21-765FILE REFERENCE FORM
X Additional File Exists
Additional File Contains Records Not Public, According to the Public Records Act
Other
FILE(S)
Ordinance Created By 20-420
Amended by – Ordinance 21-765
Date Initials
03/17/2020 CW
05/25/2021 1 cw
21-765ORDINANCE NO.
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF DENTON REPEALING
ORDINANCE NO. 20-420; APPROVING THE 202 1 DENTON MUNICIPAL ELECTRIC-
ENERGY RISK MANAGEMENT POLICY; DELEGATING AUTHORITY AS PROVIDED IN
THE 2021 ERMP; AUTHORIZING AND APPROVING THE SUBSEQUENT EXECUTION
OF SUCH OTHER ANCILLARY AND RELATED DOCUMENTS, INCLUDING, WITHOUT
LIMITATION. CONTRACTS, NOMINATIONS, CERTIFICATES, ASSIGNMENTS,
LICENSES, DIRECTIONS, INSTRUMENTS, CONFIRMATIONS, ORDERS, AND
STATEMENTS AS ARE AUTHORIZED BY THE 2021 ERMP, WHICH ARE INCIDENT TO
OR RELATED THERETO; CONFIRMING THAT THE CITY OF DENTON, ITS MAYOR,
ITS CITY COUNCIL MEMBERS, ITS CITY MANAGER, OR DESIGNEES, ITS CITY
ATrORNEY. OR DESIGNEES, AND ITS CITY SECRETARY, OR DESIGNEES, ARE
AUTHORIZED TO PERFORM SUCH ACTS AND OBLIGATIONS AS ARE
REASONABLY REQUIRED TO CONSUMMATE THOSE FUTURE TRANSACTIONS
WHICH ARE PROVIDED FOR AND AUTHORIZED BY THE 2021 ERMP; FINDING
THAT THE PURCHASE OF ELECTRICITY, NATURAL GAS, AND RELATED
COMMODITIES AND INSTRUMENTS ARE EXEMPT FROM THE REQUIREMENTS OF
COMPETITIVE BIDDING; FINDING THAT THE PURCHASE OF ELECTRIC ENERGY,
NATURAL GAS, AND RELATED COMMODITIES AND rNSTUN4ENTS MADE BY THE
CITY UNDER THE TERMS OF THE 2021 ERMP ARE IN THE PUBLIC WELFARE OF THE
CITIZENS AND ELECTRIC RATEPAYERS OF THE CITY; AUTHORIZING THE
EXPENDITURE OF FUNDS THEREFOR; AND, PROVIDING AN EFFECTIVE DATE.
WHEREAS, the City of Denton ("City"), a Texas home-rule municipal corporation
governed by the constitution and laws of the State of Texas, operates a municipally-owned
electric utility; and
WHEREAS, on March 17, 2020, the City Council ("Council") passed Ordinance No. 2020-
420 which repealed the 2019 Denton Municipal Electric -Energy Risk Management Policy and
approved the 2020 Denton Municipal Electric - Energy Risk Management Policy ("2020 ERW");
and
WHEREAS, the 2020 ERMP requires that it be reviewed, amended if necessary, and
approved annually by the Council; and
WHEREAS, the Council has determined and finds that (i) the 2021 ERMP provides for the
purchase of electricity, natural gas, related commodities and instruments in the future in strict
accordance with the provisions of the 2021 ERMP; (ii) 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 and instruments and the City are, (a) provided that these transactions
are within the described and delineated limits and guidelines which are set forth in the 202 1 ERMP,
authorized, and (b) excepted from public disclosure, as permitted by the provisions of Section
552.133, Texas Government Code, as documents that are reasonably related to the competitive
public power matter, the disclosure of which documents would provide an advantage to the
competitors or prospective competitors of Denton Municipal Electric; and, (iii) all such documents
which are incident to or related with the above-described documents, as from time to time may
be required by the City and/or the seller, are (a) authorized, and (b) should be excepted from
1
public disclosure, as permitted by the provisions of Section 552.133, 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 has determined and finds that the 2021 ERMP 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 determined and finds that both (i) Sections 252.022(a)(15) and
252.022(c), Texas Local Government Code, are applicable to the 2021 ERMP and those
subsequent transactions authorized by said 2021 ERMP involving the purchase of electricity,
natural gas, and related commodities, and (ii) the Texas statutory competitive bidding law are not
applicable to such purchases by the City; and
WHEREAS, the Council has further determined and finds that these actions and the 2021
ERMP are in the best interest of its citizens and ratepayers;
NOW THERFORE, THE COUNCIL OF THE CITY OF DENTON HEREBY
ORDAINS :
SECTION 1. The finding and recitations contained in the preamble of this Ordinance are
incorporated herein by reference and are made a part of this Ordinance.
