HomeMy WebLinkAboutRES 011122-AB - Risk Management PolicyRESOLUTION NO. C)1 I 1 71-
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF GEORGETOWN,
TEXAS, ADPOTING THE ENERGY RISK MANAGEMENT POLICY UNDER
CHAPTER 13.38 OF THE CODE OF ORDINANCES; REPEALING
CONFLICTING RESOLUTIONS; INCLUDING A SEVERABILITY CLAUSE;
AND ESTABLISHING AN EFFECTIVE DATE.
WHEREAS, the City has determined that amending the Code of Ordinances facilitates
greater transparency by reflecting current practices and business needs; and
WHEREAS, the City passed Resolution No. 121019-Y on December 10, 2019, adopting the
Energy Risk Management Policy under Chapter 13.38 of the Code of Ordinances; and
WHEREAS, the City has identified amendments to the Energy Risk Management Policy
to better manage energy risk; and
WHEREAS, the City finds that amending the Energy Risk Management Policy will
enhance the City's ability to provide economic and reliable service to its customers.
NOW THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF
GEORGETOWN TEXAS:
SECTION 1. The facts and recitations contained in the preamble of this Resolution are
hereby found and declared to be true and correct, and are incorporated by reference herein and
expressly made a part hereof, as if copied verbatim.
SECTION 2. The Energy Risk Management Policy attached hereto as Exhibit A is hereby
adopted.
SECTION 3. The Mayor is hereby authorized to sign this Resolution and the City
Secretary to attest.
SECTION 4. This Resolution shall become effective and be in full force and effect upon
execution by the Mayor.
Resolution No. Page 1 of 2
Subject: Adoptin , Risk Management I oli", — Ch. 13.38
Date Approved 1 ZZ
PASSED AND APPROVED on the I I TV\ day of &AN&A_a202V.,.
ATTEST:
Robyn 5ensmore, City Secretary
APPROVED AS TO FORM:
Skye N4son, dity Attorney
CITY OF RG OWN, TZXAS
By:
look 9..h,.. @de , Mayor PIra T4-r-N,
Resolution No. OW Page 2 of 2
Subject: Adopting Risk Management Policy —Ch. 13.38
Date Approved L-,
GEORGETOWN ELECTRIC UTILITY
ENERGY RISK MANAGEMENT POLICY
12/14/2021
1. Policy Purpose
The purpose of this document is to formalize the policies of Georgetown Electric Utility
(Georgetown Electric) regarding managing its energy risks. Accordingly, this policy will set
forth Georgetown Electric's:
• risk management objectives,
• risk governance structure and responsibilities,
• scope of business activities governed by this policy,
• the list of associated ERM guidelines and policy documents.
Georgetown Electric intends that risk management will support the advancement of its strategic
business plan, and will properly manage its energy risks through:
• prudent oversight,
• adequate mitigation of risks consistent with the City of Georgetown's defined risk
tolerance, and
• sufficient internal controls and procedures.
Managing the energy risks of Georgetown Electric's business entails the coordination of
resources and activities among multiple departments within the City of Georgetown.
2. Risk Management Objectives
Georgetown Electric exists primarily to provide competitive and stable priced, reliable electric
service to its customers. Managing Georgetown Electric's energy risk is consistent with that
goal, and serves the following objectives:
• to maintain risk within desired tolerances for a defined period in the future,
• to mitigate price volatility to its customers,
• to participate in commodity markets and derivative instruments for hedging and not for
speculative purposes, and
■ to develop a risk management culture.
3. Risk Governance Structure and Responsibilities
Risk governance will follow a top -down approach whereby the City Council identifies
Georgetown Electric's risk management objectives and provides risk management oversight.
Supporting controls, policies and procedures will be implemented and aligned throughout the
risk governance structure, with distinct roles and responsibilities that result in a risk control
environment. Governance and controls include the organizational structure, policies, procedures,
and reporting processes that support Georgetown Electric's business models, risk tolerance, and
power supply objectives, and segregate responsibilities appropriately.
a. City Council Duties
• Has a basic understanding of energy risk management.
