Resolution No. 74891 RESOLUTION NO. 7489
2
A RESOLUTION OF THE CITY COUNCIL OF
3 THE CITY OF VERNON ADOPTING A
STRATEGIC DIRECTION AND RISK
4 TOLERANCE FOR RESOURCE PROCUREMENT
FOR THE UTILITIES DEPARTMENT
5
6 WHEREAS, the City Council has approved a Resource
7 Procurement Plan and Credit Risk Management Policy (the "Policy")
8 for the Utilities Department (the "Department") in order to
9 enable the Department to plan, execute and control the management
10 of a variety of risks inherent in power resource procurement in
11 the deregulated power market;
12 WHEREAS, the Policy requires the establishment of a
13 multi -year strategic direction for resource procurement and the
14 net position for risk tolerance for the Department;
15 WHEREAS, the Department has prepared a Strategic
16 Direction and Risk Tolerance for Resource Procurement (the
17 "Strategic Direction") to satisfy the requirements of the Policy,
18 to establish and communicate a plan that will enable the
19 Department to provide low cost power and optimize its resource
20 portfolio while managing and mitigating risk; and
21 WHEREAS, the City Clerk, by letter dated February 3,
22 2000, has recommended the adoption of the Strategic Direction.
23 NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF
24 THE CITY OF VERNON AS FOLLOWS:
25 SECTION 1: The City Council of the City of Vernon does
26 hereby find -and determine that the recitals contained hereinabove
27 are true and correct.
28 SECTION 2: The City Council of the City of Vernon
-1-
1 hereby approves and adopts the Strategic Direction And Risk
2 Tolerance For Resource Procurement, a copy of which is attached
3 hereto as Exhibit "A," and presented to the City Council
4 concurrently with this Resolution, and the City Council hereby
5 orders said Strategic Direction to be received and filed by the
6 City Clerk.
7 SECTION 3: The City Clerk of the City of Vernon shall
8 certify to the passage of this Resolution and thereupon and
9 thereafter the same shall be in full force and effect.
10 APPROVED AND ADOPTED this 15th day of February, 2000.
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ONIS C. MALBUIG, Mayo
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14 ATTEST:
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17 BRUCE V. MALKENHORST, City Clerk
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1 STATE OF CALIFORNIA
2 COUNTY OF LOS ANGELES )
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4 i, BRUCE V. MALKENHORST, City Clerk of the City of
5 Vernon, do hereby certify that the foregoing Resolution, being
6 Resolution No. 7489, was duly adopted by the City Council of the
7 City of Vernon at a regular meeting of the City Council duly held
8 on Tuesday, February 15, 2000, and thereafter was duly signed by
9 the Mayor of the City of Vernon.
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BRUCE V. MALKENHORST, City Clerk
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16 (SEAL)
17 F3:RES07489.DOC
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SUPPORTING
DOCUMENTS
CITY COUNCIL
LEONIS C. MALBURG
Mayor
THOMAS A. YBARRA
Mayor Pro-Tem
Wm. 'BILL" DAVIS
Councilman
H. "LARRY" GONZALES
Councilman
W. MICHAEL McCORMICK
Councilman
BRUCE V. MALKENHORST
City Administrator / City Clerk
FAX (323) 581-7924
DAVID B. BREARLEY
City Attorney
FAX: (626) 330-5818
KEVIN WILSON
Director of Community Services & Water
FAX: (323) 588-2761
CITY HALL
4305 SANTA FE AVENUE, VERNON, CALIFORNIA 90058
TELEPHONE (323) 583-8811
February 22, 2000
Eric Fresch, Esq.
1735 Vistazo West
Tiburon, CA 94920
Re: Resolution Nos. 7489 & 7490
Dear Eric:
KENNETH J. DeDARIO
Director of Municipal Utilities
FAX: (323) 583-1983
DAVE TELFORD
Fire Chief
FAX: (323) 581-1385
BRUCE W. OLSON
Police Chief
FAX: (323) 583-5236
Transmitted herewith is a copy of Resolution Nos. US
# & 7490
that were approved by City Council on February 15, 2000.
Very truly yours,
G o is J. Or s
Chief Deput City Clerk
GJO:rcm
OFFICE OF THE CITY ADMINISTRATOR/CITY CLERK
INTER -OFFICE MEMORANDUM
TO: Kenneth DeDario, Dire for of Utilities
FROM: Gloria J. Orosco, Deputy City Clerk
DATE: February 22, 2000
RE: Resolution Nos. 7489 & 7490
Transmitted herewith is a copy of Resolution Nos. & 7490
that were approved by City Council on February 15, 2000.