SECTION 2. Ordinance No. 20-240, and the 2020 Denton Municipal Electric-Energy Risk
Management Policy (commonly referred to as the 2020 ERMP) approved by the same, are both
repealed and are of no further force and effect, except that all transactions made under the 2020
ERMP remain protected from disclosure Section 552.133, Texas Government Code.
SECTION 3. The 2021 Denton Municipal Electric – Energy Risk Management Policy ("2021
ERMP"), attached as Exhibit "A’' and incorporated by reference, is approved and adopted.
SECTION 4. The City Manager, or his designee, and the City Secretary, or her designee,
are authorized to execute, attest and deliver respectively, all contracts which are authorized by the
2021 ERMP, and other such documents which are incident to, or related to, or which arise under the
same ("Related Documents"), 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 in this
Ordinance and the 2021 ERMP.
SECTION 5. All subsequent actions taken by the Mayor, or his designee; the City Manager,
or his designee; the City Attorney, or her designee; or the City Secretary, or her designee,
in furtherance of any future transactions that are authorized under the 202 1 ERMP are approved
and authorized in all respects as of the dates and times that such actions are taken.
SECTION 6. Immediately following the adoption by the Council of the 2021 ERMP, any
and all subsequent documents and supporting documents which are executed pursuant to the 2021
ERMP as amended 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 law fully ordered to
disclose said documents
2
SECTION 7. The expenditure of funds as provided for in this Ordinance is hereby
authorized.
SECTION 8. This Ordinance shall become effective immediately upon its passage and
approval.
secondeHy'GtPd '€,:TJhi= ''di"’"" "” 'We D=nii\=:as>dq:£pproved byU
following vote FL - a :
@ NIa r Abstain Absent
and
Gerard Hudspeth, Mayor:
Vicki Byrd, District 1 :
Brian Beck, District 2:
Jesse Davis, District 3 :
Alison Maguire, District 4:
Deb Armintor, At Large Place 5 :
Paul Meltzer, At Large Place 6:
V‘
Vr
£
V/
Vr
PASSED AND APPROVED this the 25' tD day of 202 1
GERARD HUDSPETH, MAYOR
ATTEST:
ROSA RIOS, CITY SECRETARY bUtt tIltIII
da DJ
APPROVED AS TO LEGAL FORM:
AARON LEAL, CITY ATTORNEY
CXginlty signed by Catherine Chftul
DN: dc=com, dc=atyofdenton, chccxlacl
and Groups aId+neal
ema;t=Cathe rine
Date: 2021 OS.19 18:1527 4S'00
Exhibit 'A'
Denton Municipal Electric
Energy Risk Management Policy
Approved by the City Council of the City of Denton, Texas
City Ordinance No. 21-
TII I c IT A L
EIEGTHIG
Energizing tomorrow's community frxlcry!
Page 1 5/xx/21
Exhibit 'A'
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 ................................................................................. 7
1.3.4 Risk Control Infrastructure ........................................................................... 7
Procedures and Guidelines....................................................................................... 71.4
SECTION 2 ORGANIZATION STRUCTURE ......................................................... 8
2.1 Risk Management Committee (“RMC").................................................................... 8
2.1.2 Risk Management Committee Structure ...............................................
2.1.3 Meeting Frequency, Voting, Member Vacancies and Reports...............
2.1.4 Outside RMC Support; Outside Review of Standard Reports; DME
Cooperation with Consultant; Quarterly Report from Consultant..................
Front, Middle, and Back Offices .....................................................................
2.2.1 Front Office.........................................................................................
2.2.2 Middle Office
2.2.3 Back Office...................................................
2.2
SECTION 3 MARKET RISK PROTOCOLS AND EXPOSURE CONTROL
3.1
3.2
3.3
Market Risk Protocols....
Authorized Transactions............................
Market Risk Control..
