Resolution No. 2022-040RESOLUTION NO. 2022-40
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF VERNON
APPROVING AND ADOPTING AN ENERGY RISK MANAGEMENT
POLICY AND REPEALING RESOLUTION NO. 2012-45
SECTION 1. Recitals.
A. On April 3, 2012, the City Council adopted Resolution No. 2012-45, adopting an
Energy and Credit Risk Management Policy.
B. Vernon Public Utilities (VPU) is incorporating the current best utility practices to
bring the existing Energy and Credit Risk Management Policy up to date as the utility
industry evolves and is confronted with new financial, operational, and market risks.
C. VPU has prepared an updated Energy Risk Management Policy (ERMP) to
establish a process and procedures for the purchase and sale of energy and natural gas
which are commercially reasonable, to prevent fraud and collusion, and to ensure the City
receives optimum value in its procurements.
D. The ERMP fulfills the current California Independent System Operator (CAISO)
Tariff requirements for participating in the CAISO markets and satisfies anticipated
requests from potential contractual counterparties.
E. The ERMP provides guidelines to govern VPU’s energy portfolio and risk control
activities and provides a framework through which management and personnel will
identify, measure, manage, and report financial and other portfolio risks.
F. The ERMP is not intended to deal with the mitigation of risk of catastrophic events,
environmental impacts, or regulatory exposures.
G. VPU recommends the adoption of the updated Energy Risk Management Policy.
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY
OF VERNON AS FOLLOWS:
SECTION 2. The City Council of the City of Vernon hereby finds and determines
that the above recitals are true and correct.
SECTION 3. Effective November 15, 2022, the City Council of the City of Vernon
hereby approves the ERMP, attached hereto as Exhibit A.
SECTION 4. All resolutions or parts of resolutions, specifically Resolution No.
2012-45, not consistent with or in conflict with this resolution are hereby repealed.
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SECTION 5. The City Clerk shall certify the passage and adoption of this
resolution and enter it into the book of original resolutions.
APPROVED AND ADOPTED November 15, 2022.
________________________
LETICIA LOPEZ, Mayor
ATTEST:
LISA POPE, City Clerk
(seal)
APPROVED AS TO FORM:
ZAYNAH N. MOUSSA, City Attorney
I CERTIFY THAT THE FOREGOING RESOLUTION NO. 2022-40 was passed and
adopted by the City Council of the City of Vernon at the Regular meeting on November
15, 2022 by the following vote:
AYES: 5 Council Members: Davis, Merlo, Ybarra, Larios, Lopez
NOES: 0
ABSENT: 0
ABSTAIN: 0
________________________________
LISA POPE, City Clerk
(seal)
CITY OF VERNON
ENERGY RISK MANAGEMENT POLICY
Adopted on November 15, 2022
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CITY OF VERNON
ENERGY RISK MANAGEMENT POLICY (ERMP)
Table of Contents
Section 1 – Executive Summary Page 3
Section 2 – Organizational Structure and Responsibilities Page 6
Section 3 – Hedging Program and Requirements Page 11
Section 4 – Procedures for Authorized Transactions Page 12
Section 5 – Wholesale Counterparty Approval and Exposure Page 18
Section 6 – Risk Measurement, Monitoring, and Reporting Page 25
Section 7 – Control Exception Reporting Page 26
Section 8 – Conflict of Interests Page 28
Section 9 – Review, Authorization and Revision Process Page 29
Appendix A – Glossary of Terms
Appendix B – Risk Policy Acknowledgment Form
Appendix C – Authorized Transactions
Appendix D – Energy and Natural Gas Transaction Limits
Appendix E – Vernon Procurement Strategies
Appendix F – Sample Procurement Strategy
Appendix G – Sample ERMC Report
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Section 1
Executive Summary
The City of Vernon (Vernon) engages in business activities that inherently involve various
forms of market and credit risk. These risks create uncertainty in Vernon’s financial
performance resulting from future market or credit factors that affect cash flows as Vernon
meets the operating and service requirements of the Vernon Public Utilities (VPU).
Vernon recognizes that certain risks are unavoidable when engaging in power and gas
supply and corresponding hedging activities.
Vernon has developed this Energy Risk Management Policy (ERMP or Risk Policy) to
establish a process and procedures for the purchase and sale of energy and natural gas
which are commercially reasonable, to prevent fraud and collusion, and to ensure that
Vernon receives optimum value in its procurements.
Pursuant to the Vernon City Charter and City Code Title 3 Revenue and Finance, Chapter
3.32 Purchasing, Section 3.32.110 Exemptions, competitive bidding shall not be required
for “contracts for the acquisition, sale or transmission of electrical power, natural gas,
water, or telecommunications, where it is commercially unreasonable to comply with
standard procurement procedures. All such procurements shall be made pursuant to a
resolution of the City Council which establishes a process for procurement which is
commercially reasonable and furthers the objectives of this chapter, including, but without
limitation, to prevent fraud and collusion and to ensure that the City receives optimum
value in its procurements.”
The Risk Policy is intended to establish the framework for Vernon to manage the credit
and market risks that are inherent in meeting the power and gas supply obligations of
VPU. It is important to recognize that the Risk Policy is intended to help mitigate risk but
cannot eliminate all risk. Financial, credit and business risk are intrinsic to trading
activities, and the Risk Policy is designed, if carefully administered and followed, to
provide a framework, process, and procedures to monitor and mitigate risk in these
activities. The primary objectives of the Risk Policy are:
x to provide stable electric and gas rates to Vernon’s ratepayers by helping to ensure
greater budget certainty;
x to reduce market exposure and credit risk to Vernon by executing, monitoring, and
evaluating trading activities and requirements, including hedging requirements,
authorized transactions, and counterparty exposure;
x to preserve business flexibility while balancing risk to deliver the least cost power
and gas supply portfolio that meets load, retail, and regulatory requirements of
Vernon, including but not limited to Renewable Portfolio Standards (RPS) and
Greenhouse Gas (GHG) emissions reductions regulations.
The Risk Policy is intended to help Vernon manage risks inherent with serving load,
including the risks associated with cost-hedging activities, regulatory compliance, and
participation in wholesale markets, including the California Independent System Operator
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(CAISO). The Risk Policy serves as a detailed framework to describe and define the risk
management activities and process requirements in the sale or transmission of electrical
power and natural gas considered appropriate for Vernon in the normal course of
business.
Vernon also operates a municipal gas utility. Therefore, the Risk Policy will also be
applicable to wholesale commodities and services related procurement activities to serve
VPU gas utility’s retail customers and provide natural gas for the operation of the Malburg
Generating Station (MGS) under the same risk management principles and procedures
as procurement activities related to power supply and regulatory compliance.
To the extent feasible, given market, political, regulatory, and environmental
constraints, Vernon shall ensure that the cost of its fuels, energy and related
services shall remain competitive over the long-term. Therefore, Vernon shall
conduct its energy and gas procurement in a manner necessary to compete
successfully in the marketplace while managing costs and mitigating risks as
outlined in the Risk Policy.
The ERMP is designed to guide energy portfolio activities and provide a framework
through which Vernon management and staff will identify, capture, measure, manage,
control, monitor and report financial, credit and operational (administrative) risks. The
program specifically addresses the management of the energy and gas portfolio through
designated procedures and requirements and provides a framework to maintain proper
controls over portfolio activities as they evolve over time. The results of the risk
management program will continually be evaluated and updated as needed to meet
Vernon’s objectives and ensure effective performance.
The purchasing and selling of energy, capacity, natural gas, natural gas transportation
service, Renewable Energy Credits (RECs), emission allowances, offset credits and
congestion revenue rights shall be conducted under the process and procedures and
within the guidelines and requirements of the Risk Policy. Vernon may not engage in
activities that expose Vernon to speculative commodity trading risk. Any activities that are
not related to Vernon’s normal power or gas supply business, inconsistent with the
process and procedures of the Risk Policy, or have the effect, or potential effect, of
increasing risk without authorization, shall be avoided.
For purposes of the Risk Policy, speculative commodity trading is defined as engaging in
a transaction with the sole intent of holding the position in anticipation of market price
fluctuations for economic gains. A financial contract may be used if its purpose is to lower
market or budget risk of a physical position. It should never be used as a speculative
trade where there is no physical position to cover. A speculative risk is unrelated to the
production and delivery of electricity or gas to Vernon’s retail customers and should be
avoided without any financial penalty to Vernon. The monetization of surplus owned
assets beyond Vernon’s load serving obligations within City Council approved parameters
is not considered speculative commodity trading.
The Risk Policy is prepared by VPU at the direction of the City Administrator’s office and
approved by Vernon’s City Council. The Energy Risk Management Committee (ERMC)
as described in the Risk Policy will oversee the implementation, compliance, and revision
of the Risk Policy by the appropriate VPU staff.
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Vernon’s employees involved with energy risk management activities, including members
of the ERMC, VPU’s management and operational level employees, are all expected to
review and fully understand the Risk Policy, including its requirements and procedures
and the extent to which their decisions and actions expose Vernon to risks, and to execute
a signed acknowledgment of the Risk Policy and its requirements as detailed in Appendix
B (Risk Policy Acknowledgment Form).
Vernon’s employees and contractors involved with energy risk management activities,
shall maintain the confidentiality of strategic plans for competitive transactions and
information exchanged with partners, suppliers, customers, and other entities as
necessary for successful market participation, to the fullest extent allowed under
California’s Public Records Act requirements.
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Section 2
Organizational Structure and Responsibilities
Lines of authority and responsibility for managing and controlling risk exposure
should be clearly defined. A guiding principle is the required separation between
power and gas trading activities and management oversight and control. The
objective is to facilitate, promote and maintain independent risk management and
reporting.
The Risk Policy is intended to create an organizational framework that will provide ample
management oversight while maintaining sufficient business flexibility to capture market
opportunities as they arise. The Risk Policy outlines specific transaction and counterparty
limits (Appendix D) by position within Vernon and creates an Energy Risk Management
Committee (ERMC) to manage the implementation of the Risk Policy. Vernon shall have
the following organizational structure and associated responsibilities in implementing the
Risk Policy:
1. Vernon City Council
1. Annual approval of the Risk Policy, including affirmation that the Risk Policy
establishes a process and procedures for the purchase and sale of energy
and natural gas which is commercially reasonable in order to prevent fraud
and collusion and to ensure that Vernon receives optimum value in its
procurements and/or any amendments to the Risk Policy.
2. Ultimate authority for all transactions entered into pursuant to the Risk
Policy, notwithstanding any delegations specified in the Risk Policy.
3. Based on recommendations of the ERMC, approval of any exceptions
outside of the authorized parameters of the Risk Policy, including any
exceptions to the authorities or limits in connection with transaction
management, authorized transactions, wholesale counterparty exposure
and any other requirements of the Risk Policy.
2. Energy Risk Management Committee
Vernon hereby establishes an ERMC to provide managerial oversight of the Risk Policy’s
implementation, compliance, monitoring, and amendment, as necessary. The ERMC
serves as the highest level of organizational risk management reporting to the City
Council. The ERMC will consist of four voting members and two non-voting members.
