January 11, 2022 updatingthe Energy Risk Management Policy, and Resolution N• on April 12, 2022 updating the Energy Risk Management Policy and the accompanying sub -policies, and the City passed Resolution No. 012324-5.H on January 24, 2024 updating the Energy Risk Management Policy . • the accompanying -policies • r the credit policy,and, the trading authority policy; and WHEREAS, the City has identified amendments to the Energy Risk Management to better manage and identifyenergy risk, and update roles and responsibilities of poll] mismism WHEREAS ' the City finds that amending the Energy Risk Management Policy and certain sub -policies ability # provide economic and reliable service to its SECTION- facts and recitations contained in the preamble of es i are hereby• #.. and declared i be true and correct and are incorporated iy reference herein and expressly made a part hereof, as if copied verbatim. SECTION i• policies are hereby updated and aft► "i the Energy Risk Management Policy attached hereto as Exhibit A, f the updated confidential sub-policies:the credit policy, the heding policy and the training authority policy. . SECTION . The Mayor is hereby authorized to sign this Resolution and the City Secretary to attest. Resolution No. 00 . Pagel of 2 Subject: Ae vnda �Risk Inagernent Poky - Ch.13.38 Date Apprtsrat»<� i ' TMLMOM I A T y. Robyn e more, City Secretary APPROVED O. 3 . Resolution No. Page 2 of 2 Subject: Amending Risk Mana ertr t l��A - Ch. 13.38 Date ppwwd `�"" ENERGY RISK MANAGEMENT POLICY 08/26/2025 1. Poli Pit* o The purpose of this document is to formalize the policies of Georgetown Electric Utility (Georgetown Electric) regarding managing its energy risks. Accordingly, this policy will set forth Georgetown Electric's: • risk management objectives, • risk governance structure and responsibilities, • scope of business activities governed by this policy, • the list of associated ERM guidelines and policy documents. W-FitrC7,971rim - SW=1 )MIRMT&CIII-017 IL 474 MSLIUL—OPW business plan, and will properly manage its energy risks through: • prudent oversight, • adequate mitigation of risks consistent with the City of Georgetown's defined risk tolerance, and • sufficient internal controls and procedures. Managing the energy risks of Georgetown Electric's business entails the coordination of resources and activities among multiple departments within the City of Georgetown. 2. AW��ILaUgjggj WkqhA Georgetown Electric exists primarily to provide competitive and stable priced, reliable electr service to its customers. Managing Georgetown Electric's energy risk is consistent with th goal, and serves the following objectives: I to maintain risk within desired tolerances for a defined period in the future, to mitigate price volatility to its customers, to participate in commodity markets and derivative instruments for hedging and not for speculative purposes, and to develop a risk management culture. 3. &WWKI— Risk governance will follow a top -down approach whereby the City Council identifies Georgetown Electric's risk management objectives and provides risk management oversight. Supporting controls, policies and procedures will be implemented and aligned throughout the risk governance structure, with distinct roles and responsibilities that result in a risk control environment. Governance and controls include the organizational structure, policies, procedures, and rep)orting, pprocesses th ort rcyofn—" Plot - - - e, and power supply objectives, and segregate responsibilities appropriately. • Has a basic understanding of energy risk management. • Approves Georgetown Electric's energy risk management objectives, and the General Manager's/City Manager's authority limits to conduct energy transactions. • Approves no less than annually a resolution of the energy portfolio goals and risk tolerance guidelines around such goals. These goals and risk tolerance guidelines shall be consistent with the City Council's desired risk management objectives, time horizons, and risk tolerance for managing energy risk. • Approves, periodically reviews, and make recommended changes to the Energy Risk Management Policy that establishes an overall framework for evaluation, management, and control of risk. Approves members of the Internal Risk Management Committee • Has an advanced understanding of energy risk management. • Oversees the energy risk management activities of Georgetown Electric. • Ensures the scope and frequency for management reporting to the City Council complies with applicable laws. Periodically reviews risk exposures and compliance with policies and procedures� Discusses Georgetown Electric's major energy risk exposures and the steps management has taken or will take to mitigate, control, and monitor such exposures. Periodically reviews the Energy Risk Management Policy and supporting Energy Risk Management Policies and recommends changes to the City Council for approval. Recommends members of the IRMC. Receives reports by the independent risk management function on Georgetown Electric's compliance with its risk policies. c. General Manager — Risk Management Responsibilities and Duties Recommends Georgetown Electric staff to serve as members of the IRMC. Has authority to transact within