19-110FILE REFERENCE FORM 1 19-110
X Additional File Exists
Additional File Contains Records Not Public, According to the Public Records Act
Other
FILE(S) Date Initials
Ordinance No. 20-420
03/17/20
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF DENTON, TEXAS
REPEALING
R. ♦ ORDINANCE NO. 2018-
i ,♦.. APPROVING
R i i,.. AND ADOPTING
DENTON MUNICIPAL ELECTRIC ENERGY RISK MANAGEMENT
ERMP"); AUTHORIZING AND APPROVING THE EXECUTION BY THE MAYOR, OR HIS
DESIGNEE, OF THE 2019 ERMP; DELEGATING AUTHORITY AS PROVIDED IN THE 2019
ERMP; AUTHORIZING AND APPROVING THE SUBSEQUENT EXECUTION OF
CONTRACTS AND RELATED AT9D
LIMITATION, NOMINATIONS,
DIRECTIONS, INSTRUMENTS, CONFIRMATIONS, ORDERS AND STATEMENTS, AS
ARE AUTHORIZED BY THE 2019 h i, WHICH ARE R RELATED
'1D
THERETO; CONFIRMING 1T THE CITY OF DENTON, TEXAS, MAYOR,
ITS CITY
COUNCIL MEMBERS, MANAGER, OR HIS DESIGNEES, ITS CITY ♦ i
R'... HIS DESIGNEES, AND ITS CITY SECRETARY,
1 i i'.. HER DESIGNEES, ARE
AUTHORIZED PERFORM ACTS AND OBLIGATIONS 1 ARE REASONABLY
REQUIRED TO CONSUMMATE THOSE FUTURE TRANSACTIONS WHICH ARE
PROVIDED FOR AND • R BY THE 2019 ERMP; FINDING THAT THE
EXEMPTPURCHASE OF ELECTRICITY, NATURAL GAS AND RELATED COMMODITIES ARE
• REQUIREMENTS OF • ' D!ING; FINDING THAT
THE PURCHASE OF ELECTRIC ENERGY, NATURAL GAS AND RELATED
COMMODITIES MADE BY THE CITY UNDER THE TERMS OF THE 2019 ERMP ARE IN
THE PUBLIC 1THE AND R: RATEPAYERS
AUTHORIZING OF FUNDSTHEREFOR;PROVIDING I
DATE.EFFECTIVE
WHEREAS, . City of Denton,
Texas
home-rule
.,
corporation# by - constitution and I of of a
WHEREAS, in 2017, the City hired the consulting firm of Deloitte & Touc e ("Deloitte")
to conduct a review of the City's 2014 Denton Municipal Electric - Energy Risk Management
Policy; and
WHEREAS, on May 1, 2018, the City Council passed Ordinance No. 2018-237 which
repealed 4 ERMP and approved the 2018 Denton #I Electric
Management Policy 4 ' '' • #.'.
MIN
WHEREAS, the 2019 Denton Municipal Electric - Energy Risk Management Policy
("2019 ERMP") implements the Phase 11 recommendations from Deloitte; and
on L # Public a Board recommended to the
Ordinance No. 2018-237 and the 2018 ERMP be repealed and the 2019 ERMP, through ordinance,
be approved; and
WHEREAS, the Council has further determined and finds that the 2019 ERMP provides
for the purchase and/or sale of electricity, natural gas and related commodities in the future in strict
accordance with the provisions of the 2019 ERMP; the Council also finds that any and all contracts
and other documents that are required to be entered into by and between the buyers or sellers of
electric energy, natural gas and related commodities fuel and the City are, provided that these
transactions are within the described and delineated limits and guidelines which are set forth in the
2019 ERMP, are authorized and excepted from public disclosure, as permitted by the provisions
of §552.133 of the Texas Government Code, as documents that are reasonably related to a
competitive public power matter, the disclosure of which documents would provide an advantage
to the competitors or prospective competitors of Denton Municipal Electric; the Council also finds
that all such documents which are incident to or related with the above -described contracts, as
from time to time may be required by the City and/or the seller, are authorized and should be
excepted from public disclosure, as permitted by the provisions of §552.133 of the Texas
Government Code, as documents that are reasonably related to a competitive public power matter,
the disclosure of which documents would provide an advantage to the competitors or prospective
competitors of Denton Municipal Electric; and
WHEREAS, the Council finds and affirms that the 2019 ERMP as approved by this
ordinance, will not impair the ability of the City to comply with the provisions of any of its utility
revenue bonds, as amended, which are now issued and outstanding; and
WHEREAS, the Council has further determined and finds that Texas Local Government
Code, Sections 252.022(a)(15) and 252.022(c), are applicable to the 2019 ERMP and those
subsequent transactions authorized by said 2019 ERMP involving the purchase of electricity and
natural gas, and that the Texas competitive bidding law is not applicable to such purchases by the
City; and
WHEREAS, the Council has further determined and finds that these actions and the 2019
ERMP are in the best interest of its citizens and ratepayers; NOW, THEREFORE,
THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS:
SECTION 1. The findings and recitations contained in the preamble of this Ordinance are
incorporated herein by reference.
SECTION2. Ordinance No. 2018-237, and the 2018 Denton Municipal Electric -Energy
Risk Management Policy (commonly referred to as the 2018 ERMP) approved by the same, are
both repealed and are of no further force and effect.
SECTION 3. The 2019 Denton Municipal Electric - Energy Risk Management Policy
("2019 ERMP"), attached as Exhibit "A" and incorporated herewith by reference, is approved and
adopted.
SECTION 4. The City Manager, or his designee, and City Secretary, or her designee, are
authorized to execute, attest and deliver respectively, any and all contracts which are authorized
by the 2019 ERMP, and other such documents which are incident to, or are related to, or which
arise under, the same, and to take such other additional actions as the City Manager, or his designee
shall determine to be necessary and appropriate to effectuate the matters set forth above.
SECTION 5. The recitations as are stated in the Preamble hereto are incorporated by
reference and are made a part of this Ordinance.
SECTION 6. All subsequent actions taken by the Mayor, or his designee; the City
Manager, or his designee; the City Attorney, or her designee; the City Secretary, or her designee;
in furtherance of any fixture transactions that are authorized under said 2019 ERMP are approved
and authorized in all respects as of the dates and times that such actions will be taken.
SECTION 7. Immediately following the adoption by the Council of the 2019 ERMP, any
and all subsequent documents and supporting documents which are executed pursuant to the 2019
ERMP are to be sealed by the City Secretary and maintained in her custody and control as
documents which are excepted from public disclosure under the provisions of §552.133 of the
Texas Government Code (the "Public Power Exception"); unless otherwise lawfully ordered to
disclose said documents.
SECTION 8. The expenditure of funds as provided for in this Ordinance is hereby
authorized.
SECTION 9. This Ordinance shall become effective immediately upon its passage and
approval.
The motion to approve this ordinance was made by °,I� �� ...�"�k.�t'�',r� and
seconded by �( , the ordinance was passed and approved by the
following vote
Aye
Mayor Chris Watts:
Gerard Hudspeth, District 1:
Keely G. Briggs, District 2:
Don Duff, District 3:
John Ryan, District 4:�
Deb Armintor, At Large Place 5:'
Paul Meltzer, At Large Place 6:
Nay Abstain Absent
PASSED AND APPROVED this the J.;' day of l tdw.y, 2019,
Cl IR,1 "WATTS, MAYOR
ATTEST:
ROSA RIOS, CITY SECRETARY
BY: ,��...
� Po
.
APPROVED AS TO LEGAL FORM:
AARON LEAL, CITY ATTORNEY
BY: 101
Denton Municipal Electric
Energy Risk Management Policy
Approved by the City Council of the City of Denton, Texas
City Ordinance No. 19-4
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public power
utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104, 552.110 and/or
552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
Contents
SECTION 1 PROGRAM OVERVIEW..........................................,..........®........... 5
1.1
Introduction „ ........ ........ ......... ......... ......... ......... ...- ............ ......................
5
1.2
Objectives......................................................... ......... ...,, .............,..... ............5
1.3
Energy Risk Management Framework .... ......... ---- ...... ,.......... ................. ..,.,,,...,,...
6
1.3.1 Organizational Objectives...............................................................„.......,.,...
6
1.3.2 Risk Mitigation and Measurement................................................................
6
1.3.3 Portfolio Management....................................................... ....... - ....... ,..,.,,....,
6
1.3.4 Risk Control Infrastructure.............................................................................
6
1.4
Procedures and Guidelines ................... --- ........ ,,,,--...,.,,,........ .,,...... ,.......... ,,..,,,,,
7
SECTION 2 ORGANIZATION STRUCTURE.., .......,...,................................ ..........8
2.1
Risk Management Committee("RMC").....................................................................
8
2.1.2 Risk Management Committee Structure..........................................................
8
2.1.3 Meeting Frequency, Voting, Member Vacancies and Reports .........................
9
2.2
Front, Middle, and Back Offices ... ......... ......... ........... .,,....., .,..,,.,,,
11
2.2.1 Front Office.... ——. ......... ........-- ...,,............ .................. ......... .,........
11
2.2.2 Middle Office...............................................................................................
12
2.2.3 Back Office . ......... ......... ......... ......... ......... ...........— ..... ..,................
13
SECTION 3 MARKET RISK PROTOCOLS AND EXPOSURE CONTROL ..................15
3.1
Market Risk Protocols..................................................................................„.......,...