Voting members:
x City Administrator or their designee (Chair)
x VPU General Manager or their designee
x Planning and Analysis Manager
x Front Office Supervisor – Integrated Resources Manager
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Non-voting members:
x Finance Director
x City Attorney
The ERMC will be chaired by the City Administrator. The Planning and Analysis Manager
will act as Secretary. A quorum shall constitute three (3) voting members of the ERMC
with simple majority governing any decisions. In case of a tie, the City Administrator shall
govern any decision or recommendation of the ERMC.
Committee members are comprised of individuals filling the named post, or that may be
assigned from time-to-time to fulfill a particular function. The ERMC will meet as needed,
but not less than quarterly each calendar year, or as otherwise specified and agreed upon
by the ERMC, to review and act upon the responsibilities and requirements herein,
including any recommendations or information that shall be presented to City Council.
Initial meetings shall be monthly. Any member of the ERMC can request an emergency
meeting of the ERMC to address circumstances or issues that may require immediate
attention.
In cases where a position on the ERMC becomes vacant, the City Administrator will
resolve the vacancy by making an interim appointment at his or her discretion within 30
days. Meetings may be conducted by conference call or electronically under special
circumstances where an in-person meeting is not possible. Minutes of the ERMC
meetings will be kept for future review.
The ERMC is responsible for approving procedures to ensure compliance with the Risk
Policy. As delegated by the Vernon City Council, responsibilities, and authorities of the
ERMC include:
i. Ensuring compliance, monitoring and presentation of the Risk Policy to City
Council and executive management.
ii. Reviewing and recommending any amendments to the Risk Policy and
associated policies to City Council.
iii. Ensuring that reporting of risk management activities is provided to City
Council, as needed.
iv. Setting, changing, and approving the design of all internal control processes
for effectively implementing the Risk Policy.
v. Assessing the adequacy and functioning of the systems of control over
market and credit risks.
vi. Approving all parameters, risk tolerance and risk factors associated with
monitoring risks.
vii. Reviewing and approving trading strategies proposed by the Front Office
prior to the execution of individual transactions within the five-year time
horizon of the Risk Policy.
viii. Approval of strategy adjustments that result in variations of the approved
transactions.
ix. Approving all types of financial and physical transactions and controls
including new products and instruments.
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x. Reviewing and assessing the adequacy of risk reports generated by both
the Front- and Middle-Office.
xi. Periodic review, approval, rejection, or amendment of counterparty credit
limits.
xii. Authority to waive credit standards on a case-by-case basis to comply with
regulatory or governmental mandates.
xiii. Authority to waive credit standards on a case-by-case and limited basis for
Vernon term transactions with the purpose of mitigating potential adverse
liquidation exposures due to counterparty credit downgrade events after
transactions have been entered into.
xiv. Counterparty prepayment authorization.
xv. Review and approval of any credit enhancement, including any Guarantees
and/or Letters of Credit, and
xvi. Review all exceptions to this Risk Policy.
3. City Administrator’s Office
As outlined in the Risk Policy, the City Administrator, or their designee, will Chair the
ERMC and have the flexibility to approve transactions within the Transaction Limits
established in the Risk Policy (Appendix D). As personnel changes may dictate, the City
Administrator, or VPU’s General Manager, if delegated, may inform counterparties and
brokers regarding those personnel who are authorized to perform Front-, Middle- and
Back-Office activities on behalf of Vernon. The ERMC and City Administrator, or their
designees, are authorized to inform counterparties of any other authorizing restrictions
(i.e., no leveraged transactions, etc.) imposed on such authorized personnel.
Additionally, the City Administrator or as delegated, VPU’s General Manager or the
ERMC members may, for the avoidance of doubt, inform counterparties regarding trading
authority and restrictions, including authorized product types, Transaction Limits, Term
Limits and/or Counterparty Limits.
Based on direction from the ERMC, the City Administrator will have the flexibility to take
actions necessary to reduce risk or otherwise ensure compliance with the Risk Policy,
including but not limited to the ability to terminate and otherwise settle transactions that
are no longer in compliance with the Risk Policy. All such activity shall be reported and
presented to City Council as an information item.
4. City Attorney’s Office
A designated member of Vernon City Attorney’s Office shall serve as legal counsel to the
ERMC and shall advise staff, the ERMC and the City Council on all legal issues related
to the Risk Policy.
5. Vernon Staff
Vernon shall maintain a separation of business activities to ensure adequate control and
independent oversight of trading activities. The staff will be functionally organized using
the “Front-Middle-Back Office” model, defined as:
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i. The Front Office performs resource planning, executes transactions (purchasing
or selling), and prepares procurement strategies within authorized limits. Its
activities are under the purview of VPU’s General Manager.
a) Front Office activities will be functionally independent from the Middle
and Back Office activities. The Front Office will neither perform nor
supervise risk management activities, financial accounting, or
settlements.
ii. The Middle Office performs risk control and is responsible for maintaining the
mark-to-market inputs and performing portfolio analysis to monitor risk. Its
activities are under the purview of the ERMC. Middle Office activities and
responsibilities of the Planning and Analysis Manager include:
a) Developing and implementing risk management methodologies.
b) Performing portfolio valuation and composition statistics.
c) Monitoring and assessing current and potential credit exposure.
d) Monitoring and implementing counterparty risk limits as stated by this
Risk Policy.
e) Monitoring Front and Back Office activities for Risk Policy compliance.
f) Provide oversight on Renewable Portfolio Standards (RPS) and GHG
regulation compliance, and
g) Provide periodic reports as required by the ERMC.
iii. The Back Office supports the Front and Middle Offices with a wide range of
accounting, verification, reconciling, and administrative activities including deal
confirmations review and invoice processing. Its activities are under the purview of
VPU’s General Manager. The Back Office shall be responsible for monthly check-
outs with each counterparty and providing the verified data to the Middle Office.
Back Office activities include:
a) Verify Open Access Technology International (OATI) tags and day
ahead schedules.
b) Record energy flow on respective ECS sheet.
c) Record CAISO meter data for the resources. Notify schedulers of
outages, curtailments, and discrepancies.
d) Verify and reconcile Broker and Consultant invoices.
e) Analyze Resource Adequacy and Bilateral Import Trade contracts.
Verify MW and price with counterparty.
f) Settle weekly CAISO Market and Participating Transmission Owner
(PTO) invoices.
g) Record and reconcile Edison invoices.
h) Verify and reconcile Energy invoices.
i) Record and reconcile SCPPA Renewable Energy Project invoices.
j) Analyze Customer Service meter data to calculate and create gas
shipper’s imbalance statements.
k) Analyze and verify gas purchase and sales invoices.
l) Reconcile gas invoices with counterparties.
m) Verify gas sales counterparties and create gas sales invoices in the
City’s Finance and Accounting System.
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n) Analyze, update, and finalize nomination sheet (NOMS) to confirm gas
purchase and sales and notify schedulers/Traders of any changes or
discrepancies.
o) Reconcile Portfolio Content Category (PCC) procurement invoices.
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Section 3
Hedging Program and Requirements
While being mindful of the objective and need of maintaining competitive rates, Vernon
seeks to minimize financial exposure to spot market wholesale electricity and natural gas
availabilities and price volatilities by the use of hedging. Failure to adequately hedge
market exposure creates budget uncertainty and retail rate instability.
In order to mitigate potential financial exposure to volatile market conditions and
provide budget certainty, the Risk Policy limits the quantities of capacity, energy
and natural gas that are exposed to spot market in a systematic and defined
manner. As a general principle, Prompt Month and nearby fiscal years should be more
fully hedged when compared to the outer years to reduce short-term risk and to provide
more budget certainty for the current and upcoming fiscal years. Vernon shall have a
large percentage of its gas and power requirements purchased if short or sold if long to
comply with the Risk Policy.
Nevertheless, Vernon should still maintain some exposure to the spot market due to the
unavoidable mismatches between the forward energy purchases and sales and the
variability of the consumption pattern of Vernon’s electric and gas requirements. While a
forward commodity purchase may be used to reduce overall financial exposure, Vernon
may be exposed to potentially having purchased too much energy or gas to meet peak
loads and selling the excess during shoulder or off-peak periods when loads and prices
are lower.
Analysis of the most cost-effective combination of contracts and fixed price purchases of
energy and natural gas should be conducted regularly by the Planning and Analysis
Manager and VPU’s Front Office. The results of these analyses and the resulting hedging
strategies are to be presented to the ERMC at least on an annual basis in the form of
applicable procurement strategies and updated periodically as needed and
circumstances warrant. The ERMC is to review and approve the applicable procurement
strategies, and any such updates or amendments, before the recommended hedging
strategies are executed.
Authorized Transactions are detailed in Appendix C; Energy and Natural Gas
Transaction Limits are detailed in Appendix D and Vernon Procurement Strategies,
including Hedging Requirements, are detailed in Appendix E. Term, Volume and
Financial Limits under Appendix D are on a per transaction basis, but Counterparty
Limits are on an individual counterparty basis, tracked on the totality of
outstanding transactions for such counterparty.
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Section 4
Procedures for Authorized Transactions
In implementing the Hedging Program, Vernon shall only implement Authorized
Transactions consistent with the procedures of the Risk Policy. All transaction
activities in physical and financial products will be governed by the associated
transaction limits in and requirements of the Risk Policy. Authorized Transactions
are detailed in Appendix C and Energy and Natural Gas Transaction Limits in
Appendix D.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed
into federal law. The Dodd-Frank Act (Act) was enacted to increase transparency,
accountability and ensuring stability in the financial markets. The Commodity Futures
Trading Commission (CFTC) has enacted regulations to implement the Act that regulate
how financial swap transactions should be cleared, how counterparties to the financial
swap transactions should have risk policies in place before engaging in such financial
swap transactions, how such transactions must be conducted through a mandatory
clearing mechanism, and registration/recordkeeping/reporting requirements of such
financial swap transactions. Vernon shall be in full compliance with the CFTC regulations
under the Act.
A violation of the Risk Policy and the corresponding control procedures is a
serious matter, particularly if it involves market risk, hedging capacity, financial
cost, and/or Vernon’s reputation and standing in the industry. If a Front Office
representative knowingly enters into an unauthorized transaction or transacts with
a counterparty that has a credit exposure in excess of its assigned credit limit,
he/she may be subject to action under Vernon’s Human Resources (HR) policies.
1. New Products Approval Process
The ERMC is delegated authority to approve new products. A new product is any physical
or financial instrument, transaction type or commodity market currently not defined in the
most recently approved authorized transactions. The ERMC shall review and approve
the transaction details for any new products, including but not limited to:
i. Transaction terms, including objectives, pricing, and compliance with the Risk
Policy.
ii. Identification of risks, including credit and market risk, and any risk mitigation
considerations.
iii. Operational, administration, and management considerations, subject to
Middle- and Back-Office verification.
iv. Additional considerations including, accounting, regulatory, and tax related
requirements and risks.
v. Proposed reporting requirements, including any changes to current procedures
and systems requirements arising from implementation.
vi. Special consideration shall be given to the transaction process to ensure that
proper control mechanisms are in place in order to prevent an unauthorized
transaction from being executed.