the limits set by the City Council in the Trading Authority Policy. Has authority to approve collateral threshold amounts, trading credit limits, and credit trading restrictions in accordance with the Credit Policy approved by City Council. Approves proper organization, separation, or consolidation of functional activities. Assures prudent administrative procedures are established for execution of commodity and derivative transactions, contract controls, credit controls, trading 4A controls, risk monitoring and measurement, settlement controls, and Other energy risk management activities. • Ensures that the identification and quantification of risks and related risk mitigation strategies are integrated into the strategic planning process. • Establishes and maintains an effective working relationship with Georgetown Electric's external consultants. d. I — Responsibilities and Duties Membership shall be comprised of the following voting committee members: 1. City Manager, or designee 2. Assistant City Manager, or designee 3. Chief Financial Officer 4. General Manager 5. Portfolio Management Team Membi The ChiefFinancial Officer shall serve as the IRMC Chairperson. The Chairperson shall be responsible for keeping, or causing to be kept, a true and complete record of the proceedings. Other non -voting participants shall participate in the meetings as determined by the voting committee members. The IRMC establishes a forum for discussion of Georgetown Electric's significant ris and must develop guidelines required to implement an appropriate risk management s it c*wtr*I iwfi-astivct-,�rc; Phis iAclYIcs ibVIeimeatati*A aial m_*ait*ring,*,f c*iii'iliance f Georgetown Electric's energy risk management related policies. The IRMC execut 11 es i risk management responsibilities through direct oversight and prudent delegation of responsibilities to the independent risk management function, as well as to other company personnel. Responsibilities of the IRMC include: • Reviews the energy risk management related policies and oversees enforcement by the independent risk function. • Ensures that risk management objectives, risk tolerance guidelines, and authori limits are employed throughout Georgetown Electric. • Receives reports by the independent risk management function concerning Georgetown Electric's compliance with its risk policies, controls, and procedure. • Recommends to the General Manager the proper organizational structure, separation or consolidation of functional risk management activities. • Reviews and approves proposed risk management strategies for strategic fit, ris exposure consistent with risk tolerance, and reporting and control requirements The IRMC shall ensure that approved strategies are consistent with applicable laws and Georgetown Electric's approved strategic business plan, risk management objectives, approved risk tolerance guidelines, and compliance wit risk policies. • Periodically reviews Georgetown Electric's risk management program (a detaile review at least once a year) in light of recent changes in business practices, improved procedures, Georgetown Electric's philosophy and strategy, or markel changes; ensures continued compliance with its established guidelines. NJ Formulates risk management strategy, policy or procedures necessary for new product or market implementation. Requires and reviews regular risk reports provided by the independent risk function. Periodically engages an independent audit (internal and/or external) of risk control policies and procedures. • Holds formal monthly IRMC meetings. • For market transactions executed within Georgetown Electric, performs a revie of transaction compliance with policies and procedures. • Reviews the infrastructure supporting risk management and ensures that it mee the requirements for risk oversight and compliance. • Reviews compensation policies to ensure that they are structured so as to avoid incentives for excessive risk taking. • Reviews and approves any deviations to the Peak Load Hedge targets as authorized in the Energy Hedging Policy. e. Portfolio Management Team — Responsibilities and Duties This function shall be resl�& onsible for managing Georgetown Electric's energy Li-ortfolio. ft-esponsibilities include: • Long-term resource planning • Execution of hedging strategies in compliance with the Hedging Policy Day-to-day execution and management of transactions Settlement of energy transactions with Georgetown Electric's counterparties Power Budgeting/Portfolio Modeling and hedge strategy recommendations Quarterly Portfolio Modeling and Strategy Oversight of the activities of the External gREnergy Manager/Agent QSE and thl Enery isk Manageppor ment Sut Services Provider Reports regularly to the IRMC, at a minimum, but not limited to: • Portfolio model risk measures (1-60 months) • Power cost projections, cost ranges and percentiles E City Attorney or designee — Responsibilities and Duties This function shall be resi%onsible for - exoviding leval services to Georgetown Electric, including collaborating with the General Manager to negotiate and approve master enabling agreements with energy counterparties and approving long -form confirmation letters. g. Independent Risk Management Function — Responsibilities and