15
3.2
Authorized Transactions ... ....... ........ ................ ,...,,.,..,.,,,,., .,,....,...,.........
16
3.3
Market Risk Control ......... .................. ...........................-. ....,,... .......,,.,.......-
16
3.3.1 Risk Tolerance ............................ ........ ........ .................... ......... ...........
16
3.3.2 Transaction and Exposure Limits- ... ......... .......... ....... -- ...... .....,..,,,...,,....,.,
16
3.3.3 Stress Testing.............................. ........................................... ........... ...........
17
3.3.4 Model Validation and Controls ... ................. ................................. ,..,.....,,.,...
17
3.4
Credit Risk Control . ......... ............................. .................. .................... .........
18
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".
Energy Risk Management Policy
3.4.1 Credit Policies,........... ....... ......... ......... ......... .................. .................__ 18
3.4.2 Credit Limits .................. ......... ...................... ............... ......... .......... 19
3.4.3 Counterparty Credit Function ......... ................. .................»,.,..,,.......... ..,...... 19
3.5 Information Systems and Models.... ............... .. ..............,., .....,..,............ 20
SECTION 4 RISK REPORTING ......................................................................... 21
4.1 Risk Management Reporting Policy......................................................................... 21
4.2 Required Reports......................................................................»..............,...........,...21
4.3 Transaction Valuation .... .......... ............ ..... ...................... ........ ,,...... .....,.,,,»............... 22
SECTION 5 OTHER RESPONSIBILITIES AND POLICIES ................„.................... 23
5.1 Organization -Wide Responsibilities......................................................................... 23
5.2 Commercial Interests and Trading for Personal Accounts ...................................... 23
5.3 Acknowledgment of Policy Requirements............................................................... 24
5.4 Adoption of Energy Risk Management Policy.......................................................... 24
Appendix A PORTFOLIO RISKS...................................................................... 25
A.I. MARKET RISK,.,,,, ....... ..................... ......... ............... ......... ___ ............ ____ .... ..... 25
A.1.1. Price Risk...........................................................................................»...»....,.. 25
A.1.2. Volume Risk................................................................................................... 25
A.1.3. Liquidity Risk...........................................................................................,....... 26
A.2. CREDIT RISK............................................................................................... .................. 26
A.2.1 Credit Risk ........................... .................. ................................................... 26
A.2.2. Funding Risk,,,,..,..,.. .„.... ....... ,.......... .............».., 27
A.3. OPERATIONAL RISK...................................................................................................... 27
A.3.1. MODEL RISK................................................................................................... 27
A.4. REGULATORY RISK ........................... ........ ......»........,..................,........,...,.,, .......... 27
A.4.1 Carbon Cost ..................... ............................. ...................,...,.„ ,....,.. ...,.,.... 27
A.4.2 Changes to ERCOT market design.................................................................. 27
A.4.3 Ongoing changes to ERCOT Protocols............................................................ 28
A.4.4 Regulatory Compliance................................................................................... 28
Appendix B RISK EXPOSURE AND TRANSACTION LIMITS .............................. 29
B.1 Risk Books ......... ......... ......... .................. ... ......... ............................... 29
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
B.2 Risk Exposure Limits ............... ......... ................... ,.,.,,,. ,........,....,..,,... ,........ ,.,.,,.... 29
B.3 Portfolio Risk Exposure Limits ......... „................... .............................. ......„.. ,,..,,. 30
B.4 Open Position Management ..... ................. ....... ......................................... ........... --... 31
B.5 Transaction Limits, .................................... ......... ......... ........... ....... ............... .......... 32
B.5.1 Bilateral or Financial Power Transaction Limits, ... ... --- .......... .... 34
B.5.2 ERCOT Congestion Management Transaction Limits ,,,,,,,,,,,,,,,,,,,,„„.....,..,...„„ 35
B.5.3 Physical or Financial Natural Gas Transaction Limits .................................... 37
B.5.4 Renewable Energy Credit ("REC") Transaction Limits .................................. 38
Appendix C ORGANIZATIONAL STRUCTURE .................................................. 40
Appendix D APPROVED TRANSACTION TYPES .............................................. 42
Appendix E FORWARD HEDGING STRATEGIES AND PLANS ...........................45
Appendix F New Product/Market Instrument Approval Checklist ................46
Appendix G ENERGY RISK MANAGEMENT POLICY ACKNOWLEDGEMENT FORM
.................................................................................................................... 48
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.M WT4FW#fr#WMM9
d may be protected from required public disclosure.
Energy Risk Management Policy
SECTION 1 PROGRAM OVERVIEW
1.1 Introduction
The City of Denton's municipally owned electric utility, operated under the trade name of Denton
Municipal Electric ("DME"), is in the business of providing affordable and reliable energy and
energy services to its customers in an environmentally sustainable manner. This Energy Risk
Management Policy ("Policy") has been developed to establish a comprehensive framework for
DME to meet and exceed the overall goals and objectives set by the City Council, subject to
approved risk tolerances.
This Policy provides specific controls (e.g., segregation of duties, oversight, etc.) for the
management of strategic and operational risks and establishes guidelines for DME to plan,
execute and control the risks inherent in the generation, purchase and sale of energy for its retail
customers. The resulting framework shall govern DME's energy portfolio activities through which
City Management and DME personnel identify, capture, measure, manage, control, monitor and
report financial and other risks. This program specifically addresses management of energy
portfolio risk and provides a framework to maintain proper controls over portfolio activities as
they change over time.
1.2 Objectives
DME's energy portfolio consists of its assets such as power plants, power supply contracts of
varying delivery patterns and maturity, wholesale physical and financial hedges', and retail load
obligations. A number of inherent risks are associated with DME's energy portfolio, including
market (price) risk, volumetric risk, operational risk, organizational risk, counterparty credit risk,
liquidity (funding) risk, and regulatory and legal risks (for more detail, see Appendix A for a
summary of DME's portfolio risks).
DME manages these risks to achieve its core business objectives of delivering energy to its
customers at reasonable and stable rates. Key risk management objectives and performance
measures are shown in the table below.
Objective
Performance Metric
Reduce risk
Reduction in exposure to price volatility and volumetric
variability
' As used in this Policy, physical and financial hedges are market transactions used to offset pre -financial existing
risk in the portfolio, and are generally used to reduce price exposure associated with DME supply and demand,
price volatility or transmission congestion.
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
Competitive costs
Comparison of actual energy costs (including hedges and
ERCOT balancing transactions, but excluding PPAs) to the
average annual ERCOT Day Ahead Market (DAM) price, plus a
hedging premium
Reasonable rates
Comparison of DME average rate to that of other Texas
municipal utilities
1.3 Energy Risk Management Framework
DME's Energy Risk Management Policy is built around a framework that includes the following
four elements: Organizational Objectives, Risk Mitigation and Measurement, Portfolio
Management and Risk Control Infrastructure. Each of these elements is discussed further below.
1.3.1 Organizational Objectives
The Risk Management Committee ("RMC") approves goals, strategies, and objectives
which help define the appropriate portfolio management activities that are undertaken
by DME. This is done in coordination with strategic and business planning activities
conducted to establish the budget and through periodic strategic planning activities.
1.3.2 Risk Mitigation and Measurement
As part of clarifying organizational objectives, this Policy defines the EMO's role in
identifying, measuring and mitigating energy risks. DME's risk mitigation practices focus
on monthly hedging plans and targets, along with transaction and risk exposure limits.
1.3.3 Portfolio Management
DME engages in transactions that are conducted in accordance with hedging targets and
risk management and transaction limits specified in connection with this Policy and in
broader DME policies and operating procedures.
1.3.4 Risk Control Infrastructure
DME maintains a collection of internal controls, systems, and processes necessary to
achieve the objectives of this Policy. These controls comprise DME's energy risk control
infrastructure and includes provisions for:
• Energy Risk Management Organization Structure and Responsibilities
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
• Transaction and Risk Exposure Targets and Limits
• Portfolio Position Tracking
• Risk Measurement and Mitigation
• Performance Measurement
• Management Reporting
• Operating Procedures
1.4 Procedures and Guidelines
This Policy prescribes the management, organization, authority, processes, tools and systems to
monitor, measure, control and mitigate market risks through DME's energy management
activities. Upon adoption by the City Council, this Policy shall be implemented through a
supporting set of standard operating procedures ("EMO Procedures Manual"). The operating
criteria and parameters shall be updated as necessary to reflect changes in market conditions
and staffing levels. All standard operating procedures shall be approved by the RMC.
All departmental procedures that may impact DME's energy portfolio shall be in full compliance
with this Policy. DME executive management shall evaluate the degree of detail necessary in the
operating procedures and may require that additional procedures be developed and
implemented.
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
SECTION 2 ORGANIZATION STRUCTURE
2.1 Risk Management Committee ("RMC")
While the leadership of the Front, Middle and Back Office groups, along with the DME General
Manger regularly review executed transactions, monitor proximity to transaction limits and
oversee the implementation of DME's portfolio management activity, consistent with industry
best practices, the executive oversight of DME's energy management activities is conducted
through the Risk Management Committee ("RMC"). The RMC is also responsible for activities
governed by this Policy and ensuring that Policy requirements are met. The RMC membership is
be comprised of five voting members and two non -voting members.
2.1.1. Risk Management Committee Responsibility
The RMC has the responsibility for executive oversight over the Program, which includes:
■ Understanding DME's risk management objectives as described in Section 1.2 above and
risk tolerances as described in Appendix B.3 and B.4.