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vii. Legal, tax, finance and internal audit review and concurrence, if necessary.
The Front Office shall prepare a report including the elements described above, the
proposed limits, and written recommendation for ERMC approval of the new product and
any required amendments to the Risk Policy.
The report and written recommendation shall be presented to the ERMC for review and
approval. In the event that circumstances and/or market conditions do not allow for delay,
the report and recommendation for approval shall be distributed in electronic format to
the ERMC. Transactions under the new product are prohibited until approved by the
ERMC.
2. Transaction Management
Transactions must be authorized and executed pursuant to the Risk Policy. No
transactions shall be permitted unless there is adequate training and supervision
of all transactions consistent with the Risk Policy.
Monthly forward volumes shall be prepared by the Front Office no less than annually in
connection with the Vernon Budget and approved by the ERMC. The applicable
procurement strategy pursuant to Risk Policy shall be documented for transactional
strategies and related transactions for the projected monthly forward volumes. Such
projected monthly forward volumes shall be adjusted as needed and circumstances
warrant and presented to the ERMC, including any changes to the procurement strategy.
Required master or enabling agreements must be in effect prior to any transactions.
The Front Office staff shall be authorized to enter into transactions, (a) pursuant to a
procurement strategy approved by the ERMC under the Risk Policy or (b) subject to
compliance with their Authorized Transactions and Transaction Limits specified in
Appendices C and D. Term, Volume and Financial Limits under Appendix D are on
a per transaction basis, but Counterparty Limits are on an individual counterparty
basis, tracked on the totality of outstanding transactions for such counterparty.
No new transaction(s), whether on a term, day ahead or real-time basis, are to be
entered into with a counterparty if such transaction(s) is expected to cause a
violation or exception to the Risk Policy. The only exception to be able to enter into
these transactions is if they mitigate or reduce existing exposure, are necessary to
ensure compliance with the Risk Policy or if those transactions have prior approval
of Vernon’s City Administrator, VPU’s General Manager, or the Planning and
Analysis Manager, within authorized limits.
Transactions with non-approved counterparties are only allowed during system
emergency to meet customer load and/or maintain system reliability. Transactions with
non-approved counterparties shall be reported to the Planning and Analysis Manager to
arrange the needed credit agreements, including any credit enhancement, to establish
protections to Vernon.
The Front Office shall be responsible for determining the type and cost of any proposed
term transaction and shall verify that the counterparty to the transaction is on the ERMC
approved list of counterparties. Competitive pricing process is expected to be followed
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for all transactions. Quotes for commitment are expected to be obtained competitively
from the available and approved counterparties, consistent with the size and type of
transaction. Traders are expected to obtain the most favorable available in the market
and to use commercially reasonable efforts to do so by obtaining or otherwise observing
multiple quotes for any transaction.
All transactions must be executed on a recorded phone line, an electronic trading platform
which can be recorded, documented, and audited or through a signed confirmation from
both parties. The use of instant messaging should be limited to transactions through
Intercontinental Exchange (ICE) for transactions of three months or less (real time, day
ahead and monthly). All transactions shall be executed at Vernon’s offices. All other off-
premises transactions are prohibited unless authorized by Vernon’s City Administrator, or
as delegated to VPU’s General Manager and reported to the ERMC in specific instances.
Once the term transaction has been completed and confirmed by the counterparty, it is
the responsibility of the Front Office staff to cause the recording of the transaction and
update the systems and records to reflect all current transactions. Immediately after a
transaction is confirmed, it is responsibility of the Front Office staff to update the
transaction log to reflect all current transactions and to provide an updated version of the
transaction log to the Planning and Analysis Manager for cross-check.
Copies of any written or trading confirmation, transaction invoicing (when available) and
any other related documents (collectively, “Transaction Documentation”) shall be sent to
the Planning and Analysis Manager within three (3) business days of the transaction for
verification that the transaction was in compliance with the Risk Policy. Such Transaction
Documentation shall also be provided to the applicable Back Office staff within three (3)
business days of the transaction. If Transaction Documentation is not provided to the
Planning and Analysis Manager within the three (3) business days as required by this
Risk Policy, this will be documented as stated on the Control Exception Report under
Section 7 of the Risk Policy.
3. Contract Requirements
When entering into a transaction, Front Office staff must make sure that all proper
enabling agreements are in place with the counterparty. Below is a list of the approved
agreements.
x Western Systems Power Pool (WSPP) Agreement. Master agreement used for
short-term and term physical and financial transactions with WSPP members.
x North American Energy Standards Board (NAESB) Agreement. Contract for sale
and purchase of natural gas with standardized set of business practices and
standards that most buyers and sellers have adopted for their natural gas and
electricity transactions.
x International Swaps and Derivatives Association, Inc. (ISDA) Agreement. Master
agreement to be used for swap transactions.
Master netting agreements should be incorporated into all counterparty agreements and
transactions. Back and Middle Offices will ensure that any non-standard terms and
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conditions are properly submitted for review and approval by the ERMC and the City
Attorney’s Office, if necessary, prior to Vernon becoming financially committed to the
transaction.
Agreement terms and conditions shall not conflict with the terms and conditions
required by Vernon as described below. All master or enabling agreements must
be approved as to form by the ERMC and by Vernon’s City Council prior to
execution. All confirmations or special conditions that substantively modify the
legal terms and conditions in the related master or enabling agreement must be
reviewed and approved as to form by Vernon’s City Attorney’s office and the ERMC.
Absent prior authorization from the appropriate regulatory body(s), any agreement
entered into pursuant to this Risk Policy containing terms and conditions inconsistent with
those articulated below will not be a valid agreement. Contract requirements should
include:
i. Each counterparty to any Agreement must warrant and represent that it
possesses the necessary corporate, governmental, and/or legal authority, right,
and power to enter into the agreement and perform each and every duty
imposed thereunder.
ii. No provision of any Agreement shall restrict the ability of Vernon to enter into
new agreements with any counterparty or to perform fully under any existing
agreement.
iii. Unless specifically required by a master or enabling agreement duly approved
by the appropriate regulatory body(s), no provision of any Agreement shall
require Vernon to unilaterally indemnify or release from liability any
counterparty, nor shall it impose indemnification or release of liability
obligations on Vernon less favorable than those imposed on the counterparty(s)
to the agreement.
iv. No waiver by Vernon of its rights under an Agreement shall be deemed a waiver
with respect to any other rights under that agreement or any other agreement.
v. Nothing contained in any Agreement shall be construed to create an
association, joint venture, trust, partnership, or agency relationship between or
among the parties, or to impose a trust or partnership covenant, obligation, or
liability on or with regard to any of the parties.
vi. No Agreement shall be construed to create rights in, or to grant remedies to,
any third party as a beneficiary of that agreement or of any duty, obligation, or
undertaking established therein.
vii. If Vernon has reasonable grounds for insecurity regarding the performance of
any obligation under any Agreement by any counterparty and the Agreement
so provides, Vernon may demand adequate assurance of performance,
including, but not limited to, a standby irrevocable letter of credit, a prepayment,
a security interest in an asset, a performance bond or guaranty or other
collateral or security of sufficient credit quality to protect the financial interests
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of Vernon from any counterparty default.
viii. No provision in any Agreement shall restrict the ability of Vernon to seek
specific performance of any counterparty’s duties and obligations under that
Agreement in any court of competent jurisdiction.
ix. No Agreement shall obligate Vernon to submit any dispute arising therefrom to
binding arbitration.
x. No provision in any Agreement shall require Vernon to act in contravention of
the California Public Records Act or otherwise restrict the ability of Vernon to
comply with existing, applicable laws and regulations.
4. Credit Requirements
Credit and contract requirements and limits for counterparties and any credit
enhancement, including any guarantors and corresponding guaranty, are identified in
Wholesale Counterparty Approval Exposure (Section 5) and Appendix D.
5. Speculation
Speculative commodity trading activities and positions are prohibited. For purposes
of this Risk Policy, speculative commodity trading is defined as engaging in a transaction
with the sole intent of holding the position in anticipation of market price fluctuations for
economic gains. Hedging and portfolio optimization are not considered speculative
commodity trading and is permitted.
6. Cap and Trade Regulation
Under the regulations promulgated by the California Air Resources Board (CARB),
Vernon must comply with Mandatory Reporting Requirements (MRR) for GHG emissions
as well as meet direct compliance obligations of GHG emissions from Vernon’s power
generating resources by obtaining sufficient GHG allowance instruments for each
compliance period. One GHG allowance entitles the entity holding it to incur one ton of
GHG emission. Failure to meet direct GHG compliance during any compliance period will
result in stiff financial penalties imposed by CARB that are multiples of compliance
obligations.
Vernon receives an annual allotment of allowances which approximately equates to
Vernon’s GHG emissions from Vernon’s power generating resources per year. In theory,
Vernon is fully hedged against its direct and indirect GHG compliance obligations
associated with Vernon’s owned and contracted for power generating resources.
However, Vernon is required to sell Vernon’s freely allocated allowances into the CARB
administered quarterly auctions and buy GHG allowances either in the CARB
administered auctions or through secondary markets, creating potential mismatches
between the allowance volume sold into the auction and allowance volume bought out of
the auction and secondary markets. Such volume mismatches cannot be effectively or
completely eliminated simply by engaging in hedging activities in the secondary markets.
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The most effective and cost neutral strategy is to engage in simultaneous buys and sales
transactions in the CARB quarterly auctions trying to match the buy and sale volumes at
all times. To the extent Vernon is able to match the buy and sale volumes in any given
auction, then the financial exposures can be managed and minimized.
In addition, Vernon might engage in additional hedging activities in the auctions or in the
secondary market for GHG compliance obligations not covered by the freely allocated
GHG allowances. ERMC will be annually updated, during its first quarterly meeting of
each year, of Vernon’s compliance status with the Cap-and-Trade program which may
include but not be limited to:
i. The amount of Vernon’s freely allocated allowances by vintage year.
ii. The amount of Vernon’s freely allocated allowances successfully sold (by
vintage year) in the CARB auctions.
iii. The revenues derived from the sales of freely allocated allowances by each
quarterly auction.
iv. The amount of allowances bought in the quarterly auctions and in the
secondary market.
v. The costs incurred from the purchases of allowances by each quarter.
vi. The cumulative direct compliance obligations for the compliance period.
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Section 5
Wholesale Counterparty Approval and
Exposure
Vernon fulfills its supply obligations by purchasing and selling power and natural gas
supply-related commodities that it owns or controls, contracting with counterparties on a
long-term or short-term basis, or participating in outside markets. These transaction
activities create counterparty credit risk, including:
x Payment Risk – the potential loss from the failure of a counterparty to make
payment on a contract.
x Performance Risk – the potential loss from the failure of a counterparty to
deliver or take delivery on a contract.