■ Approves Georgetown Electric's energy risk management objectives, and the
General Manager's/City Manager's authority limits to conduct energy
transactions.
• Approves no less than annually a resolution of the energy supply goals and risk
tolerance guidelines around such goals. These goals and risk tolerance guidelines
shall be consistent with the City Council's desired risk management objectives,
time horizons, and risk tolerance for managing energy risk.
• Approves, periodically reviews, and make recommended changes to the Energy
Risk Management Policy that establishes an overall framework for evaluation,
management, and control of risk.
b. Risk Oversight Committee — Responsibilities and Duties
The Georgetown Electric Board will serve in the role of Georgetown Electric's Risk
Oversight Committee.
• Has an advanced understanding of energy risk management.
• Oversees the energy risk management activities of Georgetown Electric.
• Establishes the scope and frequency for management reporting to the City
Council.
■ Periodically reviews risk exposures and compliance with policies and procedures.
• Discusses Georgetown Electric's major energy risk exposures and the steps
management has taken or will take to mitigate, control, and monitor such
exposures.
• Periodically reviews the Energy Risk Management Policy and supporting Energy
Risk Management Policies and recommends changes to the City Council for
approval.
• Approves management staff to serve as members of an Internal Risk Management
Committee ("IRMC").
• Receives reports by the independent risk management function on Georgetown
Electric's compliance with its risk policies.
• Reviews and approves the energy risk identification and exposure management
guidelines (Appendix A).
c. General Manager — Risk Management Responsibilities and Duties
Recommends staff to serve as members of the IRMC.
■ Has authority to transact within the limits set by the City Council in the Trading
Authority Policy.
• Approves proper organization, separation, or consolidation of functional
activities.
• Assures prudent administrative procedures are established for execution of
commodity and derivative transactions, contract controls, credit controls, trading
controls, risk monitoring and measurement, settlement controls, and other energy
risk management activities.
Ensures that the identification and quantification of risks and related risk
mitigation strategies are integrated into the strategic planning process.
Establishes and maintains an effective working relationship with Georgetown
Electric's external consultants.
d. IRMC — Responsibilities and Duties
Membership shall be comprised of the following voting committee members:
1. City Manager, or designee
2. Assistant City Manager, or designee
3. Finance Director
4. General Manager
5. Senior Utility Analyst, Resource Management
The Finance Director shall serve as the IRMC Chairperson. The Chairperson shall be
responsible for keeping, or causing to be kept, a true and complete record of the
proceedings. Other non -voting participants shall participate in the meetings as
determined by the voting committee members.
The IRMC establishes a forum for discussion of Georgetown Electric's significant risks
and must develop guidelines required to implement an appropriate risk management
control infrastructure; this includes implementation and monitoring of compliance with
Georgetown Electric's energy risk management related policies. The IRMC executes its
risk management responsibilities through direct oversight and prudent delegation of its
responsibilities to the independent risk management function, as well as to other
company personnel.
Responsibilities of the IRMC include:
• Reviews the energy risk management related policies and oversees enforcement
by the independent risk function.
• Ensures that risk management objectives, risk tolerance guidelines, and authority
limits are employed throughout Georgetown Electric.
• Receives reports by the independent risk management function concerning
Georgetown Electric's compliance with its risk policies, controls, and procedures.
• Recommends to the General Manager the proper organizational structure,
separation or consolidation of functional risk management activities.
• Reviews and approves proposed risk management strategies for strategic fit, risk
exposure consistent with risk tolerance, and reporting and control requirements.
The IRMC shall ensure that approved strategies are consistent with Georgetown
Electric's approved strategic business plan, risk management objectives, approved
risk tolerance guidelines, and compliance with risk policies.
■ Periodically reviews Georgetown Electric's risk management program (a detailed
review at least once a year) in light of recent changes in business practices,
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improved procedures, Georgetown Electric's philosophy and strategy, or market
changes; and ensures continued compliance with its established guidelines.
• Formulates risk management strategy, policy or procedures necessary for new
product or market implementation.
• Requires and reviews regular risk reports provided by the independent risk
function.