■ Approving annual risk plans, targets and limits as reflected in DME's proposed annual
budget.
■ Ensuring Program strategies are consistent with overall City goals and obligations.
■ Reviewing this Policy at least annually and making recommendations for changes to the
City Council and Public Utilities Board.
■ Reviewing and monitoring DME's progress in managing its hedging plans/targets as
described in Appendix E and proximity risk exposure limits specified in Appendix B.3.
■ Understanding and discussing DME's energy -related financial risk exposures and DME's
strategies for monitoring and controlling these exposures.
2.1.2 Risk Management Committee Structure
The voting members are:
• PUB Chair (or designee)
• City Manager (or designee)
• DME General Manager (Chairman)
• DME Compliance Manager
• City's Chief Financial Officer (or designee)
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
The non -voting members, both acting solely within their respective responsibilities set out
in the City's Charter, are:
Page 9
• City Auditor (or designee)
• City Attorney (or designee)
2.1.3 Meeting Frequency, Voting, Member Vacancies and Reports
1. The RMC shall meet quarterly as follows:
• January
• April
• July
• October
2. Any member of the RMC can request a meeting to address circumstances or
issues that may require immediate attention.
3. As needed, but not less than annually, the RMC reports results of DME's energy
management activities and compliance with this Policyto the Public Utilities Board
and the City Council each January.
4. Each of the five voting members shall have a single vote on matters that come before
the RMC and a voting member, or designee, must participate in the RMC meeting in
order to vote and approve a proposed action. If a voting member is unable to attend
an RMC meeting in person or by telephone, the member may designate an alternate
to vote in his or her absence. A quorum of at least four (4) voting members is required
for a vote to take place. The RMC makes decisions and take actions by a simple
majority vote. If the RMC reaches an impasse that cannot be addressed through a
vote, the DME General Manager may make a final decision by the end of the next
business day on the issue and shall immediately notify all RMC members by email.
5. In cases where a member of the RMC leaves the employ of the City, the City Manager,
upon consultation with the DME General Manager, will resolve the RMC vacancy by
making an interim appointment at his discretion.
6. A standard set of reports shall be prepared and distributed by the Chairman in
advance of the meeting. The representative from DME will act as Secretary to the
RMC and will document all meetings and actions taken by the RMC in meeting notes
that will be distributed to RMC members for their review and acceptance. What
reports constitute the standard set of reports will be determined by the RMC at the
first meeting after the approval of this policy. When establishing the standard set of
reports, the RMC will consider the requirements set out in 2.1.3.
5/7/19
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
7. Meeting notes approved by the RMC will be distributed by the City Attorney to the
RMC members, the City Manager, City Council and PUB.
8. As Chairman of the Risk Management Committee, the DME General Manager is
responsible for all DME energy management activities, including the day-to-day
efforts of the risk control function. At a high level, these responsibilities include
understanding and measuring market risk, validating risk mitigation activities,
hedge strategy compliance and risk reporting.
2.1.3 Outside RMC Support; Outside Review of Standard Reports; DME
Cooperation with Consultant; Quarterly Report from Consultant
1. The City Manager may employ a consultant who directly reports to the City
Manager to provide independent support to the RMC including, but not limited
to:
• Assessment of energy markets including energy news and counterparty
information relevant to DME's risk management and hedge positions
• Independent monitoring of DME's risk and policy limits as defined and
approved in this policy
• Review of DME's front office hedge strategy and recommendations for
potential improvements
• Independent review of DME's executed hedge positions for compliance with
this policy
• Review of DME's hedge positions and portfolio, including review of
o Risk report
o Position reports
o P/L reports
o Counterparty exposure reports
o Settlements reports
• Support in the ongoing development of DME's RMC standard set of reports
• Attendance at DME's RMC quarterly meetings and other RMC meetings
• Calculation of the past quarter's cost benchmark analysis
2. The standard reports prepared by DME for the meetings shall be provided to the
City Manager at least 5 days before the date of the meeting and the same shall be
reviewed by a consultant who reports directly to the City Manager.
3. DME shall cooperate with all requests of the consultant.
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
4. In conjunction with the quarterly RMC meetings, the consultant will provide a
report to the RMC which will include, but not limited to:
• Risk and position reports
• Benchmark analysis
• Recommendations, as needed, for changes to DME's risk management
program
2.2 Front, Middle, and Back Offices
The "Front -Middle -Back Office" model provides for segregation of duties and efficient
administrative support. It is a way to segregate DME energy management activities into
transactional ("Front Office"), independent risk control and transaction compliance ("Middle
Office") and financial, accounting, and contract administration support ("Back Office")
functions.
2.2.1 Front Office
The Front Office is primarily responsible for managing the energy supply portfolio
associated with DME's wholesale market activities and directing its daily physical and
financial trading.
The Front Office directly executes physical or financial transactions to support activities
such as management of fuel, power, congestion, ancillary services procurement,
environmental attributes, and wholesale sales activities as well as develops measurable
hedge strategies and plans at least annually (see Appendix E for details on hedging
framework).
Specific responsibilities of Front Office personnel include:
1. Evaluating whether prospective strategies are consistent with program objectives
and this Policy.
2. Monitoring the energy marketplace for structural changes, changes in
counterparties and market liquidity, and new supply and hedging market
instruments.
3. Advising the RMC of significant changes in the market and in the liquidity of
approved hedging instruments, along with advising the RMC of the need for seeking
Council approval of in new hedging instruments that may help DME achieve its risk
objectives. New hedging instruments shall be approved based on the guidelines
shown in Appendix E — New Product / Market Instrument Approval Checklist.
4. Managing the portfolio of positions in physical and financial energy and energy -
related commodities in a manner consistent with DME's risk management
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
objectives and the corresponding Hedge Strategies contained in Appendix E —
Forward Hedging Strategies and Plans.
5. Executing physical and financial transactions with approved counterparties.
6. Recording details of financial and physical transactions for DME's risk information
system.
7. Ensuring that transactions are in compliance with DME's Energy Risk Policy.
The Front Office oversight role is accomplished through supervisory review and approval.
DME's Front Office consists of Market Operations and the Market Analytics group.
2.2.2 Middle Office
The Middle Office is responsible for monitoring compliance with this Policy, for assuring
that energy transactions and exposures are within authorized limits and meet minimum
targets, and for reporting the market exposure associated with all transactions entered
into by the Front Office on an ongoing basis. The Middle Office institutes and reviews
energy portfolio management activities, such as portfolio credit exposure, transaction
compliance and approval of counterparties. The Middle Office also quantifies risk
exposure of native business activities (including both price and volumetric uncertainty),
excluding hedges. In the event hedge decisions do not achieve program objectives, the
Middle Office will determine why the objectives were not achieved and recommend to
the RMC how to re -align hedge decisions with program objectives to promote improved
effectiveness.
The Middle Office responsibilities include monitoring DME's energy management risk
exposures and mitigation measures and ensuring compliance with policies, guidelines,
and procedures. In connection with this responsibility, the Middle Office maintains a
compliance log of any operational and/or procedural violations, which can be used to
monitor issues and their severity, frequency and resolution.
Additionally, the Middle Office is responsible for recommending to the RMC when
changes in policy or operating procedures are required. These recommendations may
involve the temporary or permanent halting of transactions with one or more
counterparties, and any other topic the Middle Office believes represents potential
unacceptable risk exposure.
The Middle Office adopts and updates, as necessary, the Energy Risk Management Policy,
guidelines and procedures so that portfolio management functions occur in compliance
with Energy Risk Management Policies and energy risk procedures and guidelines.
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
Specific responsibilities of the Middle Office include the following:
1. On a daily basis, confirms and reconciles physical and financial transactions,
including conditions, quantities, and amounts to be paid and dates. The Middle
Office verifies and reconciles every position that has been entered into by Front
Office to ensure that the terms recorded and understood by DME to match the
terms actually agreed upon with counter parties and/or brokers.
2. Compares energy portfolio to the market (market to market) by collecting and
validating market prices, and preparing position reports identifying the financial
positions, physical positions, anticipated physical exposures, and the market value
of the energy portfolio(s) on a position -by -position and aggregate basis.
3. Operates risk measurement, performance, and valuation models, including various
stress tests.
4. Prepares routine risk reports, including those identified in Section 4.2 — Required
Reports.
5. On a daily basis, confirms that all exposures and activities comply with authorized
market instruments as contained in Appendix D — Approved Types, the risk limits as
contained in Appendix A— Risk Exposure and Transaction Limits and hedge coverage
targets as contained in Appendix E— Forward Hedging Strategies and Plans. In doing
so, the Middle Office monitors transactions and position limits, review daily
positions, and activity reports, and ensures that trading instruments are in
compliance with current hedging strategies and are permissible.
6. Follows the remedial actions process in the event of any risk limit or hedge target
breaches.
7. Ensures all transactions are in compliance with DME's Energy Risk Policy.
8. Generates and sends written confirmations to counterparties to ensure terms and
conditions are mutually agreed upon.
2.2.3 Back Office
The Back Office's primary responsibility is to ensure that financial records of DME's energy
management operation accurately reflect the current state of energy risk management
and power supply portfolio management activity. The Back Office is responsible for
verifying supply payments, invoicing, and settlements. The Back Office is also responsible,
in coordination with City of Denton Finance, AR, and AP departments, for accurately
calculating and booking the financial results of energy transaction activities, billing, and
accounts payable, as well as recording, reporting and accounting for risk management
and hedging. Specific responsibilities of the Back Office include the following:
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Energy Risk Management Policy
1. Supports accounts payable and receivable operations.
2. Coordinates with City Finance the recording of all revenue and expenses in the
general ledger and other subsidiary ledgers when appropriate.