3.3.1 Risk Tolerance.......
3.3.2 Transaction and Exposure Limits ...
3.3.3 Stress Testing
3.3.4 Model Validation and Controls
Page 2 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
Credit Risk Control.................................................................................................. 18
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
3.4
4.1
4.2
Risk Management Reporting Policy........................................................................ 21
Risk Committee Meeting Updates.......................................................................... 21
Transaction Valuation ............................................................................................ 224.3
SECTION 5 OTHER RESPONSIBILITIES AND POLICIES ..................................... 23
5.1 Organization-Wide Responsibilities,
5.2 Commercial Interests and Trading for Personal Accounts..,
5.3 Acknowledgment of Policy Requirements...........,
5.4 Adoption of Energy Risk Management Policy......................................................... 24
SECTION 6 CREDIT RISK POLICY .................................................................... 25
23
,.. 23
,............. 24
6.1
6.2
Introduction ..........
POLICY OVERVIEW....
,............. 25
,.. 25
Appendix A PORTFOLIO RISKS...................................................................... 26
A.1. MARKET RISK ............................................................................................................. 26
A.1.1. Price Risk ...
A.1.2. Volume Risk....
A.1.3. Liquidity Risk ..
A.2. CREDIT RISK................................................................................................................ 27
A.2.1 Credit Risk ..................................................................................................... 27
A.2.2. Funding Risk ................................................................................................. 28
A.3. OPERATIONAL RISK .................................................................................................... 28
A.3.1. MODEL RISK ................................................................................................. 28
A.3.2. DENTON ENERGY CENTER OUTAGE RISK...................................................... 28
A.4. REGULATORY RISK...................................................................................................... 28
A.4.1 Carbon Cost................................................................................................... 29
A.4.2 Changes to ERCOT market design ................................................................. 29
. 26
,.. 26
.. 27
Page 3 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
A.4.3 Ongoing changes to ERCOT Protocols ........................................................... 29
A.4.4 Regulatory Compliance ................................................................................. 29
Appendix B RISK EXPOSURE AND TRANSACTION LIMITS .............................. 30
B.I Risk Books ................................................................................................................... 30
B.2 Risk Exposure Limits .................................................................................................... 31
B.3 Portfolio Risk Exposure Limits ..................................................................................... 31
B.4 Open Position Management ....................................................................................... 32
B.5 Transaction Limits ....................................................................................................... 33
B.5.1 Bilateral or Financial Power Transaction Limits ........................................... 35
B.5.2 Congestion Management Transaction Limits ................................................ 36
B.5.3 Physical or Financial Natural Gas Transaction Limits ................................... 39
B.5.4 Renewable Energy Credit (“REC") Transaction Limits.................................. 40
Appendix C ORGANIZATIONAL STRUCTURE.................................................. 41
Appendix D APPROVED TRANSACTION TYPES .............................................. 43
Appendix E FORWARD HEDGING STRATEGIES AND PLANS........................... 46
Appendix F 2021- 2022 DME HEDGE PLAN ................................................... 48
Hedge Plan Overview ............................................................................................. 48
Appendix G NEW PRODUCT/MARKET INSTRUMENT APPROVAL CHECKLIST . 50
Appendix H ENERGY RISK MANAGEMENT POLICY ACKNOWLEDGEMENT FORM
52
Page 4 5/xx/21
Exhibit 'A'
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
The objectives of this Risk Policy are as follows:
1. Identification of inherent risks associated with procurement of energy and ancillary
services to serve the retail load of DME’s customer/owners.
2. Periodic and consistent measurement and reporting of risks
3. Establishment of acceptable risks levels
4. Identification of authorized risk management transactions, volumes, terms and authority
levels for all employees, committees, and boards involved in execution of risk
management transactions.
5. Establishing disciplinary actions for violation of risk management policy including trading
limits
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 hedges1, congestion
management trades, ancillary service requirements 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)
1 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.
Page 5 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
risk, and regulatory/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
Reduce risk
Performance Metric
Reduction in exposure to price volatility and volumetric
variabil
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
Comparison of DME average rate to that of other Texas
municipal utilities
Identification, reporting and disciplinary action of policy
violations
Competitive costs
Reasonable rates
Risk Policy Adherence
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 implementation of the approved Hedge Plan for mid to long term risk mitigation and
inside the month risk management activities to meet required targets, along with
transaction and risk exposure limits.
Page 6 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
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
•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.
Page 7 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
SECTION 2 ORGANIZATION STRUcruRE
2.1 Risk Management Committee (“RMC”)
While the leadership of the Front, Middle and Back Office groups, along with the DME General
Manager 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 and Hedge Plan.
•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 DMIE’s
strategies for monitoring and controlling these exposures.