Vernon recognizes the need to manage counterparty credit risk as an essential
component of the diligent management of the Risk Policy. Effective wholesale
counterparty management and credit analysis is necessary to mitigate the
counterparty credit risk associated with physical or financial transactions in
electricity and natural gas markets.
The objective of the procedures for Wholesale Counterparty Exposure is to govern the
financial interactions of Vernon and its exposure to wholesale counterparties, whether
buying or selling energy or natural gas, and to preserve Vernon’s capital, liquidity, and
supply reliability by limiting wholesale counterparty credit risk to acceptable levels.
The Risk Policy is prepared to minimize as much as possible the negative financial impact
in the event of a default by transactional counterparties. The Front Office will only transact
with approved counterparties and within Transaction Limits. Counterparty credit risk
management is a functional responsibility of the Planning and Analysis Manager.
Analytical procedures for granting open lines of credit and managing counterparty
exposures are required. However, Vernon recognizes that the models used in managing
credit risk are not predictive; they are explanatory. Credit risk management models cannot
predict individual or collective credit events and monitoring and reporting is required to
help Vernon manage invariable changes in any counterparty’s credit and financial
wherewithal, which may arise due to unforeseen and non-correlated events.
The only exception to these policies is in the event of emergency conditions. During
emergency conditions, a limited number of transactions with non-approved counterparties
may be required to meet load requirements and/or maintain system stability. An
emergency condition is an immediate and unforeseen risk to health, life, property, or the
environment. Under such conditions, these transactions shall be reported to the Planning
and Analysis Manager within 48 hours of the trade execution. The Planning and Analysis
Manager will report the transactions to the ERMC at the next regularly scheduled ERMC
meeting.
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Counterparty credit risk will be monitored by the Planning and Analysis Manager, with
recommendations to the ERMC as necessary, with an emphasis in the following areas:
counterparty credit rating, regional diversity, contract type (fixed price or options), contract
term and Mark-to-Market exposure.
1. Approval Authority and Maximum Credit Exposure
Unless otherwise provided, all new counterparties are subject to the credit
approval process prior to entering into any transactions. Once approved by the
ERMC, a counterparty’s authorized credit limit (“Maximum Credit Exposure”) may
not be increased higher than the transaction limit authorized under the Risk Policy.
The ERMC shall review the list of approved counterparties on at least a quarterly basis.
The Planning and Analysis Manager is responsible for categorizing publicly
traded/privately held and publicly owned, and municipal counterparties into one of three
Classes based upon the highest published rating of at least one of three National
Recognized Statistical Ratings Organization (NRSRO) as identified below. The Planning
and Analysis Manager may factor in the published outlooks (positive, stable, negative)
should a categorization be borderline.
S&P Moody’s Fitch
Class I AA- to AAA Aa3 to Aaa AA- to AAA
Class II A- to A+ A3 to A1 A- to A+
Class III BBB- to BBB+ Baa3 to Baa1 BBB- to BBB+
Credit Exposure shall be based on the expected notional dollar value associated with
transactions to cover Vernon’s transaction activities. The notional dollar value shall be
reviewed quarterly by the ERMC or more frequently as required and adjusted based on
market prices and open exposure volumes. The total amount of a counterparty’s credit
exposure shall be cumulative across all transactions with the same counterparty and is
defined as the sum of:
i. The value of all amounts invoiced and unpaid (accounts receivable); plus
ii. The amount of all deliveries that have not yet been invoiced (unbilled sales);
plus
iii. The marked-to-market value of all forward transactions; less
iv. All offsetting amounts that are supported by legally binding netting agreements.
The Planning and Analysis Manager shall determine the Maximum Credit Exposure to
any individual counterparty, measured across all of the individual transactions with an
individual counterparty and which will be capped according to the counterparty “Class”
category assigned based on a credit evaluation prepared by the Planning and Analysis
Manager and approved by the ERMC. The counterparty credit exposure categories are:
i. Class I: Low-risk counterparties with Maximum Credit Exposure of $25
million and a term not to exceed sixty (60) months.
ii. Class II: Medium-risk counterparties with Maximum Credit Exposure of $10
million and a term not to exceed thirty-six (36) months.
iii. Class III: High-risk counterparties with Maximum Credit Exposure up to the
discretion of the Planning and Analysis Manager or VPU General Manager.
These counterparties will be limited to real-time and day-ahead.
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For publicly traded/privately held entities, Maximum Credit Exposure may be extended
up to 5% of the counterparty’s adjusted tangible net worth, not to exceed $25,000,000 for
Class I, $10 million for Class II and up to the discretion of the Planning and Analysis
Manager or VPU General Manager for Class III.
Tangible net Worth is defined as the sum of:
Shareholder equity; minus,
Goodwill; minus,
Intangible assets.
Dependent upon factors such as the size and/or terms of a transaction, the
following may be included, in addition to the above, in the determination of
Tangible Net Worth:
Minus,
Receivables from officers;
Investments in other trading companies;
Off-balance sheet liabilities.
In the case of publicly owned, and municipal counterparties, Maximum Credit Exposure
may be extended up to 100% of average Free Cash Flow or Net Revenues for the prior
two years, not to exceed $25,000,000 for Class I, $10 million for Class II and up to the
discretion of the Planning and Analysis Manager or VPU General Manager for Class III.
Free Cash Flow is defined as the sum of:
Net income; plus or minus,
Non-cash charges such as depreciation, plus or minus,
Changes in accounts receivable, inventory, prepaid expenses, accounts
payable, and accrued liabilities; minus,
Principal Debt Service payments.
Net Revenues is defined as the sum of:
Annual Operating Revenues; minus,
Annual Operating Expenses, minus,
Annual Debt Service,
Maximum Credit Exposure may be further reduced in the case of publicly owned, and
municipal counterparties based on the highest published rating of the counterparty and
according to the limits noted below:
AAA = 100%
AA- to AA+ = 90%
A- to A+ = 80%
BBB to BBB+ = 70%
BBB- = 60%
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For example, if a publicly owned counterparty in Class II qualifies for a credit limit of
$10,000,000 based on the cash flow test (e.g., 100% of average free cash flow for past
two years not to exceed $10,000,000) and has a rating of A, then the maximum policy
limit allowed would be $8,000,000 ($10,000,000 x .80 = $8,000,000).
It will be the responsibility of the Planning and Analysis Manager to set lower limits, if any,
for individual counterparties when additional information is available, including split
ratings among different rating agencies and/or rating outlooks, that would otherwise
reduce the amount of credit exposure that Vernon may want to an individual counterparty.
It will be the responsibility of the Planning and Analysis Manager to set temporary lower
limits for counterparties when new information becomes available through public rating
agencies or other business news sources providing an alert about the financial situation
of a trading counterparty that could potentially impact Vernon, including any changes in
the published credit ratings and/or credit outlooks.
The following counterparties are not subject to this credit approval process:
i. Any counterparty and/or resource in which Vernon has an interest through
a legally separate financing agency (e.g., Southern California Public Power
Authority).
ii. Publicly owned, and municipal counterparty with a rating of A- or better.
Such counterparties shall be automatically added as an Approved
Counterparty with a Maximum Credit Exposure as authorized herein.
iii. Counterparties associated with sale or purchase of RA under the WSPP for
a term not to exceed twelve (12) months and cost not to exceed $1 million.
iv. Counterparties associated with sale or purchase of RECs for a cost not to
exceed $1 million.
v. Counterparties associated with day-ahead/hour-ahead purchases where
risk associated with market movements is eliminated.
vi. Counterparties subject to a master agreement for transactions whereby the
credit risk is not assumed by Vernon (e.g., ICE or the CAISO).
Any such transactions, including Transaction Documentation, shall be presented to the
Planning and Analysis Manager and the ERMC.
2. Credit Approval Process
The Front Office is responsible for submitting recommendations of new counterparties for
credit review and approval to the Planning and Analysis Manager. The Planning and
Analysis Manager will establish credit limits for credit worthy counterparties based upon
satisfactory review of the financial capacity and wherewithal of a counterparty to meet its
obligations, including, but not limited to, the balance sheet, income statement, statement
of cash flows, associated notes and any financial metrics that the Planning and Analysis
Manager deems material. All counterparties will be reviewed for public debt ratings as
published by a NRSRO such as Standard & Poor’s Rating Group (S&P), Moody’s Investor
Services (Moody’s), and/or Fitch Ratings (Fitch).
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Contracts proposed between Vernon and counterparties not meeting Vernon’s minimum
credit requirements are subject to the prior approval of the ERMC and will be reported to
Vernon City Council.
Once a counterparty has been determined creditworthy, the Planning and Analysis
Manager will assign the credit limit to the counterparty and provide to the Front Office an
updated approved counterparty list. The list will be reviewed at least on a semi-annual
basis or as material new information is learned that would otherwise impact an individual
counterparty, to assess if there are any changes needed to any of the approved
counterparties and the corresponding credit limits. The Planning and Analysis Manager
shall inform the traders and the ERMC of any such changes.
Although a counterparty may qualify for a certain maximum credit limit, anticipated
transaction volumes, proprietary scoring, default probabilities as provided by a reputable
credit monitoring service, and other business and financial factors may prompt the
selection of a lower limit at the discretion of the Planning and Analysis Manager. As a
result, the credit limit methodology provides a maximum credit exposure while allowing
flexibility in response to normal business activities or changes in a counterparty’s credit
quality or financial metrics to reduce the allowable credit exposure of any individual
counterparty.
3. Credit Enhancement
If a counterparty does not meet Vernon’s minimum credit requirements or its rating is
below investment grade, unless waived by the ERMC, credit enhancement is required
before trading is permitted as specified herein. The enhancements can be in one of the
following types of security prior to the execution of transactions:
i. Guarantees
Wholesale counterparties may provide a Guarantee from a third party, or
parent, that meet the creditworthiness requirements. If a counterparty provides
such a Guarantee, the amount of any open line of credit will be determined
through an analysis of the financial strength of the guarantor, which must have
a senior debt rating of at least “A-” (or its equivalent) from a NRSRO. The
guarantor will be considered liable for the obligations of the counterparty.
All Guarantees must be approved as to form by the City Attorney’s Office.
Specific policy requirements for Guarantees are described in the Authorized
Transactions and Limits.
ii. Letter of Credit or Surety Bond
Counterparties may provide an irrevocable standby Letter of Credit or Surety
Bond for an amount sufficient to cover the related transactions. Letters of Credit
or a Surety Bond must be issued by a bank, financial institution or guarantor
which has a senior debt rating of at least “A-” (or its equivalent) from a NRSRO.
Letters of Credit and Surety Bonds must have a term of at least forty-five (45)
days past the term of the transaction(s).