3. Coordinates the recording of posted cash receipts and revenues with City Finance
to the appropriate subsidiary ledger.
4. Settles transactions (verification, accounts payable/receivable)
5. Develops and maintain documentation outlining standard procedures for
performing the settlement functions described herein.
6. Notifies the Front Office, Middle Office, and the General Manager of any
discrepancies that result from the reconciliation process.
7. Oversees the safekeeping of transaction -related documents.
8. Maintains funding and reconciles and records activity in cash accounts held with
other ERCOT and other market participants.
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This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
SECTION 3 MARKET RISK PROTOCOLS AND EXPOSURE
CONTROL
3.1 Market Risk Protocols
The following market risk protocols shall govern DME's participation in wholesale energy
markets. Specific limits, methodologies, reports, operational procedures and approval processes
are detailed in the EMO Procedures Manual.
• DME will ensure that it has full knowledge of its energy portfolio position and the resulting
exposure, and understands the implications of its energy management activities;
• Only personnel authorized by the DME General Manager, or his designee, pursuant to a
written Delegation of Authority Memorandum can transact on behalf of DME in the
wholesale energy market (see Transaction Limits section of Appendix B);
• Personnel involved with DME's energy management activities will ensure they obtain
competitive prices, transact "at the market" and that counterparty credit risk is diversified by
setting up master enabling agreements [such as the International Swaps and Derivatives
Association, Inc. (ISDA), Edison Electric Institute (EEI), and the North American Energy
Standards Board (NAESB)] with as many pre -qualified financial counterparties as possible.
• DME may only transact in wholesale energy -market products authorized by this Policy.
• DME may only transact within transaction limits approved and defined in this Policy.
• All wholesale energy transactions will be carried out on recorded phone lines, electronic
trading platforms, or other media that can be recorded and documented;
• Metrics for assessing DME's market risk exposure will be specified, measured, monitored,
and reported on a regular basis to the RMC;
• On a daily basis, all wholesale market transactions will be recorded in the official system of
record which will capture and report physical and financial positions so that each can be
reviewed separately and in total so that net volume and price risk and collateralization
requirements can be accurately assessed and managed in real time. This system will also
serve as a central check and balance tool; therefore, it will allow for reconciliation of physical
and financial confirmations with transactional input. This system will also support and report
risk information.
• Models and inputs for valuation and risk measurement and mitigation shall be subjected to a
validation and change control process. The models employed and associated processes shall
be described in detail in the EMO Procedures Manual; and
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
3.2 Authorized Transactions
Authorized types of transactions are addressed in Appendix D of this Policy. These transactions
types are, and shall continue to be, focused on supporting the energy portfolio goals of the City
Council and this Policy.
3.3 Market Risk Control
An important element to any energy risk management and mitigation program is the regular
identification, measurement, and communication of market risk. DME's net "open" position (i.e.,
whether it needs to buy or sell energy products on a daily, hourly, monthly or annual basis to
balance the energy portfolio) and the market exposure associated with its net open positions
shall be quantified and compared against exposure limits contained in this Policy and discussed,
on a regular basis, within the RMC.
Market exposure associated with these net positions shall be quantified using forms of
measurement approved by the RMC. The market exposure measurement criteria shall be
reviewed at least annually and consider changes in DME's net positions and existing and
projected market conditions. The Middle Office shall have primary responsibility for coordinating
the development, maintenance, and modification all market measurement methodologies within
DME and for recommending approval of these methodologies by the RMC.
3.3.1 Risk Tolerance
For the purposes of this Policy, DME's Energy Risk tolerance is defined by the degree of
uncertainty that DME can accept in its future financial ratios and customer rates on a
projected basis.
DME's Energy Risk tolerance and measurement of Energy Risk shall include "at risk" forms
of risk measurement such as Cash Flow at Risk (" CFaR") or Value at Risk ("VaR"),
augmented with scenario analysis and stress testing. These forms of risk measurement
are described in more detail in Appendix A — Risk Exposure and Transaction Limits and in
sections of the EMO Procedures Manual.
3.3.2 Transaction and Exposure Limits
The setting of and the adherence to transaction limits is an important control element to
ensure DME does not assume greater aggregate energy market exposure than is intended
and helps ensure that the transaction strategy level is appropriate at various levels of
aggregation (e.g. by commodity, delivery period, strategy, energy portfolio, etc.).
Appendices B and D, along with the EMO Procedures Manual, contain the Approved
Transaction Types and the Transaction Limits for DME. It is the responsibility of the Front
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Energy Risk Management Policy
Office, Middle Office and the RMC to utilize these limits to manage and mitigate risk -
taking activities. The Front Office shall be responsible for maintaining exposures within
prescribed limits and for recommending changes to those limits to the RMC when market
conditions or operating circumstances result in limits becoming ineffective or
inappropriate in controlling these activities.
The Middle Office shall be responsible for monitoring compliance with the Transaction
Limits, and obtaining approval from the RMC for any changes to Transaction Limits or the
Transaction Limit structure. It is the responsibility of the Middle Office and Front Office
to ensure that Transaction Limits are strictly enforced.
3.3.3 Stress Testing
In addition to mitigating and measuring financial exposure using the methods above,
stress testing is used to examine performance of the energy portfolio under extreme
adverse conditions.
In stress testing, extreme market conditions are applied to the portfolio to determine how
the portfolio will perform under such conditions. Stress testing requires thorough
evaluation of past market periods to determine those that would represent severe
outcomes. In addition, the performance of the portfolio is also estimated for individual
and combined potential market conditions. Such conditions are intentionally chosen to
represent adverse conditions and combinations of conditions, even if they are extremely
unlikely.
The Middle Office shall design and maintain a stress testing program, in consultation with
the Front Office. The stress testing approach shall be reviewed by the Middle Office
regularly, and the stress testing program shall be presented to the RMC for review on at
least an annual basis.
3.3.4 Model Validation and Controls
A risk commonly faced by those involved with energy management activity is model risk —
the risk that either the methodology or assumptions used to value the portfolio becomes
invalid. Inaccurate assumptions and incorrectly designed models can cause risk
management problems in every market. However, the complexity of energy models and
their extended lifetimes, make these problems especially common in the energy markets.
Model risk occurs primarily for two reasons:
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
• The model may have fundamental errors the user is unaware of and may produce
inaccurate outputs when viewed against the design objective and intended business
uses.
• The model may be used incorrectly or inappropriately.
Ensuring adequate model documentation is an important control for managing
modeling risk. This requires both organizing model information and accountability from
people using and developing models.
DME keeps a record of all internally and externally developed models used in its operation
(see EMO Operating Procedures 1-4), including
• a description of the information input component (assumptions and data used by
the model, including quantitative approaches whose inputs are partially or wholly
qualitative or based on expert judgment),
• version control (when key model inputs or model processes change)
• processing component (which transform inputs into estimates), and
• reporting component (which translates the estimates into useful business
information).
The Middle Office will review and validate models used by DME and report to the RMC
annually.
3.4 Credit Risk Control
Credit Risk is the potential impact on DME's financial performance due to the chance of non-
performance in payment or delivery (either physical or financial) by an energy entity that has
executed a commercial agreement with DME to buy and sell energy ("counterparty").
DME actively mitigates its energy credit risk by making informed decisions regarding which
counterparties to transact with and to what degree. Credit risk is defined as the risk of
counterparty nonperformance, or failure to deliver its obligation (whether with an energy
product itself or the payment of amounts owed).
3.4.1 Credit Policies
DME mitigates its energy credit risk by
• Incorporating the expected transacting volumes, timing, and expected energy prices,
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Energy Risk Management Policy
when establishing an energy credit risk tolerance for a calendar year;
• Assessing counterparty creditworthiness and establishing credit limits for
counterparties based on that assessment;
• Requiring a counterparty to be assigned a credit limit prior to transacting with it;
• Monitoring and assessing market and counterparty events to adjust credit limits as
appropriate;
• Calculating and reporting the maximum expected loss if a counterparty defaults
("counterparty credit exposure"); and
3.4.2 Credit Limits
The EMO Procedures Manual includes a credit limit framework for DME's counterparties
based on various factors such as debt ratings and financial statistics. Specific counterparty
credit limits include consideration of financial ratios, audited financial statements, and
asset quality. Credit limits on all counterparties are reviewed at least semi-annually by
the Middle Office, or immediately if their business conditions change or their credit rating
has been downgraded.
Prior to execution of any transaction with a counterparty, the Front Office verifies that
the counterparty has available credit. In addition, no transaction shall be executed that
will cause the counterparty credit limit to be exceeded unless explicitly approved by the
RMC.
3.4.3 Counterparty Credit Function
The counterparty credit function concerns counterparty credit analysis and approval of
new and existing counterparties as well as the calculation, aggregation, monitoring and
reporting of credit exposures. DME's credit function is managed by the Middle Office and
reports to the DME Compliance Manager.