• Periodically engages an independent audit (internal and/or external) of risk
control policies and procedures.
• Holds formal monthly IRMC meetings.
• For market transactions executed within Georgetown Electric, performs a review
of transaction compliance with policies and procedures.
■ Reviews the infrastructure supporting risk management and ensures that it meets
the requirements for risk oversight and compliance.
• Reviews compensation policies to ensure that they are structured so as to avoid
incentives for excessive risk taking.
e. Portfolio Management Team — Responsibilities and Duties
This function shall be responsible for managing Georgetown Electric's energy portfolio.
Responsibilities include:
• Long-term resource planning
• Execution of hedging strategies in compliance with the Hedging Policy
• Day-to-day execution and management of transactions
• Settlement of energy transactions with Georgetown Electric's counterparties
■ Oversight of the activities of the External Energy Manager/QSE and the Energy
Portfolio Management Support Services Provider
• Reports regularly to the IRMC, at a minimum, but not limited to:
o Portfolio model risk measures (1-60 months)
o Power cost projections, cost ranges and percentiles
f. City Attorney — Responsibilities and Duties
This function shall be responsible for providing legal services to Georgetown Electric,
including collaborating with the General Manager to negotiate and approve master
enabling agreements with energy counterparties and approving long -form confirmation
letters.
g. Independent Risk Management Function — Responsibilities and Duties
This function shall be the responsibility of the Finance Director who is organizationally
independent of functions whose activities initiate or directly participate in managing most
of the energy risks of Georgetown Electric. Various departments will be required to
provide this function with reports or information required for risk assessment and
analysis on a regular or periodic basis. Responsibilities include:
• Performs responsibilities delegated by the IRMC.
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• Organizes and conducts the IRMC meetings.
• Engages the IRMC in discussions regarding events or developments that could
expose Georgetown Electric to potential losses.
• Develops, recommends, and administers risk management processes and
procedures.
• Provides input to tools to assist in risk management.
• Provides risk management education/training to City Council, the Risk Oversight
Committee, management, and staff.
• Reviews risk management activities and risk controls, and recommends
modifications of controls to meet changing business needs.
• Reviews adequacy and accuracy of reports, and reports any deficiencies to the
IRMC.
• Assesses risks to Georgetown Electric in aggregate, by department, and by
material business activity.
• Reports any violation of Georgetown Electric's risk policies.
• Reviews and recommends changes to the risk management policies and
procedures, as appropriate.
■ Reports regularly to the IRMC, at a minimum, but not limited to:
o Credit and contract risk exposures
o Other Key Performance Indicators that support effective energy risk
management
o Policy and procedural violations
• Reviews and evaluates proposed risk management transactions to be executed by
Georgetown Electric, and ensures adequate analysis has been performed with
proper assessment and mitigation of any such risk consistent with risk
management objectives and risk tolerance guidelines, and compliance with risk
management policies.
• Oversees the activities of the Energy Risk Management Support Services Provider
h. Energy Risk Management Support Services Provider — Roles and
Responsibilities
Georgetown Electric uses a consultant to provide the following risk management support
services, in accordance with the agreement between Georgetown Electric and the
provider:
• Ongoing Credit Services
• Credit/Collateral Review and Recommendation Services
• Annual Review of Energy Risk Management Policies
• Power Budgeting/Portfolio Modeling Services
• Trading Authority and Hedge Policy Compliance Monitoring Services
• Monitoring master agreements for compliance with Georgetown Electric's trading
activities
• Dodd Frank services
• Quarterly Portfolio Modeling and Strategy Services
• Transaction Evaluation Services
• Ad hoc Consulting Services
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i. External Energy Manager/QSE — Roles and Responsibilities
Georgetown Electric uses a consultant to provide Energy Manager/QSE services, in
accordance with the agreement between Georgetown Electric and the provider. Per the
agreement, the Energy Manager/QSE is authorized to and shall:
■ Participate in the day -ahead and real-time ERCOT market on behalf of Georgetown
Electric.