CITY COUNCIL
LEONIS C. MALBURG
Mayor
THOMAS A. YBARRA
Mayor Pro -Tern
Wm. 'BILL" DAVIS
Councilman
H. "LARRY" GONZALES
Councilman
W. MICHAEL McCORMICK
Councilman
BRUCE V. MALKENHORST
City Administrator / City -Clerk
FAX (323) 581-7924
ugh
DAV BR ARLEY
ty Attorney
OleFA : (626) 330-5818
• a KEVIN WILSON
irector of Community Services & Water
FAX: (323) 588-2761
KENNETH J. DeDARIO
Director of Municipal Utilities
FAX: (323) 583-1983
CITY HALL
4305 SANTA FE AVENUE, VERNON, CALIFORNIA 90058
TELEPHONE (323) 583-8811
February 3, 2000
City Council
City of Vernon
Honorable Members:
DAVE TELFORD
Fire Chief
FAX: (323) 581-1385
BRUCE W. OLSON
Police Chief
FAX: (323) 583-5236
On February 16, 1999 this Council approved the Resource
Procurement Plan & Credit Risk Management Policy (Plan & Policy)
which established guidelines for the Utilities Department to
plan, execute, and control the management of a variety of risks
inherent in power resource procurement. Section 3.4 of the plan
& Policy requires the establishment of a multi -year strategic
direction for resource procurement and the net position risk
tolerance for the Utilities Department. Attached herewith, is a
Strategic Direction and Risk Tolerance for Resource Procurement
(Strategic Direction) document which satisfies those
requirements, and establishes and communicates a plan that will
better enable the Utilities Department to provide low cost power
and optimize its portfolio while managing and mitigating risk.
This has been reviewed by the Director of Utilities and
Financial Legal Consultant, Eric T. Fresch, and it is hereby
recommended that the attached Strategic Direction document be
approved.
Very truly yours,
Bruce V. Malkenhorst
City Clerk
BVM/gst
February 1, 2000
TO: Bruce V. Malkenhorst, City Administrator
FROM: Kenneth J. DeDario, Director of Utilities K
SUBJECT: Strategic Direction And Risk Tolerance For Resource Procurement
I recommend approval of the attached Strategic Direction And Risk Tolerance For Resource
Procurement (Strategic Direction).
On February 16, 1999 Council approved the Resource Procurement Plan & Credit Risk
Management Policy (Plan & Policy) which established guidelines for the Utilities Department to
plan, execute and control the management of a variety of risks inherent in power resource
procurement. Section 3.4 of the Plan & Policy requires the establishment of a multi -year
strategic direction for resource procurement and the net position risk tolerance for the Utilities
Department. The attached Strategic Direction document satisfies those requirements,
establishing and communicating a plan that will better enable the Utilities Department to provide
low cost power and optimize its portfolio while managing and mitigating risk.
If you have any questions or comments, please contact me. Thank you for your consideration.
KJD:dm
Attachment
i YO�4
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IM/ 0�p .
CITY OF VERNON
UTILITIES DEPARTMENT
STRATEGIC DIRECTION
AND
RISK TOLERANCE
FOR RESOURCE PROCUREMENT
Date:
February 15, 2000
Strategic Direction and Risk Tolerance
I.
BACKGROUND.......................................................................................................
3
II.
PURPOSE..................................................................................................................4
III.
UTILITIES DEPARTMENT OBJECTIVES............................................................
5
A)
Retain and Attract Customer Base..........................................................................
5
B)
Be Financially Sound..............................................................................................
5
C)
Optimize Resources................................................................................................
5
IV.
LOAD/RESOURCE BALANCE..............................................................................
6
V.
PRICE FORECAST...................................................................................................
7
VI.
TRANSACTION TOOLS.........................................................................................
9
VII.
STRATEGIC OPTIONS.........................................................................................10
VIR.
RECOMMENDED STRATEGY............................................................................12
IX.
RISK PROFILE.......................................................................................................13
Table 1: Qualitative Risk Profile.............................................................................14
X.