The objective of the counterparty credit function is to minimize the potential adverse
financial impacts on DME in the event of a potential default by a counterparty. The
counterparty credit function will minimize DME's credit exposure and potential adverse
financial impacts by:
• Establishing a credit risk mitigation structure within the energy risk management
program;
• Providing a framework to enable DME to qualify energy suppliers and transact with
approved counterparties;
• Determining counterparty transacting parameters ("transaction limits") to
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
conservatively control and measure DME's exposure to any one supplier; and
• Implementing conservative business processes and procedures (to be included in the
EMO Procedures Manual) to gather and monitor financial information on each
counterparty to estimate counterparty credit exposures
3.5 Information Systems and Models
Energy risk management information systems consist of the data, models and other software and
hardware used to collect, analyze, test, and validate transactions within DME's portfolio in order
to monitor and control risk. Although various departments within the City of Denton or DME
may have responsibilities for using and maintaining DME's risk management systems, the Middle
Office shall have overall responsibility for ensuring that the systems are sufficient to perform the
risk management functions outlined in this Policy.
As part of a service level agreement with the City of Denton Technology Services, the Middle
Office shall also be responsible for maintaining the security, integrity and reliability of the
software used for energy risk management purposes (e.g. valuation models, administrative and
reporting software, energy risk management databases, etc.).
In accordance with the Service Level Agreement between DME and the City of Denton
Technology Services, Technology Services shall be responsible for maintaining the integrity and
reliability of the hardware used for both energy management and energy risk management
purposes, including business continuity, disaster protection and recovery plans.
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
SECTION 4 RISK REPORTING
4.1 Risk Management Reporting Policy
Key to energy risk management is the monitoring of risks and the accurate and timely information
that must be provided to all parties involved in any aspect of energy risk management to allow
them to perform their functions appropriately. The separation of execution and reporting
responsibilities ensures that timely and accurate information is being reported.
On an annual basis, the RMC Chairman will meet with the PUB and City Council and provide
details of the DME's forward purchases, market exposure, credit exposure, counterparty credit
ratings, transaction compliance and other relevant data. In addition, DME will provide periodic
training to the PUB and Council on energy market fundamentals and commodity trading best
practices to help facilitate more productive risk meetings.
4.2 Required Reports
Minutes and meeting materials from quarterly RMC meetings will be distributed to the PUB and
Council for their review.
Minimum reporting requirements are listed below and are prepared for the RMC by the Middle
Office and reviewed by both the Middle Office and Front Office.
Controls Compliance Report
Identifies any activities that have exceeded permissible limits.
Hedge Target Compliance Report
Provides an understanding of the status of portfolio exposure relative to
program objectives and associated hedge targets.
Competitiveness Report
Provides a comparison of latest 12-month cost/mwh vs ERCOT spot markets (Day -
Ahead and Real -Time Market)
Renewable Resource Effective Cost Report
Tracks the effective cost of each renewable resource, including the cost of market
purchases when renewables output is insufficient to meet load.
Price Risk Reduction Report
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Energy Risk Management Policy
Measures the inherent market risk exposure over a given time horizon for DME's
energy portfolio prior to market hedges and the residual market risk exposure
after hedging.
Credit Exposure Report
Identifies the credit limit for each counterparty, current level of exposure with the
counterparty, and remaining available credit.
4.3 Transaction Valuation
DME's financial records will be maintained in full accordance with generally accepted accounting
principles ("GAAP") and will be consistent with FERC Uniform System of Accounts.
Front, Middle, and Back Office functions shall coordinate their efforts and maintain vigilance to
ensure that DME's energy management transactions and risk exposures are accurately valued in
an unbiased manner. Transaction valuation and reporting of positions shall be based on
objective, market -observed prices or models.
Open positions (i.e., whether DME needs to buy or sell energy on a daily, hourly, monthly or
annual basis to balance customer loads against available resources) should be valued ("marked -
to -market") daily, based on consistent valuation methods and data sources. Whenever possible,
these valuations shall be based on independent, publicly available market information and data
sources (e.g., Bloomberg, Reuters, NYMEX, ICE, broker quotes, etc.).
The specification of position valuation methods is the responsibility of the Middle Office and is
subject to RMC review. The Middle Office is responsible for obtaining and disseminating market
information in a timely and consistent manner, along with maintaining and updating transaction
data and information sources used for trade evaluation. The Middle Office is also responsible for
assuring that data used for energy risk management calculations represent accurate and timely
information available from reputable market or internal sources.
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552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
SECTION 5 OTHER RESPONSIBILITIES AND POLICIES
5.1 Organization -Wide Responsibilities
It is the policy of DME and the City of Denton that all personnel adhere to standards of integrity,
ethics, conflicts of interest, compliance with statutory law and regulations and other applicable
standards of personal conduct.
The willful misrepresentation or concealment of information regarding portfolio management
and/or risk management activities from senior management or any person responsible for the
accurate tracking and reporting of such activities shall result in disciplinary action up to and
including termination in accordance with DME and City of Denton policies and possible legal
action as allowed or required by law.
As an employee of the City of Denton, all DME personnel involved with its energy management
activity should not have an expectation of privacy in the conduct of their duties. At any time,
recorded phone calls and electronic transactions may be reviewed to ensure appropriate conduct
or to review transactional information.
5.2 Commercial Interests and Trading for Personal Accounts
All DME personnel who have any specific responsibilities delineated under this Policy or in the
EMO Procedures Manual, are prohibited from engaging in the activities listed below:
• Physical or financial trading of any commodities stipulated in this Policy or in supporting
departmental procedures for their own account
• Holding an undisclosed interest in any account or corporate entity (other than DME), which
is used to trade the commodities described above.
If there is any doubt as to whether a prohibited condition exists, then it is the employee's
responsibility to disclose and discuss the possible prohibited condition with their supervisor. In
addition, any employee receiving taxable income from any person or business doing business
with DME must file a Conflicts Disclosure Statement in accordance with Chapter 176 of the Texas
Local Government Code. Failure to comply with these requirements may result in disciplinary
action up to and including immediate termination of employment, in accordance with DME and
City of Denton policies.
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Energy Risk Management Policy
5.3 Acknowledgment of Policy Requirements
All DME personnel connected with the energy risk management program must sign a statement
attesting that they have received, read, and understand this Policy document and the City of
Denton policies regarding employee conduct. A sample statement is provided in Appendix G.
5.4 Adoption of Energy Risk Management Policy
The Energy Risk Management Policy shall be formally reviewed, approved and adopted by
ordinance of the City Council annually in January.
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
Appendix A PORTFOLIO RISKS
As an electric utility, participation in physical and financial energy markets has the inherent
potential to expose DME to the risks of cost and pricing uncertainty, revenue and commodity
market volatility, and uncertainty in meeting budget targets. These risks may be broadly
categorized into three risk categories: market, credit, and operational. Each category of risk is
described below. The categories are not entirely separate: disruptions of planned operations,
for instance, can expose a utility to the risk of having to enter into unforeseen transactions in
adverse market conditions.
The following section provides descriptions of the energy -related risks the Policy is intended to
address.
A.1. MARKET RISK
DME manages energy purchases and sales with the goal of reducing the business risks associated
with its obligation to serve energy to its ratepayers. These risks include volume -related and price -
related risks.
A.M. Price Risk
Because of continual changes in the supply and demand for electricity, significant price
changes can occur over a short time frame, otherwise known as price volatility. High price
volatility means a high degree of uncertainty about the level of prices in the future. DME's
price risk takes several forms, including: 1) exposure to changes in spot prices which DME
faces in purchasing electric energy from the ERCOT market, 2) forward price risk of
anticipated purchases or sales of power or fuel in the future and 3) the cost of energy -
related products and services such as congestion revenue rights and ancillary services.
Price risk also includes the basis risk associated with potential differences in the price of
a commodity between geographic locations. For example, whenever DME must purchase
power to satisfy native load requirements or is exposed to natural gas price uncertainty
at various physical delivery points, DME is financially at risk due to the uncertainty in
transmission or transportation costs between various locations.
A.1.2. Volume Risk
Volume Risk refers to uncertainty in the quantity of a commodity or service demanded,
acquired, or supplied that has a potential economic impact. A primary volume risk for
DME is the uncertainty associated with the amount of load DME will be required to serve.
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Energy Risk Management Policy
Weather conditions affect customer energy usage, and weather changes make
forecasting of load and non-dispatchable resources a challenge, causing actual quantities
to deviate from forecasts. Forced or unexpected outages of generation resources also
impact DME's volumetric risk. EMO Operating Procedures 1-4 contain details about
DME's processes for developing forecasts of expected volumes associated with its
portfolio of load and resources.
A.M. Liquidity Risk
DME transacts business in commodity markets that have inherent liquidity risk. Liquidity
risk for DME arises when its intended transaction quantities exceed the size of current
market bids (to buy) and offers (to sell). When DME desires to execute a transaction for
a volume/quantity in excess of current market bids or offers, potential counterparties
may be unwilling or unavailable to transact with DME. Transactions of nonstandard sizes
and types also present liquidity risks.
Liquidity risk should also be considered with regard to positions thought to be offsetting,
but that may become open in the event that a counterparty defaults on their transaction
responsibility (also referred to as "default risk"). It may be difficult to replace defaulted
transactions on short notice. If a position must be covered quickly, the price of the
necessary replacement transaction can be worse than if no urgency existed, especially if
the potential counterparties know about the urgent need, putting DME as a significant
disadvantage.
A.2. CREDIT RISK
DME is at risk if a customer, supplier or trading counterparty is unable or unwilling to fulfill its
present or future contractual obligations to deliver power or fuel, or to make a timely payment
of invoices or collateral.