j. Energy Portfolio Management Support Services — Roles and Responsibilities
Georgetown Electric uses a consultant to provide the following energy portfolio
management support services, in accordance with the agreement between Georgetown
Electric and the provider:
• Energy Portfolio Management Services
• Ongoing Portfolio Congestion and Curtailment Risk Management Services
• Regulatory Support and Representation in ERCOT Stakeholder Processes
• Settlement and Invoice Verification Support, as needed
• Subject Matter Expertise for Contract and Legal Disputes
• Ongoing Power Marketing, Trading and Operations Management Services
• Ad hoc Consulting Services
4. Scot3c of Business Activities Governed by this Palic
The scope of this policy is designed to address the management of the energy risks associated
with Georgetown Electric, including but not limited to:
■ Commercial operational risk
• Commodity market price risk
• Concentration risk
• Counterparty contract and credit risk
■ Delivery risk
• Liquidity risk
• Operations risk
■ Regulatory risk
• Volumetric risk
5. Associated El�Nl Guidelines and Policies
Supporting guidelines and policies are required as outlined below. Responsibility for their
approval, modification, oversight, and compliance shall be consistent with the governance
section of this policy.
• Trading Authority Policy
• Trading Sanctions Policy
• Hedging Policy
• Credit Policy
■ Appendix A Energy Risk Identification and Exposure Management Guidelines
A
GEORGETOWN ELECTRIC UTILITY
APPENDIX A of the ENERGY RISK MANAGEMENT POLICY
1. Identification of Enerzy Risks
The energy portfolio of Georgetown Electric is naturally exposed to the following primary
energy risks:
• Commercial operational risk
o Inadequate controls and procedures
o Errors and fraud
• Commodity market price risk
o Power
o Natural Gas
o Renewable Energy Credits
• Concentration risk (or lack of diversity)
o Suppliers
o Customers
• Counterparty Contract and Credit risk
o Inadequate contractual language
o Supplier bankruptcy (mark to market risk)
o Large industrial bankruptcy
• Delivery risk
o Transmission risk (aka congestion)
• Liquidity risk
■ Operations risk
o Transmission outages
■ Regulatory risk
• Volumetric risk
o Load forecast/ weather variability risk
o Loss of load
o Load growth
Section 2 of this document defines these primary risks and other relevant definitions.
Section 3 identifies the tools and provides guidelines as to how risks shall be managed under
most conditions.
Section 4 provides a description of Georgetown Electric's power supply risk profile and why it
differs from others engaged in the energy markets.
2. Definition of Risks
Commercial operational risk is the risk of loss from inadequate or failed internal processes,
people, and systems.
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Commodity market price risk is the risk of loss due to potential fluctuations in the prices of an
underlying energy commodity. In the wholesale power market, Georgetown Electric has risk
that commodity prices rise, spike, or are generally high when it is short of meeting its firm
supply obligations. Georgetown Electric has risk that prices fall or are generally low when it is
has excess capacity or electric energy compared to its firm supply obligations.
Commodity market price risk occurs across all tenors, from the hourly market to the long-term
forward market (5 years +). Georgetown Electric is exposed to commodity price risk for power,
natural gas, and renewable energy credits.
Concentration risk is the risk of having large exposures to significant power supply
components. Concentration risk can be found with suppliers (contract and credit risk), and
native load customers.
Congestion risk is the risk of negative price differentials between the location of power supplies
and the demand location. If Georgetown Electric needs to buy electricity and the transmission
system is congested, it would pay a premium to secure the needed electricity, if it is available at
all. If Georgetown Electric has excess electricity to sell and the transmission system is
congested, then it may not be able to sell the excess or may have to sell at a discounted price to a
non -congested area. Congestion risk typically manifests itself in power commodity market price
risk.
Contract risk or Counterparty performance risk is the risk of a potential adverse occurrence
of a counterparty's ability to operationally perform on an agreement or due to contractual
provisions that leave Georgetown Electric with no recourse under an event of default.
Credit risk is the risk of a potential adverse occurrence of a counterparty's ability to pay its
obligations (debts) to Georgetown Electric or the suppliers declare bankruptcy and abrogate a
supply contract that must be replaced during a time of higher commodity market prices.
