Resolution No. 8915
. .
J
1
2
3
RESOLUTION NO. 8915
4
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
VERNON APPROVING AND ADOPTING A MARKET RISK
MITIGATION POLICY FOR THE CITY OF VERNON
5
6 WHEREAS, by Resolution No. 7276 adopted on February 16, 1999,
7 the City Council of the City of Vernon approved a Resource Procurement
8 Plan and Credit Risk Management Policy for the Light & Power Department
9 in order to enable the Department to plan, execute and control the
10 management of a variety of risks inherent in power resource procurement
11 in the deregulated power market; and
12 WHEREAS, by Resolution No. 7489 adopted on February 15, 2000,
13 as amended by Resolution No. 7728 on March 21, 2001, the City Council
14 of the City of Vernon approved a Strategic Direction and Risk Tolerance
15 for Resource Procurement policy to establish a plan that enabled the
16 Light & Power Department to provide low cost power and optimize its
17 resource portfolio while managing and mitigating risk; and
18 WHEREAS, the functions and responsibilities for managing the
19 resource portfolio has been transferred to the Finance Department; and
20 WHEREAS, the Finance Department has prepared a Market Risk
21 Mitigation Policy (the "Policy") to establish a comprehensive,
22 integrated and effective risk management framework to provide explicit
23 and proactive risk management processes to mitigate the City's exposure
24 to market risk associated with forecast cash flow arising from rising
25 operating expenses and/or reduced revenues due to price fluctuations
26 with respect to its natural gas and electricity purchases; and
27 WHEREAS, the Finance Director recommends the approval of the
28 Policy in order to produce better financial and nonfinancial
. .
"
1 performance outcomes and less volatility; and
2 WHEREAS, the Policy will support and operate in conjunction
3 with all other policies and strategies of the City of Vernon.
4 NOW, THEREFORE, BE IT RESOLV8D BY THE CITY COUNCIL OF THE
5 CITY OF VERNON AS FOLLOWS:
6
SECTION 1:
The City Council of the City of Vernon hereby
7 finds and determines that the recitals contained hereinabove are true
8 and correct.
9
SECTION 2:
The City Council of the City of Vernon hereby
10 approves and adopts the Market Risk Mitigation Policy - Energy, a copy
11 of which is attached hereto as Exhibit A and incorporated by
12 reference.
13
SECTION 4:
The Acting City Clerk of the City of Vernon
14 shall certify to the passage of this resolution, and thereupon and
15 thereafter the same shall be in full force and effect.
16 APPROVED AND ADOPTED this 7th day of December, 2005.
17
18
19
20
21
22 BRUCE V. MALKENHORST, JR.
Acting City Clerk
ATTEST:
~~
~ LEONIS C. MAL URG, ay~r
23
24
25
26
27
28
- 2 -
1 STATE OF CALIFORNIA
ss
2
3
4 I, BRUCE V. MALKENHORST, JR., Acting City Clerk of the City of
COUNTY OF LOS ANGELES
5 Vernon, do hereby certify that the foregoing Resolution, being
6 Resolution No. 8915, was duly adopted by the City Council of the City
7 of Vernon at a regular meeting of the City Council duly held on
8 Wednesday, December 7, 2005, and thereafter was duly signed by the
9 Mayor of the City of Vernon.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
BRUCE V. MALKENHORST, JR.
Acting City Clerk
(SEAL)
25
26
27
28
- 3 -
EXHIBIT
A
'.
Market Risk Mitigation Policy -
Energy
December 5, 2005
TABLE OF CONTENTS
2
Article I. Purpose and Scope .........................................................................................
2
Article II. Objectives and Strategies...............................................................................
2
Article III. Derivatives .....................................................................................................
3
Article IV. Roles and Responsibilities................... ......... ...... ...... ..... ......... ............. ..........
3
Article V. Limit Determination........... ....... ....... ...... ..... .... ............. ........ ............. ..... ..........
4
Article VI. Monitoring and Reporting ............................................................. ......... ........
4
Article VII. Policy Authority................. ...... ................ .......... ............... ......... ........... .........
4
Article VIII. Lim its............................................................................................................
Market Risk Mitigation Policy
Article I. Purpose and Scope
Section 1.01 This Policy pertains to the mitigation of market risk, where market risk refers to
City of Vernon's exposure to reduced cash flow (arising from rising operating
expenses and/or reduced revenues), resulting from adverse market changes.
Market risk includes risk associated with commodity price moves. Market liquidity
risk is the risk that Vernon is unable to repurchase or sell (Le. liquidate) an
instrument or portfolio within a reasonable period of time or at a reasonable cost
due to inadequate market depth, market volume or market existence. Market risk
may also result from short or long-term changes in correlation between markets
or products (basis risk).
Section 1.02 The City of Vernon is committed to establishing a comprehensive, integrated and
effective Risk Management framework to provide explicit and proactive risk
management processes as a means of producing better financial and non-
financial performance outcomes and less volatility.
Section 1.03 It is the intent that this Policy support and operate in conjunction with all other
policies and strategies of the City of Vernon ("Vernon" or "the City").
Article II. Objectives
Section 2.01 Market risk mitigation may be accomplished by utilizing both financial and
physical instruments and will generally involve the use.of fixed price or cap/floor
structures or embedded optionality.