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iii. Credit Enhancement Requirements
Any credit enhancement or guaranty entered into for the purpose of protecting
the financial interests of Vernon shall contain the following provisions:
a. A statement that the guaranty is one of payment and not of collection.
b. A statement that the guaranteed obligations are unconditional,
irrespective of value, genuineness, validity, waiver, release, alteration,
amendment, or enforceability of the guaranteed obligations.
c. A statement that the guarantor agrees to pay the guaranteed obligations
on the date due and waives demand, notice, marshaling of assets, or
any comparable requirements.
d. A statement that the guarantor waives its right to subrogation until the
guaranteed obligations are paid in full.
e. A statement that the guaranty shall reinstate if any guaranteed obligation
made by the primary obligor is recaptured as a result of the primary
obligor’s bankruptcy or insolvency.
f. A statement that the guaranty is binding on successors of the guarantor.
g. A statement restricting the guarantor’s right to terminate the guaranty
with less than thirty (30) days’ notice.
4. Prepayment
For sale transactions, counterparties may provide a prepayment or a cash margin deposit
in an amount that is sufficient to cover the related transactions. Discounts for prepayment,
consistent with industry standards, may be applied to the sum owed as authorized by the
City Administrator, or as delegated to VPU’s General Manager.
5. Credit Controls
Controls over counterparty inputs and systems operations are of particular importance in
ensuring the integrity of data used in counterparty credit risk control and management. In
all cases, the Planning and Analysis Manager will be responsible for managing the
wholesale counterparty review and rating process, monitoring credit risk and wholesale
counterparty reporting.
The Planning and Analysis Manager shall notify the ERMC in the event that the
counterparty is determined to be an unacceptable credit risk. The Planning and Analysis
Manager may reduce the counterparty credit limit as a result of public news pertaining to
credit events including, but not limited to, press announcements, mergers, acquisitions,
business sale, reorganizations, and name changes.
Intentionally entering into unsecured transactions with a wholesale counterparty that has
total credit exposure in excess of its credit limit is not allowed under this Risk Policy unless
otherwise approved. VPU staff’s delegated authority to transact with approved
counterparties is discussed in Appendices C and D.
VPU’s Front Office and/or other employees or officers responsible for transacting
activities shall not be involved in the counterparty underwriting process. The underwriting
process shall have complete independence from all transacting activities and VPU’s staff.
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6. Margin Calls
A margin call may be necessary when counterparty credit exposure exceeds an
established credit limit. Timing of a margin call is not dictated by this Risk Policy, but
factors to consider include financial capacity, volume of business, overall portfolio
concentration and market conditions. Calling margin may include a request for cash
collateral or other credit enhancement. The Planning and Analysis Manager is
responsible for implementing a margin call.
In the normal course of business, the City does not expect to post collateral or margins
for trading activity. Any such requirements, including any requirements for trading
platforms, such as the ICE, shall be recommended by the Planning and Analysis Manager
and approved by the ERMC.
7. Credit File Documentation
Credit analysis, approvals and denials must be documented in writing and all counterparty
information shall be contained in formal credit files that are maintained by the Planning
and Analysis Manager. These credit files are expected to contain audited financial
statements and a credit review analysis report. These files should also contain as much
of the following as possible:
i. At least the two most recent years of audited financial statement
information.
ii. Rating information as published by a NRSRO.
iii. Other market intelligence or relevant information related to the counterparty.
iv. General industry information.
8. Waivers
A limited number of Vernon’s potential counterparties may be counterparties identified as
small-scale power producers, limited liability entities, or special purpose entities, or there
may be extenuating circumstances whereby a waiver of the standards is necessary to
avoid anticipated regulatory penalties. Based upon a recommendation of the Planning
and Analysis Manager, the ERMC may waive the credit standards on a case-by-case
basis for term transaction with such entities. The waiver of these transactions shall be
documented by the Planning and Analysis Manager and kept in the credit file of the
counterparties.
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Section 6
Risk Measurement, Monitoring, Reporting
Key to energy risk management is the evaluation and monitoring of risks, and the accurate
and timely information gathering and dissemination. The ERMC will establish a risk-
reporting framework that serves the needs of each level of the parties involved in any
aspects of energy risk management to allow them to perform their functions appropriately.
The Middle Office will provide or cause the risk reports to be provided to the ERMC on a
periodic basis (typically quarterly) via electronic mail. The ERMC will receive the periodic
risk reports. A sample risk report is contained in Appendix G, which shall contain but not
be limited to the following information:
1. Summary report showing compliance with the Risk Policy, including hedging
requirements, and the following:
i. Report of the power and gas resources and volumes showing net
short/long actual positions versus forecasted requirements.
ii. Transaction log identifying all executed transactions, including volume,
term, and price for natural gas and energy portfolios.
iii. List of counterparties, credit limits and balance of available capacity
pursuant to credit limits.
iv. Exceptions that were executed in connection with the Risk Policy,
including any transactions that required City Council’s approval.
v. Violations of this Risk Policy and details what responses were made.
2. Variance to budget report for current operating year and projections for the balance
of the year.
3. Summary report that identifies RPS compliance status.
4. Summary report that identifies GHG compliance status.
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Section 7
Control Exception Reporting
If, at any time, VPU staff contemplates the possibility of a transaction exceeding
authorities, authorized transaction limits or approved procurement strategies
under the Risk Policy, prior to the transaction execution, an approval to that
transaction must be obtained from City Council.
To obtain City Council’s approval, a summary should be written up to describe the
transaction, deal economics, rationale as to why VPU staff believes the transaction is
important to Vernon, identify any risks, and a summary of how the transaction does not
comply with the current policies and limits. The summary will be sent to ERMC for their
approval, prior to being sent to City Council. VPU staff may not execute the transaction
with the potential counterparty, until a formal City Council approval has been obtained.
If, at any time, there is a suspicion that a transaction has violated the Risk Policy
or has been concluded that exceeds a particular individual’s authorities or one or
more of the risk control policies, procedures, authorized transaction limits, or
approved strategies under the Risk Policy, the Planning and Analysis Manager
must be informed. Planning and Analysis Manager will review the transaction in
question, to check whether any control limits (at an individual or company level) have
been exceeded.
In the event that a transaction is found to have violated the Risk Policy, including but not
limited to, the established limits or authorities, the process for handling control exception
will depend on whether the violation was caused by intentional unauthorized or
inappropriate transaction activity or negligence (“Active Violation”) or whether the violation
was caused by changes in market or system factors impacting the portfolio (“Passive
Violation”). In cases where both conditions apply, the control exception shall be treated
as an active violation. Active violations represent a serious breach of the Risk Policy.
Person(s) responsible for active violations may be subject to action in accordance with
Vernon’s Human Resource (HR) policies.
For active violations, the Planning and Analysis Manager shall promptly notify the ERMC,
the City Administrator and VPU’s General Manager and the supervisor and the staff
responsible for the active violation(s). Such notification shall be both verbal and written
and shall take place as soon as practicable after the control exception is detected.
The Planning and Analysis Manager will prepare a Control Exception Report. The report
will identify the transaction details, the nature and result of the violation of the Risk Policy,
the process by which the transaction was allowed to proceed without the relevant
authorities, any steps that were taken in response, any mitigating circumstances, and any
proposals to amend procedures to prevent a similar circumstance from arising in the
future.
The Middle Office and the Front Office shall review and analyze alternatives or other
required mitigation steps in response to a violation of the Risk Policy to determine the
optimal action to return any position to within limits and the requirements of the Risk
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Policy. The Middle Office shall coordinate with the Back Office to provide analysis
regarding any impact to financial statements resulting from the limit violation or as a result
of potential hedging activities. Any risk reduction or mitigation transactions shall normally
be executed by the close of business day. If, Front and Middle Office agree it is preferable
to wait until the next business day to execute such transactions, execution may be
delayed by up to one business day.
Although the Risk Policy defines internal controls and procedures that are applicable to
all energy risk management activities, there could be exceptions to internal controls that
are not directly associated with the transaction execution process and its authorization
limits (at individual or company level). The reporting process to the ERMC for this type of
exceptions will be at the discretion of the Planning and Analysis Manager in consultation
with the City Administrator and VPU’s General Manager. If the internal control exception
is unintentional and there is no transaction impact, the Planning and Analysis Manager
will review, document, and discuss the exception with the employee’s supervisor to avoid
recurrence and will inform VPU’s General Manager of the occurrence.
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Section 8
Conflict of Interests
Vernon employees or officers responsible for directly supporting, reviewing, or authorizing
transaction activities shall not enter into, or direct others to enter into, any energy, natural
gas, or related transactions other than on behalf of Vernon. As stated on Vernon’s Conflict
of Interests Code, all designated Vernon employees and officers shall file no later than
April 1 an annual Statement of Economic Interests in order to disclose any financial
interest in Vernon’s trading approved counterparties.
It is Vernon’s intent to have its employees and officers with assigned responsibilities
under the Risk Policy to be fully knowledgeable of conflict of interest and market
manipulation issues in carrying out their duties and responsibilities under the Risk Policy.
Vernon may require its employees and officers to undertake periodic trainings in conflict
of interests and market manipulation issues.
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Section 9
Review, Authorization and Revision Process
Due to the dynamic nature of markets, it is important to recognize that Vernon’s risk
management programs will evolve over time as market conditions and business factors
change. A mechanism will be implemented for amending elements of the risk
management program, including the Risk Policy, in order to reflect such changes. This
section specifies a process for revising and implementing the Risk Policy, as follows:
1. Vernon City Council shall approve the Risk Policy no less than annually.
2. Requests for amendments to this Risk Policy are to be sent to the ERMC in writing
based on the recommendation of the Planning and Analysis Manager, for ERMC
review and possible approval, prior to being sent to the City Council for approval.
i. The Risk Policy amendment proposal shall include the section to be
amended, a draft of the amendment language, the reason for the
proposed amendment, technical analysis, and financial, risk and credit
implications, if any and as applicable.
ii. The ERMC will review the Risk Policy amendment proposal and produce
final drafts of the amendment language.
iii. Any amendment shall be reviewed by the City Attorney’s office, and this
process will involve review by other functional areas in Vernon, at the
ERMC’s discretion.
3. The ERMC is responsible for recommending amendments to the Risk Policy to the
Vernon City Council, and Vernon City Council shall review, and as appropriate,
approve amendments to the Risk Policy.
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Appendix A
Glossary of Terms
Arbitrage: The risk-free exploitation of temporary market price anomalies in related
commodities or instruments, generally by the purchase of a commodity or instrument that
is relatively low in price and the sale of the commodity or instrument that is relatively high
priced. In order to be market neutral, the purchase and sale of the commodities or
instruments should be simultaneous.
CARB - California Air Resources Board
CCO - California Carbon Offsets
CAISO - California Independent System Operator
Call Option: An option that gives the buyer (holder) the right, but not the obligation, to buy
a futures contract (enter into a long futures position) for a specified price within a specified
period of time in exchange for a one-time premium payment. It obligates the seller (writer)
of an option to sell the underlying futures contract (enter into a short futures position) at
the designated price, should the option be exercised.
Collar: A financial instrument used to guarantee a maximum and minimum price paid for
natural gas or energy.