Duties This function shall be the responsibility of the Chief Financial Officer, who is in managing most of the energy risks of Georgetown Electric. Various departments will be required to provide this function with reports or information required for risk assessment and analysis on a regular or periodic basis. Responsibilities include: 1 • Performs responsibilities delegated by the C. • Organizes and conducts the I meetings. • Engages the I in discussions regarding events or developments that could expose Georgetown Electric to potential losses. • Develops, recommends, and administers risk management processes and procedures. • Provides input to tools to assist in risk management. • Provides risk management education/training to City Council, the GTE, management, and staff. • Reviews risk management activities and risk controls and recommends modifications of controls to meet changing business needs. • Reviews adequacy and accuracy of reports and reports any deficiencies to the IRMC. • Assesses risks to Georgetown Electric in aggregate, by department, and by material business activity. • Monitors master agreements for compliance with Georgetown Electric's trading activities • Ensures compliance with Dodd -Frank recordkeeping requirements. • Monitors compliance with and reports any violation of Georgetown Electric's risk policies. • Reviews and recommends changes to the risk management policies and procedures, as appropriate. • Reports regularly to the I on numerous topics, including, but not limited to: • Credit and contract risk exposures • Other Key Performance Indicators that support effective energy risk management • Policy and procedural violations • Reviews and evaluates proposed risk management transactions to be executed by Georgetown Electric, and ensures adequate analysis has been performed with proper assessment and mitigation of any such risk consistent with risk management objectives and risk tolerance guidelines, and compliance with risk management policies. • Oversees the activities of the Energy Risk Management Support Services Provider h. Energy Risk Management Support Services Provider— Roles and Responsibilities Georgetown Electric uses a consultant to provide the following risk management support services, in accordance with the agreement between Georgetown Electric and the provider: Ongoing Credit Services — includes minimal Trading Control services (transaction captur mark -to -market) and Contract Administration. I Credit/Collateral Review and Recommendation Services Annual Review of Energy Risk Management Policies Trading Authority Policy Monitoring Services Compliance Reporting Services Dodd Frank Record Keeping Services Forward Curves R • Transaction Evaluation Servic • Ad hoc Consulting �' I i. External Energy Manager/Agent QSE —Roles and Responsibilities Georgetown Electric uses a consultant to provide Energy ,• •` QSE services, in accordance with the agreement between Georgetown Electric and the provider. Per the agreement, the Energy Manager/Agent QSE is authorized to and shall: - Participate in the day -ahead and real-time ERCOT market on behalf of Georgetown Electric. j. Energy Portfolio Management Support Services — Roles and Responsibilitie Georgetown Electric uses a consultant to provide the following energy portfolio m.z-x?ge_'Kext sewices, ix 2o:-+4z_kce wiVA tke ?greextext-'tetweex--Cjet-rgett!!!!WI Electric and the provider: • Energy Portfolio Management Services • Ongoing Portfolio Congestion and Curtailment Risk Management Servic • Regulatory Support and Representation in ERCOT Stakeholder Processes • Settlement and Invoice Verification Support, as needed • Subject Matter Expertise for Contract and Legal Disputes • Ongoing Power Marketing, Trading and Operations Management Service • Ad hoc Consulting Services I 4. with Georgetown Electric, including but not limited to: • Commercial operational risk • Commodity market price risk • Concentration risk • Counterparty contract and credit risk • Delivery risk • Liquidity risk • Operations risk • Regulatory risk • Volumetric risk 5. Associated ERM Guidelines and Policies Supporting guidelines and policies are required as outlined below. The City Council shall be responsible for approving these policies. * Trading Authority Policy * Trading Sanctions Policy * Hedging Policy * Credit Policy * Appendix A - Energy Risk Identification and Exposure Management Guidelines N RMPFFF"M GEORGETOWN ELECTRIC UTILITY APPENDIX A of the ENERGY RISK MANAGEMENT POLICY 1. Identification of EneM &s_ks The energy portfolio of Georgetown Electric is naturally exposed to the following primary energy risks: 1. Commercial operational risk • Inadequate controls and procedures • Errors and fraud 2. Commodity market price risk • Power • Natural Gas • Renewable Energy Credits 3. Concentration risk (or lack of diversity) • Suppliers • Customers 4. Counterparty Contract and Credit risk • Inadequate contractual language • Supplier bankruptcy (mark to market risk) • Large industrial bankruptcy 5. Delivery risk o Transmission risk (aka congestion) 6. Liquidity risk 7. Operations risk o Transmission outages 8. Regulatory risk 9. Volumetric risk • Load forecast/ weather variability risk • Loss of load • Load growth 10. Temporal risk • Hedged/contracted hourly volumes of power compared to hourly demand • Forecasted daily and seasonal demand compared to actual demand MAMI MiffillnstMeTort, -me �� =� 11 � I I!V! 111.11111110111111-1113 !!V 1111 ��MEM= most conditions. ij�f � � . r tiffers from others engaged in the energy markets. 