RISK TOLERANCE...............................................................................................15
Page 2 of 15
L BACKGROUND
Vernon's core electric energy business is to provide low cost power while maintaining the
reliability of the electric distribution system. This has been accomplished primarily
through the purchase of energy and related products and services in the short-term
wholesale electricity market. A successful track record of the Utilities Department with
this short-term purchase program has enabled the City to maintain low electric rates that
satisfy existing customers and attract new customers and business. Currently, Vernon has
the distinction of having the lowest cost position among all California electric utilities. In
the newly deregulated market with its new challenges, continued success with the short-
term purchase program is uncertain.
Vernon's estimated peak load for the next year is 196 MW. The projected average
purchase requirement ranges from 80 to 160 MW. This purchase requirement constitutes
a "short" (or open) position that Vernon has been able to work to its competitive
advantage. Before deregulation, this open position was somewhat unique. In the absence
of competition from power marketers and traders, Vernon was one of the few energy
buyers in the open market on a consistent basis, able to work with a number of competing
sellers to acquire low cost energy. With low energy and distribution costs, Vernon
established a history of having the lowest bundled electric power cost among California
electric utilities.
The deregulated power market presents challenges for the Utilities Department to provide
low cost power to its customers on a regular basis. The challenges include competition
from various sources for buying and selling low cost power, understanding and
developing the skills and conditions necessary to participate in new markets for physical
supply and financial hedges, and risks of participation, including credit risk. For
example, utilities in nearby service areas will be able to reduce rates (and be more
competitive) as they will have paid down the debt of high cost resources between now
and 2003 (e.g. SDG&E has already paid down its resource debt). Vernon should retain
an economic advantage in ancillary services 1 and distribution costs 2. Asa result of
deregulation, the Utilities Department will benefit by expanding its potential transaction
tools 3 (see Section VI for descriptions) and transaction horizon to meet the objective of
low cost energy at low -to -moderate risk. Other operational changes and strategies may
be warranted. These strategies are discussed herein, leading to a proposed strategic
direction for the next 12 months.
1 For a period to time due to the 1997 Edison -Vernon restructuring agreement.
2 Due, primarily, to low operating costs and high -density energy use.
3 Such as those mentioned in the fifth bullet item of Section 3.4.1 of the Resource Procurement Plan &
Credit Risk Management Policy.
Page 3 of 15
K PURPOSE
Section 3.4 of the Resource Procurement Plan & Credit Risk Management Policy
requires the Director of the Utilities Department to work with the City Council to
establish a multi -year strategic direction for resource procurement and the net position
risk tolerance for the Utilities Department for the next 12 months. The purpose of this
document is to satisfy those requirements, establishing and communicating a plan that
will better enable the Utilities Department to provide low cost power and optimize its
portfolio while managing and mitigating risk.
The document should be reviewed and revised, as appropriate, on an annual basis and as
market conditions warrant.
Page 4 of 15
HL UTILITIES DEPARTMENT OBJECTIVES
The Utilities Department's operational objectives, consistent with this Strategic Direction
and Risk Tolerance, are:
A) Retain and Attract Customer Base
Provide reliable, quality service and satisfy customers, while maintaining low and
competitive electric rates 4.
B) Be Financially Sound
Plan and conduct operations such that the total expenses of the Utilities Department,
including depreciation, are less than revenues.
C) Optimize Resources
Utilize the skills and assets of the Department to optimize power resources.
Regardless of the strategic direction, these operational objectives are a driving force in
the activities of the Utilities Department.
4 It is estimated Vernon's current average 5¢Ikwh rate will satisfy the competitive portion of this objective
for the next five years.
Page 5 of 15
IV. LOAD/RESOURCE BALANCE
A load/resource balance shows the energy demand (load) vs. the energy available
(resources) to satisfy the demand. Currently, the load/resource balance of the City of
Vernon ranges from 80 to 160 MW open (80 to 140 MW off-peak; 120 to 160 MW on -
peak). This represents a pre-existing obligation to deliver electricity at a fixed -price to
customers at an unknown cost until sufficient resources are procured (purchased and
priced 5).
Figure I shows Vernon's average on -peak, off-peak, and system load on a monthly basis
in calendar year 2000. Most of the load is open and will be satisfied with purchases in
the wholesale electricity market.
MW
200
Figure 1: 2000 Average Load
175
150
125
100
75
50
25
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F M A M J J A S
O
N D
� On -Peak Off -Peak — i System
On a long-term basis, Vernon's generation resources are the Palo Verde nuclear plant,
Hoover Dam, and Vernon -based gas and diesel turbines. The generation capacity
available to Vernon from these resources is 62 MW. However, because of operational
and economic limitations, these resources are expected to produce the equivalent of less
than 15 MW of base load Therefore, as noted earlier, most of the City's electric energy
requirement must be satisfied with open -market purchases.