Section 2.02 As a municipal Light & Power and Gas Company with gas fired electricity
generation assets, Vernon accepts the exposure to outright price risk from
commodity purchase and sale transactions at market index. As part of the City's
management process, market risk mitigation transactions may be completed to
reduce the City's exposure to (i) market risk associated with forecast cash flows
expected to be generated from budgeted capital programs; or (ii) price
fluctuations with respect to a portion of its natural gas purchases to help achieve
targeted returns on new investments and steady funding of existing projects.
Article III. Derivatives
Section 3.01 Derivatives are financial instruments derived from a cash market commodity,
futures contract or other financial instrument.
Section 3.02 Derivatives may not be used for speculative purposes, where speculation is
defined as a profit-seeking activity unrelated to Vernon's Light & Power and Gas
activities.
Page 2
r.
Article IV. Roles and Responsibilities
Section 4.01 The City Council is responsible for:
(a) Approving and authorizing the Policy.
Section 4.02 The Executive Team is responsible for:
(a) Approving market risk strategies and related execution;
(b) Determining volumes applicable to market risk mitigation, subject to the limits
in Article VIII, at the time a strategy is approved.
Section 4.03 The [Power Resource Coordinator] is responsible for the following activities, in
support of clearly defined City objectives, as they pertain to Vernon's Light &
Power and Gas operations:
(a) During the annual City Budget approval process, presenting an outlook for
market prices together with recommendations for market risk management,
including a proposed execution strategy detailing instrument types and a
comparative risk analysis;
(b) Ensuring the appropriate execution, management and reporting of market risk
mitigation activity;
(c) Reviewing adherence to the Market Risk Mitigation Policy and recommending
action to support adherence;
(d) Advising the Executive Team ofa change in underlying fundamentals that
could reasonably be expected to impact forward markets by at least 10% and
providing any necessary revisions to recommended market risk mitigation
strategies.
Section 4.04 The [Power Resource Coordinator] is responsible for:
(a) Developing and supporting the implementation of the Market Risk Mitigation
Policy, risk metrics and corporate exposure limits;
(b) Monitoring the effectiveness of the Market Risk Mitigation Policy and
recommending improvements;
(c) Preparing the monthly Financial Risk Report;
(d) Overseeing the completion of a cash flow at risk analysis for proposed risk
mitigation strategies;
(e) Providing concurrence to the execution of approved risk mitigation strategies.
Article V. Limit Determination
Section 5.01 Limits for risk mitigation activity pertaining to commodities are listed in Article VIII.
All limits will be reviewed annually by the City Council coincident with the
consideration .of the annual budget and capital program.
Section 5.02 Estimated fuel volumes will be net, reduced by specifically identified fixed price
arrangements referred to in Article VIII, and adjusted to reflect the effectiveness
of the instrument to be used when compared to the underlying commodity for
which market risk is being mitigated.
Section 5.03 For purposes of this Policy, estimated electricity generation volumes will be
adjusted for the effect of major changes in load. In the event a disposition results
in a Policy limit exception, notice shall be provided to the City Council at the next
scheduled meeting, together with a recommendation to resolve the exception.
Page 3
Market Risk Mitigation Policy
Article VI. Monitoring and Reporting
Section 6.01 A Financial Risk Report will be prepared and reported on a [quarterly] basis to the
City Council.
Section 6.02 As described in Section 2.02, it is the Company's intention to enter into market
risk mitigation transactions as part of its risk management process. These
transactions will generally constitute economic hedges for risk management
purposes, and where these transactions are derivative financial instruments, they
will be marked to market for accounting purposes. Under mark to market
accounting, changes in the value of these transactions in the current period will
be included in the statement of earnings.
Article VII. Policy Authority
Section 7.01 The Executive Team, subject to the limits in this Policy, has full authority to
approve the execution of market risk mitigation strategies from time to time, on
an "opportunistic" basis.
Section 7.02 Exceptions to the Policy will be reported immediately to the Chief Financial Officer
of the Utility and the City, if different, and will be made available to the City
Council at the next scheduled meeting.
Article VI/I. Limits
Natural Gas Limits
Generation Fuel Supply - up to [75%] of the estimated fuel supply volumes (after taking into
consideration any Long-Term Fixed Price Purchases listed below) reflected in the fiscal period
covered by the approved budget, and up to [50%] of the estimated consumption volumes reflected
in the subsequent [two] fiscal year periods, or such reasonably determined period by the [Power
Resource Coordinator] and as reported to the City Council in connection with this policy.
Long-Term Fixed Price Purchase - up to [75%] of the estimated fuel requirements for the Malburg
Generation Project or any other generation project owned by the City, the City may seek sellers to
provide natural gas, on a firm basis, into the pipeline system of the Southern California Gas
Company. Such supply may be contracted for up to [15] years at a fixed price for the entire term
of the contract, or such reasonably determined period by the [Power Resource Coordinator] and
as reported to the City Council in connection with this policy. The City may choose to pre-pay the
costs for such long-term fixed price purchase of natural gas to achieve additional discount savings
for such reasonably determined period by the [Power Resource Coordinator] and as reported to
the City Council in connection with this policy.
Basis - up to 100% of the Corporation's basis exposure on estimated natural gas consumption
volumes for the fiscal periods covered by the approved budget.
Electricity Limits
Generation - up to [50%] of the estimated net generation above the forecasted load demand
within the City for a period of up to [10] years, or such reasonably determined period by the
[Power Resource Coordinator] and as reported to the City Council in connection with this policy.
Page 4