A.2.1 Credit Risk
Credit Risk equals the potential replacement value of counterparty contractual
obligations to deliver or receive power or fuel, or to make a timely payment to settle a
financial contractual obligation. The potential financial impact from counterparty
defaults is significant. DME's credit risk is addressed in a separate Credit Risk
Management Policy.
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Energy Risk Management Policy
A.2.2. Funding Risk
Funding risk is related to credit risk. This term refers to the risk that DME might have to
pay margin or post collateral to meet requirements to securitize its credit under credit
provisions of Power Purchase Agreements, wholesale energy market, or to meet margin
requirements for cleared contracts.
A.3. OPERATIONAL RISK
The term operational risk is often used as a catch-all category intended to include all risks that
are not explicitly designated by other names, such as market risk, volume risk, liquidity risk, and
credit risk. Operational risks include problems of several types that can have adverse financial
consequences, and that relate to the operations of DME's energy portfolio, identification and
control of risks, and processing and settlement of transactions. One such risk is Model Risk.
A.3.1. MODEL RISK
Model risk is a form of systems risk associated with unrecognized deficiencies of
information systems used to in value transactions. A model may incorporate assumptions
to derive unobservable pricing parameters from observable ones. There is a risk that a
particular model used to value a transaction may not properly capture the value and risks
of the transaction, and that its deficiencies may emerge only after the fact, following
unfavorable market movements.
A.4. REGULATORY RISK
Regulatory risk is the uncertainty to DME's performance due to potential changes in laws or
regulatory mandates. Examples include, but are not limited to, the following.
A.4.1 Carbon Cost
Unless explicitly borne by an energy supplier, DME is exposed to the potential risk of
carbon costs. Any applicable law, rule, regulation, ordinance, protocol, order, decree,
judgment or other similar legal mandate could cause DME to pay carbon costs associated
with the production, generation, sale, metering, measurement, transmission, storage or
delivery of electric energy.
A.4.2 Changes to ERCOT market design
The PUCT has directed ERCOT to study the impact of changes to its market design, which
could have a significant impact on the flow of dollars between suppliers and consumers
of power, possibly triggering the need to renegotiate long-term power contracts and
changing the valuation of existing generation assets.
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Energy Risk Management Policy
A.4.3 Ongoing changes to ERCOT Protocols
The rules under which ERCOT operates are in a constant state of change. In fact, they
change so often that ERCOT's governing board has a committee (Protocol Revisions
Subcommittee) that meets monthly to review and process proposed changes submitted
by ERCOT and its market participants. These changes usually impact how costs are
allocated within ERCOT among market sectors, consumers and suppliers of power, and
individual market participants like DME.
AAA Regulatory Compliance
Market Participants in the ERCOT region are subject to both state and federal laws and
regulations.
Market Participants that own or operate facilities that are part of the Bulk Electric
System, as defined in federal law, are subject to oversight by the Federal Energy
Regulatory Commission (FERC), the North American Electric Reliability Corporation
(NERC), and Texas Reliability Entity, Inc. (Texas RE).
Additionally, all ERCOT Market Participants are subject to oversight by the Public Utility
Commission of Texas (PUCT). The PUCT administers the Public Utility Regulatory Act
(PURA), and adopts and enforces rules pursuant to the authority granted in PURA. The
PUCT also has oversight and enforcement authority over the ERCOT Protocols,
Operating Guides, and Other Binding Documents. The PUCT has contracts with an
Independent Market Monitor (16 T.A.C. §25.365) and a Reliability Monitor (16 T.A.C.
§25.503) to assist with oversight and enforcement activities.
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Energy Risk Management Policy
Appendix B RISK EXPOSURE AND TRANSACTION LIMITS
DME's energy supply, trading and risk management -related activities shall be segregated among
a number of "risk books." A risk book is a way of classifying and tracking positions and
transactions that have similar or directly related purposes so that value and risk can be measured
in sufficient detail to support both risk control and transaction strategy decisions.
B.1 Risk Books
System Book
A System Book captures the value and risk position of native load obligations and long-
term power and fuel supply obligations. Positions in the System Book will generally be of
duration greater than one month or have a transaction start date of greater than one
month into the future.
Hedge Book
The purpose of a Hedge Book is to track all positions that are entered into to reduce the
total net risk exposure of the System Book. Hedge Book transactions should demonstrate
their value (on a prospective basis) in mitigating the underlying source of risk to DME's
native load, generation assets and long-term power and fuel supply obligations.
Total Portfolio Book
A Total Portfolio consists of the combination of all positions in the System Book and
Hedge Book.
B.2 Risk Exposure Limits
An essential control element in the management of market risk is the development and
adherence to an appropriate limit structure. A well -designed limit structure helps ensure DME
does not assume greater aggregate risk than intended and helps ensure that risk taking at the
transaction strategy level is appropriate at various levels of aggregation (e.g., by commodity,
delivery period, strategy, etc.).
The primary forms of limits listed below shall be applied to DME's energy management activity:
Rates at Risk — Rates at Risk ("RaR") is a form of Cash Flow at Risk (CFaR) measurement.
RaR limits will be set to limit the amount of uncertainty in future rates over the
immediately upcoming 12-24 month period. If uncertainty in future rate requirements is
higher than DME's risk tolerance, DME will consider hedging or implementing other risk
management strategies to reduce the potential need for unforeseen rate increases
and/or deterioration of DME's financial condition.
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Energy Risk Management Policy
Value at Risk —Value at Risk ("VaR") limits will be set to limit the potential loss in value of
the portfolio.
Notional/Volumetric —To augment RaR and VaR limits, notional limits and/or volumetric
limits will be established. Notional limits are specified based on transaction or strategy
dollar amount (i.e., contract or strategy volume x price). Volumetric limits are specified
based on volume (e.g., MW, MWH, MMBTU, etc.). This provides a concrete limit to
account for uncertainties in risk measurement and human judgment capabilities. Other
volumetric limits may be established in relation to specific risks not captured by RaR or VaR.
ERCOT— Implementation of the ERCOT Real Time Market (RTM) and Day Ahead Markets
(DAM) require daily attention to Available Credit Limits (ACL) and forward liability
calculations. The Back Office shall actively monitor and communicate any changes
affecting current credit positions.
Stop Loss —Stop loss limits are set, such that, if an individual position or strategy (or a
hedge transaction or strategy which has become ineffective) is performing adversely and
approaches a predetermined level of losses, the position or strategy must be liquidated
or completely hedged to prevent further loss.
B.3 Portfolio Risk Exposure Limits
Because ERCOT is responsible for ensuring physical reliability of the grid, DME's efforts focus
primarily on managing the rate impact of price volatility risk of its portfolio. For the purposes of
managing this risk, DME will assume an average consumer risk tolerance (CRT) equivalent to 1
cent per kwh of load over a rolling 12-month period.
Hedging is DME's primary method for reducing market price volatility risk, either by locking in or
limiting the amount of variation of a future market price. The "downside" of hedging is that it
not only reduces the chances of incurring higher costs than expected, it also reduces the chances
of lower than expected energy costs, and correspondingly lower electric rates.
DME uses an "at Risk"' methodology to estimate, at a 95% confidence level, the amount of an
electric rate increase that could occur due to changes in market conditions such as volumetric
z The "at Risk" metric DME will use is based on a "Rates at Risk" (RaR) methodology, which refers to the statistical
dollar amount that can be lost on the net open position of a portfolio over a specific time horizon and with a given
confidence interval. DME's RaR methodology accounts for the increasing potential distribution of prices as time
passes, as well as the expiration of the positions in the portfolio with the passage of time. The result is the estimation
of loss, at the specified confidence level, assuming that the portfolio remains constant over time until all positions
within it have expired.
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
risk associated with its renewable resources, ERCOT day -ahead and real time market price
volatility, gas price volatility, nodal price congestion, price correlations and credit risk.
If DME's estimate of a rate increase, at a 95% confidence level, exceeds the CRT threshold by
25%, DME will meet and confer with the RMC, and with the City Council and PUB as noted in the
table below, to discuss alternatives for implementing additional hedging strategies to bring the
level of possible price volatility back inside the CRT threshold. No particular portfolio action is
required, making this notification requirement very different from a trading limit.
"At Risk" limits for the total portfolio are:
RMC Notification
Council / PUB
Notification
Rolling 12 months (in aggregate)
$15.0 million
$19.0 million
BA Open Position Management
DME's primary objective is to protect against risks inherent in its portfolio, such as exposure to
price volatility and from variability in supply and demand. DME plans to execute hedging
transactions relatively evenly over time, to diversify timing risk (similar to dollar cost averaging),
and does not speculate3 . Market transactions shall be executed as a result of strategies designed
to maintain the net open position (the gap between expected demand and committed supply)
within tolerances which are consistent with current hedging strategies. The resultant net open
position shall be updated to reflect the new transactions as soon as practical, but generally no
later than the next business day.
Net open position energy tolerances shall be set at the following, on a total MWH basis either by
time of use (TOU) period (through Balance of Year)' or on an annual basis (for prompt Calendar
Year and beyond):
3 The US Commodity Futures Trading Commission defines a speculator as "a trader who does not hedge, but who
trades with the objective of achieving profits through the successful anticipation of price movements" (CFTC
Glossary: A guide to the language of the futures industry).