CFTC - Commodity Futures Trading Commission
Cost VaR (Value at Risk): Cost VaR summarizes the expected maximum “cost” exposure
over a target horizon with a given confidence level. For example, if trends indicate that an
expected (or average) cost is $100 but volatility indicates that this cost may fluctuate
wildly, VaR will capture the magnitude of this volatility as a summary number. This
number, or estimate, can then be added to average or expected cost in order to measure
the impact of volatility on potential cost.
Counterparty: A party on either side of a transaction (i.e., purchasing counterparty as
opposed to a selling counterparty). External transacting parties such as the CAISO and
NYMEX are not included in calculating counterparty credit exposures.
Counterparty VaR: The dollar estimates of the risk that subsequent changes in market
price will result in increased counterparty credit exposure.
Credit VaR: The statistical estimate of potential losses in a portfolio due to changes in
counterparty credit ratings.
Derivative: Any financial instrument, such as a futures contract, swap, or option, which
derives its value from the value of an underlying security or physical commodity.
Discretionary Resource: Resources that are flexible in their dispatch and, as a result, are
often managed as options in the sense that they may or may not be scheduled for
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dispatch. Discretionary resources contain less contractual scheduling limitations than
must-take resources.
Displacement: The replacement of one generation resource with the matching amount of
another competitively priced resource. Displacements provide for economic optimization
of discretionary resources.
Emission Allowances: Tradable compliance instrument that grants authorization to emit
up to one metric ton of carbon dioxide equivalent.
ERC - Emission Reduction Credits
Energy Capacity: The maximum amount of electric power available for generation or use,
usually expressed in kilowatts (kW) or megawatts (MW).
Electrical Energy: The generation or use of electric power over some period, usually
expressed in megawatt hours (MWh), kilowatt hours (kWh) or gigawatt hours (GWh).
Exercise Price: Also known as the strike price. The price at which futures are bought or
sold if an option is exercised.
GHG - Greenhouse Gas
Hedge Book: The portfolio of long and short positions as they relate to load balancing.
The hedge book differs from the trade book in that it is a collection of transactions initiated
for the sole intent of achieving load balance. While the hedge book can share similar
characteristics with the trade book (i.e., futures and options positions can exist in both
books) the hedge book is not designed to maximize profits. The hedge book is designed
to mitigate exposure to risk associated with load variability and volatility in cost.
ICE - Intercontinental Energy Exchange
ISDA - International Swaps and Derivatives Association
Least Cost Supply Portfolio: The mix of resources which optimizes the cost/risk profile of
the utility. For example, if the utility is risk averse, a least-cost supply mix may have a
higher cost than a supply mix that exposes the utility to greater fluctuations in volatility
and reliability.
Load Balancing: Meeting fluctuations in demand for power.
Load Management: Economic reduction of electric energy demand during a utility’s peak
generating periods. Load management differs from conservation in that load management
strategies shift the use of energy while conservation programs reduce the demand for
energy.
Malburg Generating Station (MGS): City of Vernon natural gas generating station.
Mandatory Reporting Requirements (MRR’s): Emissions reporting requirements as
promulgated by the CARB.
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Nationally Recognized Statistical Rating Organizations (NRSRO): Standard & Poor’s
(S&P), Moody’s Investor Services (Moody’s), and/or Fitch Ratings (Fitch).
NAESB - North American Energy Standards Board
OATI - Open Access Technology International
Optimization: The process of utilizing strategies and instruments to optimize the economic
benefits associated with load and resource management. Optimization differs from
trading in that the strategic rationale for a transaction is the driver rather than the
economic benefit alone. Trading functions are designed to form a commodity position with
the intent of speculating on market arbitrage opportunities.
Option: A contract that gives the holder the right, but not the obligation, to purchase or
sell the underlying commodity at a specified price during a specified time period.
Participating Transmission Operator (PTO): Transmission operator participating in the
CAISO.
Payment Risk: The potential loss from the failure of a counterparty to make a payment on
a contract.
Performance Risk: The potential loss from the failure of a counterparty to deliver or take
delivery on a contract.
Portfolio Content Category (PCC): Grandfathered RPS resource categories 1, 2, or 3 for
the RPS compliance period.
Premium: Amount paid to have the right or obligation to exercise an option.
Prompt Month: The month following the current operating month.
Put Option: An option that gives the buyer, or holder of the contract, the right but not the
obligation to sell a futures contract at a specific price during a specific time period in
exchange for a one-time premium payment. It obligates the seller, or writer, of the option
to buy the underlying futures contract at the designated price should the option be
exercised at that price.
Renewable Energy Credits (REC): Non-tangible energy commodities that are tradable
and represent proof that 1 megawatt-hour (MWh) of electricity was generated from an
eligible renewable energy resource. The owners of the REC can claim to have purchased
renewable energy.
RTC - Reclaim Trading Credits
Renewable Portfolio Standards (RPS): Renewable resource requirements as
promulgated by the State of California.
Speculation: The taking of an unhedged position (short or long) with the intent of holding
the position in anticipation of changes in market prices.
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Supply Requirements: Those requirements related to reliability and reserve standards
mandated by the requirements of regulatory agencies of competent jurisdictions.
Swap: A custom-tailored, individually negotiated transaction designed to manage
financial risk. In a typical commodity or price swap parties exchange payments based
upon the change in the price of a commodity or market index while fixing the price they
effectively pay for the physical commodity. The transaction enables each party to manage
exposure to commodity price or index values. Settlements are made in cash.
Transaction Limits: Maximum allowable transaction as authorized under the Risk Policy
as specified in Appendix D.
Transaction Liquidity: The existence of sufficient volume of transactions of a particular
product and commodity that generally assures a party’s ability to locate counterparty that
is willing to either buy or sell the product in question.
Uncovered Option: An option on an underlying asset for which the seller is not long (in
the case of a call option) or short (in the case of a put option) the underlying commodity.
Underlying Commodity: The commodity upon which the value of a derivative is
dependent.
Volatility: The magnitude and frequency of changes in prices over time. Standard
deviation is a measure of volatility.
Wheeling: In the energy market wheeling refers to the interstate or intrastate sale of power
or the transmission of power from one system to another.
WECC: The Western Electric Coordinating Council a regional reliability council created
and recognized by the North America Electric Reliability Council is responsible for
establishing guidelines and procedures related to the reliable electric operation of the 11
western U.S. states as well as parts of Canada and Mexico.
WREGIS: Renewable energy tracking system for the region covered by WECC under
which renewable energy credits (REC) are created for registered generating units.
WSPP: The Western Systems Power Pool is an organization comprised of most western
utilities and power marketers. A significant development of this group is the WSPP
agreement, a standardized enabling agreement, or master contract, utilized by over 200
utilities, marketers, and other entities across the U.S.
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Appendix B
Risk Policy Acknowledgement Form
I hereby acknowledge the receipt of the City of Vernon's Energy Risk Management
Policy, approved by Resolution 2022-XX. I understand that it is my responsibility to read
and comply with the policies contained in this policy.
Signature:
___________________________________ Date: ____________________________
Print Name: __________________________________
Employee ID#: ________________________________
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Appendix C
Authorized Transactions
Vernon Authorized Transactions
Vernon’s procurement strategy, pursuant to Appendix E, shall be documented for
transactional strategies and related transactions. Required master or enabling
agreements must be in effect prior to any transactions. Authorized Transactions shall
include:
1. Forward Power Purchases/Sales
i. Purchase or Sale of forecasted surplus energy or natural gas
ii. Purchase or Sale of forecasted surplus system, local or flexible Resource
Adequacy capacity
iii. Cover a forecasted supply shortage
iv. Economic displacement power purchase of existing physical resources
v. System, local and flexible RA capacity, including the ability to enter into
RA swaps that if executed simultaneously shall be calculated at the net
exposure to Vernon for purposes of the Transaction limits outlined in
Appendix D.
2. Purchases/Sales Transaction in the CAISO Markets (Day-Ahead, HASP, Real
Time and Congestion Management)
i. Energy (including Imbalance Energy)
ii. Capacity (system, local and flexible RA capacity)
iii. Ancillary Services (reg up, reg down, spin and non-spin)
iv. Inter SC Trades
v. Congestion Revenue Rights
3. Hedging Costs with Purchased Physical Transactions
i. Physical Call (purchase only)
ii. Physical Put (buying a Put when long on energy)
iii. Physical Collars (simultaneous purchase of a call option and sale of a put
option to bound the commodity prices within a specified price range)
iv. Heat Rate Options (purchase only)
4. Physical Natural Gas Products Purchases/Sales
i. Gas commodity (purchases and sales)
ii. Transportation
iii. Storage
iv. Puts/Calls (purchase only)
v. Physical Swap (fixed/index) for Gas/Power to hedge particular delivery
price risks, e.g., basis swap between SoCal Border and SoCal City Gate for
the delivery of natural gas products
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vi. Collars (simultaneous purchase of a call option and sale of a put option to
bound the commodity prices within a specified price range)
vii. Balancing
Short term Transactions (hourly) authorized under the CAISO Tariff, are within the
delegated authority of Appendix D. CAISO market functionality such as convergence
bidding in which Vernon is not mandated to participate, must be approved by the
ERMC, and will be added to this list of CAISO Approved Transactions. Such approval
must occur prior to Vernon initiating and participating in new products or functionalities
that are currently in or may be subsequently added to the CAISO markets.
Vernon shall ensure that any gas purchased under firm contracts is for the anticipated
forecasted operation and intended to be consumed at delivery when economic.
5. Renewable Energy Credits
To comply with RPS
6. Emission Credits Purchases/Sales (forward and after-the-fact)
i. GHG Allowances (purchases and sales)
ii. Reclaim Trading Credits (RTC’s) (purchase only)
iii. Emission Reduction Credits (ERC’s) (purchase only)
iv. California Carbon Offsets (CCO’s) (purchase only)
Purchases to meet the applicable compliance obligations and sales of GHG allowances
in compliance with CARB GHG regulations or in excess of Vernon’s need to meet
regulatory compliance are authorized. The applicable procurement strategy pursuant to
Appendix F, shall be documented for transactional strategies and related transactions.
7. Hedging Costs with Financial Instruments
Vernon, nor any of the employees, shall enter into hedging instruments using financial
instruments without adequate professional training, which shall include, but not be limited
to, risk, operational and compliance requirements. Any such instruments for VPU are
subject to the approval of the ERMC and shall be governed by Appendix D (Energy and
Natural Gas Transaction Limits).
i. Financial Call (purchase only)
ii. Financial Put (buying a put option when long on energy)
iii. Financial Collars (simultaneous purchase of a call option and sale of a put
option to bound the commodity prices within a specified price range)
iv. Financial Swap (fixed/index) for Gas/Power to hedge particular delivery
price risks, e.g., basis swap between SoCal Border and SoCal City Gate for
the delivery of natural gas products
v. Weather Derivatives (purchase only)
vi. Gas Options, Futures (purchase only)
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Appendix D
Energy and Natural Gas Transaction Limits
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APPENDIX E
Vernon Procurement Strategies
Appendix E describes the essential elements of the various procurement strategies,
including the Hedging Requirements, that Vernon is expected to engage in its role as
electric and natural gas service providers to ensure stable electric and natural gas rates
to end users by ensuring budget certainty, preserving supply cost advantages through
developing a least cost power and gas supply portfolios that meet load requirements,
state renewable energy and GHG regulations while capturing revenues from the sales of
surplus energy, capacity, renewable energy, GHG allowances and natural gas.