5 Resources can be either physical or financial. Financial positions are eventually converted to physical
resources.
Page 6 of 15
V. PRICE FORECAST
Given Vernon's open position and its intention to maintain low rates, the wholesale price
of electricity is the primary factor in establishing strategic direction. If the average
annual wholesale price of electricity in southern California is less than the price
supportable by Vernon's rates, then there is little reason to change existing operations and
strategy. On the other hand, if wholesale prices rise above the price supportable by
Vernon's rates (due to a change in market fundamentals), then alternatives to the existing
strategy should be considered.
Figure 2 shows a forecast of monthly average wholesale prices for electricity at SP15 for
calendar year 2000 vs. the price supportable by Vernon's rates (hereinafter referred to as
Vernon's monthly revenue available for power costs or RAPC 6). The SP15 forecast is a
63/37 weighted average of on -peak and off-peak prices, where on -peak prices are based
on Palo Verde futures prices on 2/1/00, which are up to 20% higher than historical prices.
Vernon's RAPC is the net of projected revenues less expenses other than power 7,
divided by the total energy requirement. The RAPC is increased, beginning in July 2000,
by reflecting withdrawals from the City's Power Resource Cost Reduction Account 8.
Additionally, beginning in January 2000, depreciation expense of approximately $2.6
million per year is excluded to show Vernon's price risk on a true cash -flow basis.
$lMWh Figure 2: 2000 Average Wholesale Price and RAPC
55
50
45
40
35
30
25
20
15
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-♦--SP15 Average -.*—RAPC (incl. w/draws) -f-RAPC (incl.wldraws, excl. depn.)
A long-term forecast of SP 15 prices was produced by a California -based consulting firm
in March 1999. The forecast was modified for this document using the most recent
market information. It is a 20-year forecast that accounts for supply/demand (fuel,
6 For convenience of discussion, the acronym RAPC is used to represent the revenue available for power
costs.
7 Excluding ancillary services
8 The withdrawals are estimated to be equivalent to the debt payment of Vernon's share of Palo Verde.
Vernon currently has approximately $38 million in the account. If withdrawals are taken from the account,
they may be as high as $550,000 per month during calendar year 2000.
Page 7 of 15
marginal units, unit efficiencies, load, load growth, etc.) and structural factors (capacity
payments, resource base, resource additions, "bidding" behavior, etc.). The average price
in the forecast also assumes a 63/37 weighting between on -peak and off-peak prices,
consistent with Vernon's load profile.
The 20-year forecast predicts a significant increase in the wholesale price of electricity
between 2001 and 2005 as the electricity market transitions from a marginal cost pool to
a total cost pool. (This view is consistent with more recent forecasts.) By 2005, it is
expected that capacity payments will disappear for California and non -California
generators and all generators will need to recover capacity costs through the wholesale
market.
Electricity prices can be highly volatile, so any price forecast will contain a degree of
uncertainty. Nevertheless, assuming the 20-year forecast for SP15 is directionally correct
and Vernon maintains its current low rates, Vernon's open electricity position contains a
noticeable price (and, therefore, cash flow) risk. beginning in 2002 9. This risk is apparent
in Figure 3 where the 20-year wholesale price forecast is shown alongside Vernon's
RAPC. As in Figure 2, beginning in July 2000, the RAPC is increased to reflect
withdrawals from the Power Resource Cost Reduction Account and, beginning in January
2000, excludes depreciation expense.
$/Mw, Figure 3: Average Wholesale Price and RAPC through 2018
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38
36
34
32
30
28
ti� ry CV IV ry�� Cb "VR # ryo�q 4, � �aAn� ryo^q� 4 4 ryoti III
CV
—♦—SP15 Forecast —RAPC (incl. w/draws) —� RAPC (incl. w/draws, excl. depn.)
The benefit of withdrawals from the Power Resource Cost Reduction Account and the
exclusion of depreciation increase Vernon's RAPC to levels comparable to the SP15
forecast. Therefore, while cash flow risk is still a concern, it is not as significant a
concern as it would be without these adjustments.