Delivery risk is the risk that Georgetown Electric cannot meet a firm supply obligation due to a
transmission constraint. Delivery risk is natural to Georgetown Electric in meeting its firm
supply obligations and reliability of service.
Liquidity risk is the risk associated with inadequate cash flow resulting from margin
requirements of a contractual agreement. For example, the EEI Master Agreement provides that
counterparties may margin each other when they are overexposed above credit thresholds that
were negotiated between the parties when the agreement was executed. Credit exposures include
replacement cost exposure on a mark -to -market basis when a counterparty's position is out -of -
the money.
Operations risk is the risk associated with physical assets. This would include failures or
outages associated with the transmission system, control systems, or other critical components
associated with the production or delivery of electricity.
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Regulatory risk is the risk that Georgetown Electric fails to comply with its various regulatory
requirements associated with participating in the energy markets, such as ERCOT business
practices and protocols, reliability requirements, and Dodd Frank requirements.
Volumetric risk is the risk that energy commodity volumes, both load obligation and
intermittent contracted resources, will vary from expected and result in a potential loss due to
changing commodity market prices. The primary volumetric risks that Georgetown Electric is
exposed to are load forecast/weather variability risk and loss of load.
Load forecast/weather variability risk is the risk that actual loads differ from forecasted loads
due to an error in weather forecasts and load forecasts. This risk is natural to Georgetown
Electric's portfolio since it serves retail consumers. Since this risk will result in Georgetown
Electric being unintentionally long or short in the spot market, it naturally results in hourly
market price risk.
Loss of load risk is the risk that Georgetown Electric loses a significant portion of its load and
that the market price for electricity coincidentally falls below the sales price of the lost load and
thereby creates a financial strain on the City. However, if market prices for electricity remain
above the sales price of a potential lost load it would create a financial benefit to the City.
3. Guidelines and Tools to Manx a Risk
Short/Intermediate Term Planning - Portfolio Model
Market price risks and volumetric risks will be managed in the near term planning cycle (1-60
months forward) utilizing a portfolio model. The portfolio model is a risk assessment of
Georgetown Electric's energy portfolio based on Monte Carlo simulation that provides ranges
for Georgetown Electric's variable costs in forward months, rolled up to years. The City
Council's risk tolerance will be set at least annually using this model as one tool, which will
include a stress test outside of reasonable expectations of commodity market prices and their
volatilities, and load forecast.
Long -Term Planning — Integrated Resource Planning Model
Market risks and volumetric risks will also be managed by long-term resource planning for a
period of 6-20 years. Georgetown Electric's Portfolio Management Team will forecast its long-
term firm supply obligations based on its expectations for load growth. This tool, along with a
short/intermediate term portfolio model and a financial forecasting modeling tool, will assist
Georgetown Electric in making appropriate capital investments to meet the needs of its
customers.
Congestion risk
Congestion risk will be managed by procuring congestion revenue rights according to the
Hedging Policy.
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Credit Policy
Credit risk and counterparty performance risk will be managed according to the credit controls,
per the Credit Policy.
Contract Controls
Counterparty performance risks will be managed according to the Trading Authority Policy and
supporting procedures.
Diversity Management
Georgetown Electric will manage its concentration risks on a rolling 12-month basis by
diversifying its supply resources and its energy purchase requirements based upon the diversity
requirements found in the Hedging Policy.
Commercial Controls
Georgetown Electric will manage its commercial operational risks according to trading authority
limits to conduct market transactions. The trading authority limits to conduct commodity market
transactions are approved by Georgetown Electric's City Council, and are included in the
Trading Authority Policy. Georgetown Electric will also manage its commercial operational
risks to new products, instruments, or locations according to a control process for such as found
in the Trading Authority Policy. Numerous other internal controls and procedures shall be in
place at Georgetown Electric to manage other purchasing activities and vendor relationships.
Hedging Policy
Commodity price risk, concentration risk, and volumetric risk will be managed according to the
Hedging Policy and supporting internal execution strategies and control procedures.