The Risk Policy requires that a Procurement Strategy be developed and presented to the
ERMC not less than annually, with periodic adjustments made as needed based on
changing circumstances, including but not limited to the energy needs of the City, the
operating profile of any owned generation and changes in customers, and/or prevailing
market conditions.
There are four elements that must be considered in connection with the development of
the annual Procurement Strategy for the electric utility and two related to VPU’s gas utility
that needs to be developed and approved by the ERMC. The procurement strategies
must include:
VPU’s Electric Utility:
x Procurement strategy related to energy resources for retail electric load to meet
specified annual energy percentage targets to hedge against market volatility and
ensure budget certainty and supply reliability.
x Procurement strategy related to the annual CAISO RA plan;
x Procurement strategy related to the annual CARB GHG compliance obligations.
x Procurement strategy related to the annual RPS compliance obligations.
VPU’s Gas Utility:
x Procurement strategy related to natural gas resources for retail gas load to meet
specified annual energy percentage targets to hedge against market volatility and
ensure budget certainty and supply reliability.
x Procurement strategy related to natural gas resources for owned generation,
including the MGS, in order to serve Vernon’s electric load and meet any regulatory
requirements.
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VPU’s Electric Utility:
1. Procurement Strategy for Energy to Meet Specific Energy Procurement
Targets Established by the ERMC
In order to achieve the goal of hedging Vernon’s power and natural gas price risks to
serve VPU’s retail electric load, VPU’s staff shall prepare a multi-year energy
Procurement Strategy not less than annually for approval by the ERMC, with a
periodic updated as needed. Before executing transactions to implement the hedging
strategy, the Procurement Strategy shall be approved by the ERMC. The multi-year
energy Procurement Strategy shall contain the following elements:
i. Forecast Monthly Energy Requirements
A tabulation of monthly forecast energy requirement in MWhs using generally
accepted forecasting methodologies/techniques shall be provided for a two-
year period, commencing the upcoming fiscal year and thru fiscal year two
years out. The forecast energy requirements will serve as the basis for the
energy procurement strategy.
ii. Percentage of Energy Already Hedged
A tabulation of monthly energy requirements already hedged under long term,
short term or ownership arrangements expressed in percent of monthly energy
requirement shall be provided for a two-year period, commencing the
upcoming fiscal year and thru the fiscal year two years out.
iii. Hedging Requirements
The Risk Policy also acknowledges that there will be a transition period in
FY2023 as the Risk Policy is implemented, including but not limited to, the
Hedging Requirements. It is intended that the City will begin implementing the
Hedging Requirements no later than June 30, 2023.
In order to ensure budget certainty, default monthly (or yearly) hedging bands
will be established with a targeted minimum and maximum monthly energy
hedging percentage, which will be differentiated by season (summer and non-
summer). Hedging bands will be reviewed by the ERMC and shall be adjusted
based on the energy needs of Vernon, the operating requirements of any
power generation, including but not limited to MGS, changes in the customer
profile of Vernon, including the addition or subtraction of any customers during
a fiscal year, and prevailing market conditions. Any such changes shall be
taken into consideration in any amendment to the Risk Policy, which shall be
approved by City Council not less than annually.
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Non-Summer (November - April)
Minimum
%
Maximum
% (*)
One Fiscal Year
Out
60%
100%
Two Fiscal
Years Out
20%
100%
(*) maximum percentage may be exceeded due to pre-existing legacy contracts
and generation ownership or due to regulatory requirements, e.g., RPS
mandates.
Summer (May - October)
Minimum
%
Maximum
% (*)
One Fiscal Year
Out
60%
100%
Two Fiscal
Years Out
20%
100%
(*) maximum percentage may be exceeded due to pre-existing legacy
contracts and generation ownership or due to regulatory requirements, e.g.,
RPS mandates.
iv. Forward Energy Products to Meet the Hedging Requirements and the
Not-to-Exceed Prices to Transact
The energy procurement strategy shall identify and document the energy
(power and gas) products that are commercially available that can be used to
bring the energy requirement hedging within the established hedging bands as
described above. For each of the products, the energy Procurement Strategy
will also document forward market prices that the products can be transacted
at and the price bounds that VPU Front Office staff are authorized to transact
these products.
The Procurement Strategy shall determine a Targeted Price for the projected
energy hedging requirements, taking into consideration current market pricing
forward pricing curves, and a reasonable expectation for volatility. Such price
shall be used for purposes of developing the Vernon Annual Budget. The
Targeted Price shall be used to determine price bounds for purposes of
authorizing transactions under the hedging requirements. The price bounds
should provide reasonable leeway for VPU Front Office staff to transact given
that forward market prices for the products can fluctuate from the time energy
procurement strategy is approved to the time transaction is consummated.
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Unless otherwise modified by ERMC, the price bound shall be 30% in excess
of the Targeted Price for the product, e.g., if the product to be procured is a
fixed price energy product at current forward market price of $60/MWh, then
the price bound for this product that VPU Front Office staff can transact without
further authorization from the ERMC will be $78 per MWh. Without additional
approval of the ERMC as specified below, transaction shall not be executed in
excess of the price bounds.
If time elapses without consummating the transactions contemplated in the
energy procurement strategy and forward market prices increase to exceed
the price bounds, then either (a) a revised energy procurement strategy will
be prepared and approved by the ERMC with the updated Targeted Price and
price bounds before VPU Front Office staff can transact for the particular
product, or (b) in the alternative, the City Administrator or VPU’s General
Manager may exercise their transaction limits specified in Appendix D.
v. Timing to Prepare the Multi-Year Energy Procurement Strategy and to
Execute Transactions to Stay Within the Hedging Band Requirement:
A two-year energy Procurement Strategy shall be prepared with sufficient lead
time, but no later than January 31 of each year for review and approval by the
ERMC. The Procurement Strategy shall be updated and approved by the
ERMC on a periodic basis as needed through the adoption of the Annual
Budget.
Unless modified by the ERMC and beginning on June 30, 2023, the timing to
complete the transactions for energy products contemplated in the approved
energy procurement strategy is as follows:
Timing Requirement
One Fiscal Year Out June 30
Two Fiscal Years Out June 30
A sample energy Procurement Strategy can be found in Appendix F.
2. Procurement Strategy for CAISO Annual RA Plan
Currently, VPU’s staff prepares annual CAISO RA plans documenting the capacity
resources that Vernon intends to utilize in the coming calendar year to fulfill Vernon’s RA
obligations with the CAISO.
Once the annual CAISO RA plan is prepared, VPU’s staff seeks the approval of Vernon
City Council before the plan is officially filed with the CAISO. The existing process to
prepare and approve RA plan comports with the spirit and intent of this Risk Policy and
should be continued and not be upended/duplicated by the procurement strategy
described herein.
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Rather, the elements of the procurement strategy for CAISO annual RA plan described
below will serve as the backstop to the extent the existing RA plan preparation and
approval process is modified or eliminated.
1.1. Backstop to the Existing CAISO Annual RA Plan Preparation and Approval Process
In order to comply with the annual CAISO RA requirements, VPU’s staff shall prepare
an annual RA plan for approval by the ERMC before executing transactions to implement
the RA plan. The annual RA Plan shall be prepared with sufficient lead time for review
and approval by the ERMC and timely execution of RA transactions. The execution of
RA transactions shall occur after ERMC approval of the procurement strategy and before
the annual RA Plan is due to the CAISO. The RA plan shall contain the following
elements:
i. Forecast Monthly Peak Capacity Requirements
A tabulation of forecast monthly peak capacities in MW for the RA
compliance period 1 using generally accepted forecasting
methodologies/techniques shall be provided.
ii. The Monthly CAISO system, local and flexible RA Capacity
Requirements
A tabulation of monthly CAISO system, local and flexible RA capacity
requirements for the RA compliance period shall be provided.
iii. System, local and flexible RA capacity already procured
A tabulation of monthly CAISO system, local and flexible RA capacity
already procured for the RA compliance period shall be provided.
iv. Analysis of system, local and flexible RA Capacity Positions
An analysis of monthly system, local and flexible RA capacity positions
(long and short) for the RA compliance period shall be provided.
v. Recommended Procurement Strategy
A recommended procurement strategy to purchase additional RA
capacity to cover RA shortfalls, to sell excess RA capacity or to
exchange or otherwise swap RA capacity in the various categories
shall be prepared in connection with the RA Plan and including an
analysis of cost implications. The recommended procurement strategy
shall be approved by the ERMC before the execution of RA
transactions take place. The recommended procurement strategy shall
1 The RA compliance period refers to the calendar year that Vernon is expected to submit an RA plan to the CAISO.
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include not-to-exceed prices for RA capacity for procurement
purposes, which unless specified otherwise and approved by ERMC,
shall be the prevailing market prices for the applicable RA capacity
product (system, local or flexible RA) plus up to 30% addition for
purchases to account for market price volatility. There is no restriction
on any sales price with the objective to maximize the achievable price
based on prevailing market conditions.
The RA procurement strategy also recognizes the RA transaction need
to take place in real time and may be executed in connection with the
simultaneous purchase and sale of RA capacity as long as such
transaction are within the authorized Transaction Limits of the Risk
Policy. Such transaction shall be viewed collectively and shall
constitute an exchange or swap whereby Vernon shall evaluate the net
exposure for purposes of complying with the Transaction Limits.
The RA procurement strategy also recognizes that while the immediate
annual requirements must be met for regulatory purposes, it is prudent
to evaluate the needs over the full regulatory compliance period, which
currently does not exceed three years. To the extent that there are
market opportunities to procure RA capacity during the compliance
period, such forward purchase opportunities shall be presented to the
ERMC for approval but shall not exceed the term of the existing
compliance period.
3. Procurement Strategy to Meet Annual CARB GHG Compliance
Obligations for both energy and natural gas
In order to meet the annual CARB GHG compliance obligations, VPU’s staff shall
prepare an annual GHG allowance/offset procurement strategy for approval by the
ERMC before executing transactions to implement GHG procurement strategy. The
annual GHG procurement strategy shall be prepared with sufficient lead time for review
and approval by the ERMC. The execution of GHG allowance/offset transactions shall
occur after ERMC approval of the annual GHG procurement strategy and before the
annual GHG compliance showing needs to be made to CARB.