4 Within the ERCOT region, through at least the balance of year, DME's open position can generally be managed by
three time of use periods; Peak Weekday (weekdays HE 7-22), Peak Weekend (weekends and holidays HE 7-22) and
Nights (HE 1-6, 23-24).
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
Tolerance if Net
Tolerance if Net
Open is "Short"'
Open is "Long"'
Period
Minimum
Maximum
Minimum
Maximum
Prompt Month
90%
110%
100%
120/ °
(by TOU)
Prompt
Quarter (by
90%
110%
100%
120%
TOU)
Balance of
Year (by TOU)
80%
110%
100%
120%
Prompt
calendar year
80%
110%
100%
120%
(Annual)
Second
calendar year
70%
110%
100%
120%
(Annual)
Third calendar
year (Annual)
60%
110%
100/
°
120/
No action is required if the net open position in a given period exceeds these
tolerances. However, in the event that it does, DME shall evaluate alternatives to flatten the net
open position (whether long or short) and will inform the RMC of any exceedance expectations
for annual periods.
B.5 Transaction Limits
Another vital control element in the management of energy risk is the development and
adherence to transaction limits. Transaction limits ensure the energy portfolio management
function is prudent, deliberate and controlled at various levels of position aggregation and
transaction duration. Transaction limits are established in consideration of overall portfolio
strategies, market conditions and risk tolerance levels and include the following principles:
5 A net "short" open position represents DME needing to buy additional energy to match its forecasted load
requirements during a given time period.
6 A net "long" open position represents DME having an obligation to accept more energy than needed to match its
forecasted load requirements during a given time period.
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552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
■ DME personnel involved with its energy management activity are authorized to execute
any intra-day or day -ahead transaction which is necessary to mitigate market and
financial risk exposure to DME customers.
■ Speculative transactions are those transactions not intended for hedging purposes and
are strictly prohibited. All transactions shall either reduce risks or be risk -neutral to DME
customers.
■ No transaction may be executed for which DME does not have adequate systems or
analytical methods to track, record, value, or analyze the incremental cash flow and risk.
■ Any single transaction for a term greater than one year must be approved by the RMC
prior to execution.
■ Scheduling of loads and resources, along with corresponding bid or offer prices associated
with ERCOT Day Ahead Market (DAM), ERCOT Real Time Market (RTM) or ERCOT
Supplementary Ancillary Services (SASM) Market are not subject to this Risk Policy or to
the limits outlined below and do not require prior RMC approval.
All executed transactions must be recorded and captured in DME's system of record. Further, all
transactions shall be conducted on recorded phone lines, electronic trading platforms, or other
media that can be recorded and documented. Any confirmations received must be signed by the
person with the authority to enter into such transaction. Confirmations for transactions with
ERCOT are evidenced through the ERCOT Settlement Summary statement.
The following tables outline the transaction authorization limits established for DME personnel
involved with its energy management activity when executing transactions. Those personnel are
permitted to execute transactions less than or equal to their designated limits or under the
direction of someone having the required authority. Only the Approved Transaction Types listed
in Appendix D may be executed unless otherwise approved by the RMC.
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
B.5.1 Bilateral or Financial Power Transaction Limits
Transacti
Title
Term
Lead Time
on Size
(Mw)
City Council
No Limit
No Limit
No Max
City Manager or RMC
< 1 Year
< 3 Years
100
DME General Manager
< 1 Year
< 2 Years
100
Assistant General Manager -
< 3 Months
< 12 Months
50
Power Supply
—
—
Market Operations Manager
< 1 Month
< 12 Months
50
Analytics & Fundamentals
Manager
Market Operations Supervisor
< 1 Week
< 1 Week
100
Senior Market Analyst
Senior Market Operator
< 1 Day
< 1 Day
400
Notes:
• Transaction Limits represent MW volume per hour.
• Lead time represents the time period from the date a trade is executed to the start of
delivery.
• Authorized products include electric power, including both physical and financial
derivatives', as well as ancillary services. Financial derivatives maybe over the counter
Electric Forwards and Options or Exchange Traded Products
As used here, a derivative is a contract that derives its value from the performance of an underlying asset or
index.
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
B.5.2 ERCOT Congestion Management Transaction Limits
Title
Auction
CRR Auction
Approved
Time
Source/Sink
Type
Period
Instruments
Period
Combinations
DME General
Annual &
Any month or 6
CRR
Time of Use
All ERCOT
Manager
Monthly
month block
Resource Nodes,
offered by
all ERCOT Hubs
ERCOT
and Load Zones
(currently 3
years)
Assistant
Annual &
Any month or 6
CRR
Time of Use
Conventional
General
Monthly
month block
Resource Nodes,
Manager -
offered by
Primary Hub and
Power Supply
ERCOT
Load Zone
(currently 3
years)
Market
Annual &
Any month or 6
CRR
Time of Use
Conventional
Operations
Monthly
month block
Resource Nodes,
Manager
offered by
Primary Hub and
ERCOT during
Load Zone
and
the current
fiscal year
Analytics &
Fundamentals
Daily
N/A
Point to Point
Hourly
Manager
Obligations/Options
Market
Monthly
Any month or 6
CRR
Time of Use
Conventional
Operations
month block
Resource Nodes,
Supervisor
offered by
Primary Hub and
ERCOT during
Load Zone
and
the current
fiscal year
Senior Market
Analysts
Daily
N/A
Point to Point
Hourly
Obligations/Options
Senior Market
Daily
N/A
Point to Point
Hourly
Conventional
Operators
Obligations/Options
Resource Nodes,
Primary Hub and
Load Zone
Notes:
• Annual CRR auctions occur monthly for successive 6-month periods (called "sequences")
with progressively increasing amounts of transmission capacity available for purchase in
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Energy Risk Management Policy
each sequence. A copy of the current CRR Activity Calendar which shows key dates
associated with each Monthly and Annual CRR auction at http://ercot.com/mktinfo/crr
• Monthly CRR auctions end about 2 weeks before the CRR effective start date
• Conventional Resource Nodes include Denton Energy Center, Gibbons Creek, White Tail
& Santa Rita Wind Farms, Blue Bell Solar Farm and resource nodes or ERCOT Hubs
associated with fully executed PPAs
• Primary ERCOT Hub is "North Hub"
• Primary ERCOT Load Zone is "Load Zone North"
• The purchase of CRRs for each Source/Sink pair from all ERCOT auctions is limited to the
nameplate rating of the generator for City -owned resources or the contract capacity
rating for PPAs.
A Congestion Revenue Right (CRR) is a financial instrument that results in a charge or a payment
to the owner, when the ERCOT transmission grid is congested in the Day Ahead Market (DAM).
DME uses CRRs as a financial hedge to lock in the price of congestion at the purchase price of the
CRR. DME also hedges congestion in ERCOT's Real -Time market by buying CRR-like instruments
called Point to Point (PTP) Obligations.
The main purposes of the ERCOT CRR market are to:
• Support a liquid energy market by providing tradable financial instruments for the
hedging of transmission congestion charges
• Allow market participants to eliminate or greatly reduce the cost uncertainties resulting
from transmission congestion charges
• Encourage competitive energy trading, where the costs of congestion might otherwise be
an impediment
DME's primary objective for hedging congestion risk is to mitigate potentially adverse financial
consequences from uncertain price differences caused by transmission congestion between the
location where it consumes power (ERCOT LZ_North), the locations where it purchases power on
a forward basis (EROTT North Hub), and the ERCOT nodes associated with its resources (Denton
Energy Center, Gibbons Creek, White Tail & Santa Rita Wind farms, Blue Bell solar farm and future
renewable resources).
DME is exposed to transmission congestion risk for all amounts of energy forecasted to be
consumed in the ERCOT North Load Zone, and energy that could potentially be produced at their
respective resource nodes. By default, ERCOT charges all DME load for energy, along with any
congestion, in the Real Time Market ("RT"). DME mitigates congestion risk with congestion
hedges using Congestion Revenue Rights (CRRs).
Page 36 5/7/19
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
Figure 1
Wolf Ridge
Market Transactions
North Haab'
pr
Ts Creek 0
Blue Bell
5,anta Rita DEC
J Gibbom Creek
North Zone
Figure 2
DME hedges congestion risk between each resource and ERCOT's North Hub location, and
between North Hub and North Load Zone, by participating in ERCOT's annual and monthly
auctions, layering in CRR purchases for up to 3 years into the future. The North Hub is also used
as a delivery point for bilateral trades (for liquidity purposes)
Consistent with DME's approach to hedging energy, DME seeks to acquire CRRs at steadily
increasing amounts roughly corresponding to Auction Capacity Percentages, to diversify timing
risk, similar to dollar cost averaging, and does not use event -driven trading to time the market,
trading in and out of positions. DME employs a tiered approach in ERCOT's annual and monthly
auctions".
B.5.3 Physical or Financial Natural Gas Transaction Limits
Transaction Size
Title
Term
Lead Time
(MMBTU/day)
City Council
No Limit
No Limit
No Max
City Manager or RMC
< 1 Years
< 3 Years
50,000
s In practice, this "buy as much as possible as early as possible" strategy means DME includes low bids for the full
amount of remaining CRRs needed in each auction to maximize the chances of capturing low clearing prices while
at the same time preventing credit collateral requirements from becoming unnecessarily high
Page 37 5/7/19
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
Title
Term
Lead Time
Transaction Size
(MMBTU/day)
DME General Manager
< 1 Year
< 2 Years
50,000
Assistant General Manager -
< 3 Months
< 12 Months
50,000
Power Supply
—
—
Market Operations Manager
Analytics &Fundamentals
< 1 Month
-
< 12 Months
-
50,000
Manager
Market Operations Supervisor
< 1 Week
< 12 Months
50,000
Senior Market Operator
Senior Market Operator
< 1 Day
S 1 Day
50,000
Notes:
• Natural Gas transactions limited to the following locations: Henry hub or locations within
Texas which are physically or financially correlated to DME energy costs
• Authorized products include natural gas, including both physical and financial derivatives.