Energy Transactions
Numerous transactions may be entered into to mitigate Georgetown Electric's energy risks
consistent with the City Council approved power supply cost goal and risk tolerance. Several
hedging instruments and commodities are used to manage Georgetown Electric's energy risks,
which include purchases or sales of physical commodities, financial instruments, and power
generation capacity, and fuel storage. The following hedging instruments and commodities are
permitted to be transacted when used consistent with the Trading Authority Policy and
supporting controls and procedures:
• Physical Transactions
o Forward power
o Options on power
o Spot market power
o Ancillary services
o ERCOT market products, including congestion revenue rights
o Renewable Energy Credits
■ Financial Transactions
o Futures contracts for power and natural gas
o Swap contracts for power and natural gas
o Options on power and natural gas
o Weather protection transactions
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o Unit outage protection transactions
4. Georgetown Electric Energy Supply frisk Profile
Georgetown Electric operates its power supply function under a different business model than
merchant energy companies, and therefore has a different risk profile, requiring a different
approach to risk management.
• Georgetown Electric is in business to provide competitive and stable priced, reliable
electric service to its retail customers.
• Georgetown Electric is not in the energy business to trade speculatively (buy low — sell
high), or to initiate energy risk positions.
■ Georgetown Electric is not in the energy business to take at -risk positions in merchant
generation.
• Georgetown Electric by nature has significant volumetric risk that results from: 1) long-
term load serving obligations, 2) the supply hedges used to meet those obligations
(forwards, options, demand side management, intermittent resources, etc), and 3) the
volumetric differences that occur between numbers 1 and 2 (`unmatched positions').
• Georgetown Electric participates in the forward term electric market defensively to hedge
the risk of its forward load serving obligations (short positions) based on monthly or
seasonal forecasted peak loads, plus a capacity planning reserve. There are about 720
hours in each calendar month, and due to the unpredictability of the weather, it is
impossible to know when the peak load hour will be. Consequently, Georgetown
Electric's forward short and long positions are measured in both MW and MWh.
• Sometimes Georgetown Electric also has forward positions that are net long after meeting
its firm load obligations, and they will participate in the forward term electric market to
hedge that risk by selling.
• Georgetown Electric participates in the weekly/daily/hourly electric market to balance its
unmatched positions at the market price in real time, and in the near term timeframe of
predictable weather trends.
■ Georgetown Electric is not in the practice of mark -to -market revenue recognition.
Revenues from rates to its customers is cost based, without variability for mark -to -market
fluctuations.
• Unlike managing a portfolio of only standard traded electric products (e.g. 5X16 Firm
LD at a pricing hub) that protect the parties financially from volumetric risk, Georgetown
Electric's energy portfolio typically has significant volumetric risk, because:
o Its load obligations are obviously not flat in volume, they fluctuate hour -by -hour,
minute -by -minute.
o Its loads can be difficult to predict (weather forecasts, weather correlation).
o Some of its supply resources may not be financially firm (unit contingent
purchases, non -firm purchases, etc.) and may be intermittent in nature.
• Unlike managing a portfolio of only standard traded electric products (e.g. 5X16 Firm
LD at a pricing hub) which are generally liquid, it would be very time consuming to
liquidate the entire forward risk in a typical energy portfolio. It is not unusual for
Georgetown Electric to have unmatched positions of load obligations (short) and supply
resources (long) that extend out in forward time for several years. In order to `flatten'
Georgetown Electric's book of unmatched risk positions to a risk neutral position, it
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would usually require a lengthy time period for a request for proposal ("RFP") and
negotiation process to obtain a tailored physical `wrap -around' alliance deal. Even then,
because of the uncertainty of forward electric prices, these types of deals are usually
limited to the next 5 or 10 years forward, not 20 to 30.
• Typical derivative risk metrics, such as Value at Risk (VaR), do not factor in volumetric
risk, and are therefore inadequate to reflect the full risk that is inherent to Georgetown
Electric's business.
• Native load does not behave according to any derivative that can be loaded into a risk
system.
■ The proper risk measurement and decision support tool for most of Georgetown
Electric's risks, is a risk model that incorporates both market price risk and volumetric
risk together, and provides for a correlation of native load demand to market prices.
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