The GHG procurement strategy shall contain the following elements:
i. The current balance of GHG allowances in Vernon’s GHG compliance
account.
ii. The amount of Vernon’s freely allocated GHG allowances from CARB in the
existing GHG compliance period.
iii. The amount of Vernon’s forecast GHG emissions for the GHG compliance
period from Vernon’s own or contracted power supply resources that Vernon
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has compliance obligations for.
iv. A recommended GHG allowance/offset procurement strategy to:
a. Sell/consign Vernon’s freely allocated GHG allowances into the four
quarterly GHG allowance auctions administered by CARB in the GHG
compliance period.
b. Buy GHG allowances needed by Vernon from the quarterly GHG
allowance auctions administered by CARB or thru the secondary markets
to meet Vernon’s GHG compliance obligations for the GHG compliance
period. Not-to-exceed GHG allowance prices shall be specified unless
waived by the ERMC.
c. Buy GHG offsets in the secondary market if Vernon intends to use GHG
offsets to meet a portion of its GHG compliance obligations for the GHG
compliance period. Not-to-exceed GHG offset prices shall be specified
unless waived by the ERMC.
d. Sell excess GHG allowances (other than the freely allocated GHG
allowances which must be consigned into CARB quarterly auctions) and/or
offsets in the secondary markets to maximize the value of Vernon’s GHG
compliance instruments. Floor prices for sales shall be specified unless
waived by the ERMC, and
e. Devise applicable adjustment processes to the procurement strategy
during the GHG compliance period if circumstances materially change.
The GHG procurement strategy also recognizes that while the immediate annual
requirements must be met for regulatory purposes, it is prudent to evaluate the needs
over the full regulatory compliance period, which currently does not exceed three years.
To the extent that there are market opportunities to procure GHG allowances/offsets
during the compliance period, such forward purchase opportunities shall be presented
to the ERMC for approval but shall not exceed the term of the existing compliance period.
While the GHG allowances/offsets may cover both energy and annual gas needs of
Vernon, VPU shall keep separate accounting and books and records allocating the
appropriate allowances/offsets and costs between the electric and gas utilities,
respectively.
4. Procurement Strategy to Meet the Annual RPS Compliance Obligations
In order to meet the annual RPS compliance obligations, VPU’s staff shall prepare an
annual RPS procurement strategy for approval by the ERMC before executing
transactions to implement RPS procurement strategy. The annual RPS procurement
strategy shall be prepared with sufficient lead time for review and approval by the ERMC.
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The execution of RPS resources transactions shall occur after ERMC approval of the
annual RPS procurement strategy and before the annual RPS compliance showing is
made. The RPS procurement strategy shall contain the following elements:
i. The forecasted retail electric sales (in MWh) in the RPS compliance period 2
using generally accepted forecasting methodologies/techniques.
ii. The applicable annual RPS target as percentage (%) of the annual retail sales
in accordance with CEC RPS regulations.
iii. Vernon’s forecasted annual RPS compliance obligations for the RPS
compliance period which equals the MWh quantity in item 1 multiplied by the
applicable annual RPS target above.
iv. A tabulation (in MWh) of the forecasted generation of Vernon’s RPS resources
by RPS categories (grandfathered RPS resources, PCC 1, 2 and 3) for the
RPS compliance period.
v. A tabulation of Vernon’s RPS resources carryovers (grandfathered and PCC
1 RPS resources only).
vi. A recommended RPS procurement strategy to:
a. Procure additional RPS resources by RPS categories if Vernon is short in
RPS resources for the RPS compliance period. Not-to-exceed prices by
RPS categories shall be specified unless waived by the ERMC.
b. Optimize the utilization of Vernon’s RPS carryovers for the RPS
compliance period.
c. If applicable, sell excess RPS resources not needed for compliance
purposes to maximize the value of such excess. Floor prices for such sales
shall be specified unless specifically waived by ERMC.
d. Devise applicable adjustment processes to the procurement strategy
during the RPS compliance period if circumstances materially change.
The RPS procurement strategy also recognizes that while the immediate annual
requirements must be met for regulatory purposes, it is prudent to evaluate the needs
over the full regulatory compliance period, which currently does not exceed three years.
To the extent that there are market opportunities to procure RPS resources during the
compliance period, such forward purchase opportunities shall be presented to the ERMC
for approval but shall not exceed the term of the existing compliance period.
2 The RPS compliance period refers to the upcoming calendar year that Vernon will have RPS compliance
obligations.
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VPU’s Gas Utility:
5. Procurement Strategy for Natural Gas to Meet Specific Gas Procurement
Targets Established by the ERMC
In order to achieve the goal of hedging Vernon’s natural gas price risks to serve VPU’s
retail gas load and to meet the projected requirements of the MGS as well as any other
future owned assets using natural gas as fuel, VPU’s staff shall prepare a multi-year
natural gas procurement strategy for annual approval by the ERMC. Such forecast shall
be updated on a periodic basis as needed given changing circumstances or market
conditions and presented to the ERMC for approval. The multi-year natural gas
procurement strategy shall contain the following elements:
i. Forecast Monthly Natural Gas Requirements
A tabulation of monthly forecast natural gas requirement in MMBtus for retail
load and MGS using generally accepted forecasting
methodologies/techniques shall be provided for a two-year period,
commencing the upcoming fiscal year and thru fiscal year two years out. The
forecast natural gas requirements will serve as the basis for the gas
procurement strategy.
ii. Percentage of Natural Gas Already Hedged
A tabulation of monthly retail natural gas requirements already hedged under
long term, short term or ownership arrangements expressed in percent of the
monthly gas requirement shall be provided for a two-year period, commencing
the upcoming fiscal year and thru fiscal year two years out.
iii. Hedging Requirements
In order to ensure budget certainty, default monthly (or yearly) hedging bands
will be established with a targeted minimum and maximum monthly gas
hedging percentage, which will be differentiated by season (summer and non-
summer). Hedging bands will be reviewed by the ERMC and shall be adjusted
based on the gas needs of Vernon, the operating requirements of any power
generation, including but not limited to MGS, changes in the customer profile
of Vernon, including the addition or subtraction of any customers during a
fiscal year, and prevailing market conditions. Any such changes shall be taken
into consideration in any amendment to the Risk Policy, which shall be
approved by City Council not less than annually.
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Non-Summer (November - April)
Minimum %
Maximum % (*)
One Fiscal Year Out 60% 100%
Two Fiscal Years Out 20% 100%
(*) maximum percentage may be exceeded due to pre-existing legacy natural
gas contracts.
Summer (May - October)
Minimum %
Maximum % (*)
One Fiscal Year Out 60% 100%
Two Fiscal Years Out 20% 100%
(*) maximum percentage may be exceeded due to pre-existing legacy natural
gas contracts.
iv. Forward Natural Gas Products to Meet the Hedging Requirements and
the Not-to-Exceed Prices to Transact
The natural gas procurement strategy shall identify and document the natural
gas products that are commercially available that can be used to bring the gas
requirement within the established hedging bands as described above. For
each of the products, the natural gas procurement strategy will also document
forward market prices that the products can be transacted at and the price
bounds that VPU Front Office staff are authorized to transact these products.
The Procurement Strategy shall determine a Targeted Price for the projected
natural gas requirements, taking into consideration current market pricing,
forward pricing curves, and a reasonable expectation for volatility. Such price
shall be used for purposes of developing the Vernon Annual Budget. The
Targeted Price shall be used to determine price bounds for purposes of
authorizing transactions under the hedging requirements. The price bounds
should provide reasonable leeway for VPU Front Office staff to transact given
that forward market prices for the products can fluctuate from the time energy
procurement strategy is approved to the time transaction is consummated.
Unless otherwise modified by ERMC, the price bound shall be 30% in excess
of the Targeted Price for the product, e.g., if the product to be procured is a
fixed price natural gas product at current forward market price of $6/MMBtu,
then the price bound for this product that VPU Front Office staff can transact
without further authorization from the ERMC will be $7.80/MMBtu. Without
additional approval of the ERMC as specified below, transaction shall not be
executed in excess of the price bounds.
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If time elapses without consummating the transactions contemplated in the
Procurement Strategy and forward market prices increase to exceed the price
bounds, then either (a) a revised energy procurement strategy will be prepared
and approved by the ERMC with the updated Targeted Price and price bounds
before VPU Front Office staff can transact for the particular product, or (b) in
the alternative, the City Administrator or VPU’s General Manager may
exercise their transaction limits specified in Appendix D.
v. Timing to Prepare the Multi-Year Natural Gas Procurement Strategy
and to Execute Transactions to Stay Within the Hedging Band
Requirement:
A two-year natural gas Procurement Strategy shall be prepared with sufficient
lead time, but no later than January 31 of each year for review and approval
by the ERMC. The Procurement Strategy shall be updated and approved by
the ERMC on a periodic basis as needed through the adoption of the Annual
Budget.
Unless modified by the ERMC and beginning on June 30, 2023, the timing to
complete the transactions for natural gas products contemplated in the
approved natural gas Procurement Strategy is as follows:
Timing Requirement
One Fiscal Year Out June 30
Two Fiscal Years Out June 30
A sample natural gas Procurement Strategy can be found in Appendix F.
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Appendix F
Sample Procurement Strategy
Sample procurement strategies for energy and natural gas are shown below.
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Appendix G
Sample ERMC Report
MEETING AGENDA AND REPORT
VERNON PUBLIC UTILITIES
ENERGY RISK MANAGEMENT COMMMITTEE
[Date]
[Time]
[Location]
The objective of the City of Vernon Public Utilities Department and the Energy Risk Management
Committee is to manage price risk inherent with serving load, including risks associated with
normal cost-hedging activities, those associated with participating in wholesale markets in general,
and the California Independent System Operator (CAISO) in particular.
MEETING MINUTES
1. Regular meeting of the ERMC on [Date]
STANDING ITEMS FOR REVIEW AND APPROVAL
2. Forward Strategy Sheet/Market Update
3. Resource Adequacy
4. Greenhouse Gas
5. Transaction Summary
6. Authorized Counterparties and Maximum Credit Exposure
DISCUSSION
7. Additional Information and Action Items
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ITEM 1: MEETING MINUTES
[INSERT MEETING MINUTES FROM PRIOR MEETING]
Meeting of: Regular Meeting of the Risk Management Committee
Date of Meeting: [Date]
Time of Meeting: [Time]
Place of Meeting: [Location]
Committee Members Present: [Name/Title]
Also in Attendance: [Name/Title]
1. _______
Prepared by: Richard Corbi
Planning and Analysis Manager
[Date]
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ITEM 2: FORWARD STRATEGY SHEET/MARKET UPDATE
[INSERT UPDATE ON LOAD FORECAST AND PERCENTAGE OF LOAD HEDGED]
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ITEM 3: RESOURCE ADEQUACY
[INSERT UPDATE ON RA]
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ITEM 4: GREENHOUSE GAS
[INSERT UPDATE ON GHG]
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ITEM 5: TRANSACTION SUMMARY
[INSERT Transaction Log]
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ITEM 6: AUTHORIZED COUNTERPARTIES AND MAX.
CREDIT EXPOSURE
[INSERT Summary of Authorized Counterparties and Max. Exposure]
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ITEM 7: ADDITIONAL DISCUSSION AND ACTION ITEMS
[INSERT Summary of Additional Information and Action Items]
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