Financial derivatives may be over the counter Gas Futures and Options or Exchange
Traded Products
B.5.4 Renewable Energy Credit ("REC") Transaction Limits
Per Transaction Limits (up to)
Title
Vintage
Volume
$/REC
City Council
No Limit
No Limit
No Max
City Manager
< 2 Years
1,200,000
No Max
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
Per Transaction Limits (up to)
Title
Vintage
Volume
$/REC
DME General Manager
< 1 Year
600,000
No Max
Assistant General Manager - Power
Supply
< 1 Year
—
300,000
No Max
Market Operations Manager
< 1 Year
300,000
No Max
Analytics & Fundamentals Manager
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
Appendix C ORGANIZATIONAL STRUCTURE
Energy Management Organization Front Office
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
Energy Management Organization Middle Office
Energy Management Organization Back Office
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
Appendix D APPROVED TRANSACTION TYPES
Products allowed for energy management activities include the purchase and sale of electric
energy, ancillary services, ERCOT Congestion Revenue Rights/Point to Point Obligations,
Renewable Energy Credits and natural gas. The City Council is responsible for authorizing all
products and commodity types.
All transactions must follow certain requirements as described throughout this Policy. Key
elements include:
• All transactions must be executed to by authorized transacting personnel
• All transactions must be with approved counterparties and/or commodity exchanges
• All transactions must be with counterparties with adequate available credit or fully
collateralized
• All transactions must be committed over recorded phone lines or via recordable
electronic communications
• All transactions must be approved transaction types
• All transactions must be consistent with this Policy and the EMO Procedures Manual
Failure to observe the above minimum requirements when executing energy transaction is a
violation of Policy and is subject to disciplinary action.
AURTHORIZED MARKETS
DME may only execute transactions to buy or sell energy -related products after some type of
enabling agreement has been signed with a counterparty or commodity exchange. In approving
DME's Energy Risk Policy, the City Council has authorized the City Manager, or his designee, to
sign such agreements.
Examples of markets where DME is currently authorized to transact include:
• Intercontinental Exchange (ICE)
o ERCOT Physical and Financial Power
o Natural Gas futures
• Bilateral markets with approved counterparties
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Energy Risk Management Policy
o Physical Natural Gas at locations within Texas and Oklahoma to support fuel
purchases for the Denton Energy Center and DME's energy portfolio
o Physical and Financial Power
• ERCOT
o Day Ahead Market
o Real Time Market
o Ancillary Services Market
o Congestion Management Auctions and Markets
AUTHORIZED POWER TRANSACTIONS
Power transactions shall be limited to delivery or exposure to power within ERCOT.
1. Physical
a. Fixed -price & Index -price purchases and sales
b. Call & Put Options (e.g., fixed & indexed, hourly, Time of Use, daily monthly,
annually)
c. Ancillary services
2. Financial
a. Fixed -price & Index -price purchases and sales
b. Exchange traded, bilateral or OTC Call or Put options9
c. Ancillary Services
d. ERCOT Congestion Revenue Rights (CRRs), Point to Point Obligations (PTPs) and
other similar congestion management transactions
AUTHORIZED NATURAL GAS TRANSACTIONS
Natural Gas transactions shall be limited to Henry Hub or a location within Texas or Oklahoma
to support commodity exposure for DME's energy portfolio.
1. Physical Gas which maybe needed to support operation of the Denton Energy Center
a. Fixed and index price Natural Gas commodity
b. Fixed and index price Natural Gas transportation
c. Fixed and index price Natural Gas storage
2. Financial
9 For example, fixed & indexed, hourly, Time of Use, daily monthly, annual options
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power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
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Energy Risk Management Policy
a. Exchange traded, bilateral or cleared futures and Exchange or OTC swaps
b. Exchange traded, bilateral or cleared and or OTC Call or Put options10
c. Index options
Other authorized energy -related commodity transactions
1. Physical Renewable Energy Credits (RECs) associated with energy that has already been
generated within the last 3 years.
to Ibid.
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Energy Risk Management Policy
Appendix E FORWARD HEDGING STRATEGIES AND PLANS
Successful management of the price and volumetric risks faced by DME requires analysis,
monitoring, and communication. Analysis of published weather forecasts and market price
data serve as key inputs to models used for planning and ensures that the appropriate data is
converted into useful information. Consistent with market risk policies defined herein and the
risk limits defined in Appendix A, DME, in concert with the RMC, develops annual hedging
strategies with underlying hedging plans as a means to manage the volumetric and price risks
faced by the utility. A review of the status of current hedging plans will typically be a topic of
discussion at RMC meetings.
Prior to February 1 of each year, DME shall submit a written Hedging Strategy for managing its
expected net open position for the upcoming three (3) full calendar years. Due to the
complexity of the wholesale energy markets and the energy regulatory environment, the
Hedging Strategy is expected to require several Hedging Plans to be developed and approved
during each year. The RMC will approve the Hedging Strategy by the end of February each year or
at its first meeting thereafter.
Each Hedging Plan will:
• Cover a clearly specified forward time period;
• Explain the justification for the hedge (a general description of the resource mix and
load that contribute to the open position for the specified time period, along with the
Open Position tolerances for the specified forward time period);
• Define a volumetric limit for hedge purchases and sales;
• Document transaction types expected to be used to carry out the Hedging Plan; and
• Proposed price triggers that will enable hedging activity within the Hedging Plan's
limits.
DME may, at any time, request that the RMC consider changes to the current Hedging
Strategy or to an individual Hedging Plan. Any approved changes to the Hedging Strategy or
Hedging Plan shall be recorded in the RMC meeting minutes and an updated written Hedging
Strategy or Hedging Plan document will be prepared as soon as practical incorporating such
changes. On occasion, it will become apparent to DME management that additional
transactions to reshape expected monthly forward positions are necessary given changes in
generation forecasts, market conditions, and load forecasts. The DME General Manager
may direct EMO staff to enter into and execute such transactions to rebalance the forward
position. These transactions will be discussed in RMC meetings ahead of time if conditions
allow, or reported after the fact and documented in the minutes of the next RMC meeting.
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Energy Risk Management Policy
Appendix F New Product/Market Instrument Approval
Checklist
Checklist Items
Primary
Accountability
Benefits
Identify and describe the benefits of using the new product
Front Office
Risk
Understand and document the payoff profile of the new product
Front Office
Identify and analyze credit risk of new product
Middle Office
Develop methodology for measuring credit risk of new product (mark -to-
market, potential exposure, stress exposure.
Middle Office
Identify prospective counterparties for new product/instrument and
determine credit suitability.
Front Office &
Middle Office
Approve new product valuation methodology.
Middle Office
Determine if staff, systems, and management skill sets are sufficient for
valuing and transacting new product.
Middle Office
Determine physical disposal or financial settlement requirements.
Front Office & Back
Office
Determine stress test requirements for new product.
Middle Office
Define how stress testing must be performed (frequency, scope,
independent source).
Middle Office
Financial
Define the capital requirements (exchange margin or collateral) of the
new product.
Front Office &
Middle Office
Determine contract documentation required.
Front Office &
Middle Office
Accounting, Tax, and Regulations
Identify applicable U.S. and local regulatory restrictions for new product.
Back Office/City
Finance
Determine regulatory compliance requirements, if any, for new product.
Middle Office &
Back Office/City
Finance
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Energy Risk Management Policy
Review accounting policies and approve proposed treatment.
Back Office/City
Finance
Determine audit requirements.
Back Office/City
Finance
Consider tax consequences of new product.
Back Office/City
Finance
Policy
Verify counterparty authority to enter into contract for new product.
Middle Office
Develop and implement monitoring and review procedures to ensure
Policy compliance.
Middle Office
Define procedures and responsibilities for independent verification of
positions and market valuation inputs (prices, and volatilities if
applicable).
Middle Office
Determine impact on position/risk limits/hedge targets
Middle Office
Determine and define procedures for confirmation and reconciliation of
new product.
Middle Office
Verify that all groups involved in new product transaction procedures can
handle anticipated transaction volume.
Middle Office
Determine and define management reporting requirements.
Middle Office
Page 47
5/7/19
This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.
Energy Risk Management Policy
Appendix G ENERGY RISK MANAGEMENT POLICY
ACKNOWLEDGEMENT FORM
The purpose of this form is to confirm that City of Denton employees involved with the
Energy Portfolio Management program have received, read, and understand DME's
Energy Risk Management Policy.
Employee Name:
Title:
Department:
Supervisor:
My signature below confirms that I have received, read and understand DME's Energy
Risk Management Policy and appendices, and the City of Denton policies regarding
employee conduct.
Signature of Employee
Date
Page 48
5/7/19
This document and any attachments thereto may contain information that is confidential, commercially -sensitive, proprietary, and/or public
power utility competitive and financial information in accordance with the provisions of Texas Government Code, Section 552.101, 552.104,
552.110 and/or 552.133, and may be protected from required public disclosure.