2. Definition of Risks people, and systems. FA Fart MUM I underlying energy commodity. In the wholesale power market, Georgetown Electric has risk that commodity prices rise, spike, or are generally high when it is short of meeting its firm supply obligations. Georgetown Electric has risk that prices fall or are generally low when it is obligations. Commodity market price risk occurs across all tenors, from the hourly market to the long-te forward market (5 years +). Georgetown Electric is exposed to commodity price risk for powle natural gas, and renewable energy credits. Concentration risk is the risk of having large exposures to significant power supply components. Concentration risk can be found with suppliers (contract and credit risk), and native load customers, primarily with large commercial and industrial customers. and the demand location. If Georgetown Electric needs to buy electricity and the transmission system is congested all. If Georgetown Electric has excess electricity to sell and the transmission system is congested- then it may, not be able to sell the excess or may have to sell at a discounted grice to a non -congested area. Congestion risk typically manifests itself in power commodity market price risk. of a counterparty's ability to operationally perform on an agreement or due to contractual provisions that leave Georgetown Electric with no recourse under an event of default. transmission constraint. Delivery risk is natural to Georgetown Electric in meeting its firm supply obligations and reliability of service. Liquidity risk is the risk associated with inadequate cash flow resulting from margin requirements of a contractual agreement. For example, the EEI Master Agreement provides th counterparties may margin each other when they are overexposed above credit thresholds thal were negotiated between the parties when the agreement was executed. Credit exposures inclul the money. Liquidity risk also includes market depth wherein pursuant to the hedge policy, a transaction can not be completed within the plan mandates due to lack of buyers or sellers in the wholesale markets. I Operations risk is the risk associated with physical assets. This would include failures or outages associate Kwz� associated with the production or delivery of electricity. 0 requirements associated with participating in the energy markets, such as ERCOT 7busliness practices and protocols, reliability requirements, and Dodd Frank requirements. Volumetric risk is the risk that energy commodity volumes, both load obligation and int • : ` • • : i • " • •r i tin ai •t ntii i : ` • due to an error in weather forecasts and load forecasts. This risk is natural to Georgetown portfolio since it serves retail consumers.• •- o market Electric being unintentionally long or short in the spot market, it naturally results in hourly therebyon the City. However,prices for Temporal Short/Intermediate Long-TermPlanning Integrated Resource Planning Model short/intermediateMarket risks and volumetric risks will also be managed by long-term resource planning for a period of 6-20 years. Georgetown Electric's Portfolio Management Team will forecast its long- term firm supply obligations based on its expectations for load growth. This tool, along with a portfolio model and a financial forecasting modeling tool, will assist Georgetown Electric in making appropriate .1..tal investments to meet the needsof customers. a Congestion risk Congestion risk will be managed by procuring congestion revenue rights according to the Hedging Policy and using financial swaps settled at the ERCOT South load zone. Credit Policy Credit risk and counterparty performance risk will be managed according to the credit controls, per the Credit Policy. Contract Controls supporting procedures. ... Diversity Management requirementsGeorgetown Electric will manage its concentration risks on a rolling 12-month basis by • + in the Hedging Policy. Commercial Controls Georgetown Electric will manage its commercial operational risks according to trading authority limits to conduct market transactions. The trading authority limits to conduct commodity market transactions are approved by Georgetown Electric's City Council and are included in the Trading Authority Policy. Georgetown Electric will also manage its commercial operational risks to new products, instruments, or locations according to a control process for such as found in the Trading Authority Policy. Numerous other internal controls and procedures shall be in place at Georgetown Electric to manage other purchasing activities and vendor relationships. Hedging • Policy Commoditi and 0 in risk Mrill Transactions Energy Numerous1 be entered into to mitigate Georgetown consistent with the City Council approved power supply cost goal and risk tolerance. Sever hedging instruments and commodities are used to manage Georgetown Electric's energy risk which include purchases or sales of physical commodities, financial instruments, and power generation cappacity, and fuel storage. The following hedging instruments and commodities a permitted to be transacted when used consistent with the Trading Authority Policy and supporting controls and procedures: Physical Transactions o Forward power o Options on power o Spot market power o Ancillary services o ECOT market products, including congestion revenue rights o Renewable Energy Credits • Futures contracts for power and natural gas • Swap contracts for power and natural gas • Options on power and natural gas 0 # Weather protection transactions • Unit outage protection transacti 4. merchant energy companies, and therefore has a different risk profile, requiring a difffe]rent approach to risk management. 