9 This risk has increased finther because of the recent increase in the ISO price cap to $750/MWh.
Page 8 of 15
VL TRANSACTION TOOLS
There are various transactions that the Utilities Department can use to meet the objective
of low cost energy at low -to -moderate risk. These transactions include, but are not
limited to, the following:
• Futures: financial positions (contracts) on the New York Mercantile Exchange
(NYN EX) in electricity or natural gas that can be converted to physical positions for
delivery with a counter -party on expiration of the contract to
• Forwards: same as futures, except the position is a bilateral contract with a specific
counter -party in the over-the-counter market (generally through WSPP agreement)
• Swap: a contract to exchange fixed for floating payments on a given quantity of
electricity
• Contracts for differences: same as a swap, except the fixed for floating payments are
on differences in price between two locations for electricity
• Option: a contract that, for a premium, gives the buyer the right to buy or sell
electricity at a given price (the strike price) on or before a specific daze
• Market position management: exchanging one physical position in electricity for
another of the same quantity, but at a different location or for a different delivery
period.
io Only financial positions in electricity would be converted to physical positions for delivery
Page 9 of 15
VII. STRATEGIC OPTIONS
Regardless of the price forecast and strategic direction,it is important for the Utilities
Department to be positioned to capture the best deal over any period, enabling the
Department to serve load at low cost while satisfying the requirements of the Risk
Management Policy. This means being able to transact business in the over-the-counter
(OTC) and futures markets, in addition to the Cal PX.
The following is a list of different strategic options to consider given the potential cash
flow challenge for the Utilities Department:
A. Maintain open position: Continuation Strategy
B. Purchase or development of generation assets: Assets Strategy
C. Formation of alliance(s) with power producers or utilities: Alliance Strategy
D. Establish long-term supply contract: Supply Strategy
E. Combinations of A through D: Combination Strategy
A. This "continuation strategy" is the most straightforward, has no long-term
commitment or up -front costs, and continues a successful program. The Utilities
Department has demonstrated success with a positive cash flow through "best efforts"
purchases in the short-term to meet load. With an expanded "tool box" that now
includes futures and options, this program should have continued success and other
strategies may not be warranted if Vernon is willing to increase rates at the
appropriate time.
It should be pointed out, however, that this strategy leaves Vernon exposed to higher
energy prices. Therefore, other programs are being considered.
B. At best, this "assets strategy" is a long-term solution to the risk of high prices
beginning in 2002. There are many types of generation assets (e.g. gas -fired turbines,
fuel cells, solar thermal units, micro -turbines, and photovoltaics), but they all require
significant capital commitments and have payoff periods of several years after
startup. Some assets simply shift price risk from electricity to fuel (e.g. natural gas)
and all assets introduce operational risks (performance, reliability, etc.), so this
strategy would only substitute, not eliminate, risk. Note, however, that fuel prices are
generally less volatile than electricity prices.
This strategy has two parts: energy supply options and demand side programs,
including renewable energy. A thorough review of available options and costs should
be completed before proceeding with this strategy.
C. This "alliance strategy" provides a means of accessing and/or controlling generation .
resources without owning them. Potential alliance partners might include other local
municipals (e.g. Pasadena), independent power producers, traders, and marketers.
The partner must have excess economic resources for an alliance to be attractive to
Vernon--- although the sale/transfer price of the excess energy to Vernon may be no
better than the PX price.
Examples of business alliances are Riverside & Avista, Anaheim & Idaho Power, and
Pasadena, & Citizen's Power. Evidence suggests, however, that most alliances have
met with very limited success. For Vernon to find an acceptable partner and
Page 10 of 15
construct a successful alliance is time-consuming and uncertain. For those reasons,
this strategy is of limited interest, and alliance proposals should be reviewed as they
develop but not actively pursued.
D. This "supply strategy" is more likely to succeed in the medium term (1 to 3 years)
than the long term (greater than 3 years) because a potential supplier must have
excess generation, financial strength, be creditworthy, and be receptive to a long-term
contract at a fixed price. Furthermore, this strategy carries the risk of long-term
supply dependency. Nevertheless, a fixed price for up to 5 years is possible and may
be advantageous, so bids from acceptable suppliers should be encouraged.
The longer the term of the transaction, the more stringent should be Vernon's
requirements of the energy supplier 11. Additionally, a good supply contract will
contain the option of indexing the purchase price to futures prices in electricity or
natural gas, giving Vernon greater price control and flexibility.