1. Georgetown Electric is in business to provide competitive and stable priced, reliable electric service to its retail customers. entering2. Georgetown Electric is not in the energy business to trade speculatively (buy low — sell high or arbitrage ), or to initiate energy risk positions. Optimization trades as authorized in the Trading Authority Policy contain risk management requirements when such tradesthat .:...- such tradesa ,!` ,::consistent with the risk management appetite of Georgetown. 3. Georgetown Electric is not in the energy business to take at -risk positions in merchant generation. 4. Georgetown Electric by nature has significant volumetric risk that results from: 1) long- term load serving obligations, 2) the supply hedges used to meet those obligations (forwards, options, demand f f' management,resources,and 3) the hedgevolumetric differences that occur between numbers I and 2 ('unmatched positions'). 5. Georgetown Electric participates in the forward term electric market defensively to hedge the risk of its forward load serving obligations (short positions) based on monthly or seasonal forecasted peak loads, plus a capacity planning reserve. There are about 720 hours in each calendar month, and due to the unpredictability of the weather, it is impossible to know when the peak load hour will be. Consequently, Georgetown Electric's forward short and long positions are measured in both MW and MWh. 6. Sometimes Georgetown Electric also has forward positions that are net long after meeting its firm load obligations, and they will participate in the forward term electric market to that risk by selling. 7. Georgetown Electriparticipates weekly/daily/hourly • balance unmatched positions at the marketprice in real time, and in the near-termof predictable weather treni:... r •. Georgetown Electric is n• practice of . • recognition. fluctuations.Revenues from rates to its customers is cost based, without variability for mark -to -market 9. Unlike managing a portfolio of only standard traded electric products (e.g. 5X16 Finn LD at a pricing hub) that protect the parties financially from volumetric risk, Georgetown Electric's energy portfolio typically has significant volumetricbecause: • Its load obligations obviously •volume, • Its loadsbe difficult to predict forecasts,• i • Some of its supply resources may notcontingent ont";cs, -non-firm purchases, etc.) and may b� interm in n46�� 10. Unlike managing a portfolio of only f. 1 traded electric products - r Firm pricing hub• load zone) -• - f • it wouldr. very time consuming • liquidate the entire forward risk in a typical- • portfolio. It is nt unusual for Georgetown Electric to have unmatched positions of load obligations (short)/ supply resourcesi extend out • f time for In • 1 to 'flatten' Georgetown Electric's book of `• risk positions to . risk neutral position, M would usually require a lengthy time period for a request for proposal ("RFP") and negotiation process to obtain a tailored physical 'wrap -around' alliance deal. Even the because of the uncertainty of forward electric prices, these types of deals are usually limited to the next 5 or 10 years forward, not 20 to 3 0. 11. Typical derivative risk metrics, such as Value at Risk (VaR), do not factor in volume risk, and are therefore inadequate to reflect the full risk that is inherent to Gcorgctow Electric's business. 12. Native load does not behave according to any derivative that can be loaded into a risk system. 13. The proper risk measurement and decision support tool for most of Georgetown Electric's risks, is a risk model that incorporates both market price risk and volumetric risk together and provides for a correlation of native load demand to market prices. I GEORGETOWN ELECTRIC UTILITY APPENDIX B of the ENERGY RISK MANAGEMENT POLICY 1. City of Georgetown Internal Energy Risk Management Members by Function 1. General 17tanager 0 Daniel Bethapul 2. I (Function/Member/Designee) 0 City Manager/David Morgan/or designee 0 Assistant City Manager/Laurie Brewer/or designee 0 Chief Financial Officer/Leigh Wallace 0 General Manager/Daniel Bethapudi 0 Portfolio Management Team Member • Jennifer Flor • Michael Weisner • Michael Simpson 3. Portfolio Management Team • Jennifer Flor • Michel Weisner • Michael Simpson 4. City Attorney 0 Skye Masson/or designey- 5. Independent Risk Management Function 0 Chief Financial Officer/Leigh Wallace Additional attending staff - Assistant Chief Financial OfficerNathan Parras Assistant Chief Financial Officer/Sarah Moody a