E. This "combination strategy" (the optimum combination of A to D) may be attractive
for different energy quantities adding up to the total requirement. It is a diversified
approach that is attractive because it uses the time available before prices rise
significantly (in early 2002, according to the price forecast) to explore options for the
"best" strategy.
i i For example, assets -based energy suppliers should be given preference for long-term supply contracts.
Page 11 of 15
VHL RECOMMENDED STRATEGY
The Combination Strategy E is recommended — specifically, combining strategies A, B,
and D, with strategies A and D to include physical and financial transactions. Strategies
A (continuation) and D (supply) build on the Utilities Department's proven success,
expanding its purchase tools and transaction horizon, while strategy B (assets) gets the
process of securing economic generation under way: Strategy A can be implemented
immediately. Strategies B and D require development of formal and informal offerings
from existing market contacts and others. The Utilities Department will strive to
implement these strategies over the course of the next 12 months.
Given this combination strategy approach, Figure 4 indicates how Vernon's energy
requirement may be satisfied in the next few years. Short-term transactions are less than
one year (Strategy A), medium -term transactions are 1 to 3 years (Strategy D), and long-
term transactions are greater than 3 years (Strategies B & D). Long-term transactions
include purchases associated with the Palo Verde nuclear plant and Hoover Dam.
•
Page 12 of 15
IX. RISK PROFILE
A risk profile provides an assessment of the financial risk in an organization's portfolio.
The profile shows the marked -to -market position of the organization (volume long or
short at an average price) vs. the market price. From the risk profile, the risk position of
the organization can be established on a qualitative (low to high) and quantitative basis
(measured in $ at risk).
Vernon's open position has the risk of the cost of power exceeding rates (or the revenue
available for energy purchases) at any time — particularly in high load periods, such as
summer and winter, and during abnormal operating conditions such as occur due to major
resource outages. If the hourly cost of power exceeds rates, the result is a negative cash
flow that, over many hours, could be substantial. This is a worst case scenario, however,
and the risk profile needs to be evaluated in tenons of realistic expectations for rates vs.
market prices.
Vernon's risk profile is illustrated in figure 5. The open position is shown alongside the
adjusted RAPC and the wholesale electricity price at SP15 for the year 2000. Price or
cash -flow risk 12 is reduced as resources are procured to meet the load requirement.
Based on Figure 5, Table 1 gives a qualitative assessment of Vernon's cash flow risk for
different periods in 2000.
12 Specifically, the risk of higher -than -anticipated expenses
Page 13 of 15
Table 1: Qualitative Risk Profile
Period
Market Price relative
to Vernon's adjusted
RAPC
Price
Volatility*
Cash Flow
Risk
Feb to June
Same
Low
Moderate
July to Sep
I Above
Hi
High
Oct to Jan
I Below
Moderate
1 Moderate
* Volatility based on observations of PX prices in Southern California.
Note: High volatility implies the market price has the potential to move significantly
higher than might be expected.
From Figure 5 and Table 1, it may be concluded that Vernon has an overall moderate risk
profile. The profile may be made more moderate by developing and opening risk -
limiting transactions (e.g. purchasing call options) throughout the year, but especially in
the third quarter. The Utilities Department is currently positioned to take advantage of
risk -limiting and other transactions as they become available and are economically
attractive.
Page 14 of 15
f
X. RISK TOLERANCE
Risk tolerance is defined by the extent and time Vernon is willing to leave its load
uncommitted (i.e. leave its position open). For example, in a high cash flow risk period
such as the third quarter, if the open position is covered with real time transactions only,
that reflects a high degree of risk tolerance. Conversely, in a low risk period such as
February, if the open position is covered at the first opportunity before the beginning of
the period, that reflects a low degree of risk tolerance. (Note that low risk tolerance does
not necessarily lead to optimal purchase decisions.)
What should the risk tolerance be for the Vernon's Utilities Department? Based on its
experience and current market expectations, a moderate degree of risk tolerance is
warranted, setting target purchase prices based on the revenue available for energy
purchases and the latest electricity price forecast. For high -risk periods, moderate risk
tolerance means, in the absence of a strong opinion otherwise, most of Vernon's open
position should be covered or hedged one to six months in advance. For low -risk
periods, moderate risk tolerance means the open position may be covered with pre -
scheduled or real time purchases only.
These general guidelines for covering the open position in different periods will only be
used as guidelines. They will be updated and revised as appropriate, based on the latest
market information and changes in risk tolerance, to enable the Utilities Department to
provide low cost, reliable power to the City of Vernon while optimizing its position.
Page 15 of 15