2.1.2 Risk Management Committee Structure
The voting members are:
• PUBChair(ordesignee)
•
•
•
•
City Manager (or designee)
DME General Manager (Chair)
DME Regulatory & Risk Division Manager (or designee)
City’s Director of Finance (or designee)
Page 8 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
The non-voting members, both acting solely within their respective responsibilities set out
in the City’s Charter, are:
• City Auditor (ordesignee)
• City Attorney (ordesignee)
2.1.3 Meeting Frequency, Voting, Member Vacancies and Reports
1.As needed, but no less than quarterly, the RMC shall meet to review EMO
operations as described in Section 4.2. The Chair of the RMC shall provide at
least five (5) business days’ notice to the members.
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 Policy to the Public Utilities Board
and the City Council
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 the member’s 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 the General Manager’s discretion.
6 A standard set of reports shall be prepared and distributed by the Chair in advance of
each RMC meeting. The DME Compliance Officer, or that officer’s designee 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. Risk Policy compliance and risk position reports will be presented the
RMC in a form that is approved by the RMC and which may be amended as
determined necessary by the RMC. When establishing the standard set of reports,
the RMC will consider the requirements set out in 2.1.3.
Page 9 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
7.
8.
Meeting notes approved by the RMC will be distributed by the City Attorney to the
RMC members, the City Manager, City Council and PUB.
As Chair 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.
2.1.4 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
10
•
•
•
•
•
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 DM E’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 DM E’s RMC quarterly meetings and other RMC meetings
Performance of a cost benchmark analysis at three (3) year intervals.
Other tasks and responsibilities as may be determined important by the City
Manager.
•
•
•
•
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 DRnE shall cooperate with all requests of the consultant.
Page 10 5/xx/21
Exhibit 'A'
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
• 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, 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.
2.
Developing and implementing strategies that are consistent with program
objectives and this Policy.
Monitoring the energy markets including determining the forward prices for
products traded by the EMO (“marking curves") structural/regulatory changes,
counterparty activity and financial wherewithal, market liquidity, and new supply
and hedging instruments.
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.
3.
4.Managing the portfolio of positions in physical and financial energy and energy-
related commodities in a manner consistent with DME’s risk management
objectives and the corresponding Hedge Strategies contained in Appendix E –
Forward Hedging Strategies and Plans.
Page 11 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
5.
6.
7.
8.
9.
Executing physical and financial transactions with approved counterparties through
the appropriate exchange, broker, voice communication, email, etc.
Recording details of financial and physical transactions for DME’s ETRM system.
Ensuring that transactions comply with DME’s Energy Risk Policy.
Functioning as the primary point of contract and as an active participant in the
ERCOT stakeholder processes.
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 and
reports to the Assistant General Manager or the functional manager of the EMO.
2.2.2 Middle Office
The Middle Office is responsible for monitoring compliance with this Policy, for
determining that energy transactions and exposures are within authorized limits and
meet minimum targets, identifying any violations of the limits in this Policy and reporting
any such violations to the General Manager and Assistant General Manager, 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 and reports risk exposure
(including both price and volumetric uncertainty). If, in the opinion of the Middle Office,
hedge decisions do not achieve program objectives, the Middle Office will determine why
the objectives are not achieved and recommend to the Front Office, changes to existing
and proposed hedge transactions and positions. In the event there is no consensus
between the Front Office and the Middle Office, the Middle Office with recommend
changes to the RMC on potential changes to the hedge transactions and the rationale for
such recommended changes.
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 will be reported to
the RMC each quarter. Alleged violations of and policy or procedures will be immediately
reported to the General Manager and the Assistant General Manager.
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
Page 12 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
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
after such updates are adopted by the RMC, guidelines and procedures so that portfolio
management functions occur in compliance with Energy Risk Management Policies and
energy risk procedures and guidelines.
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 the mark for every position that has been entered into the system of
record by Front Office and 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.
4.
5.
Operates risk measurement, performance, and valuation models, including various
stress tests.
Prepares routine risk reports, including those identified in Section 4.2 – Required
Reports.
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 comply 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.
8.
9.
10.
Ensures all transactions comply with DME’s Energy Risk Policy.
Generates, executes and sends written confirmations to counterparties to ensure
terms and conditions are mutually agreed upon.
The specification of position valuation methods.
Calculates and reports the credit risk position of DME with counterparties.
Communicates to the Front Office any counterparties that have exceeded allowed
credit risk and are prohibited from further trading activities.
Page 13 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
11. Maintains all counterparty enabling agreements and ensures that only enabled
counterparties are populated and authorized in the system of record.
The Middle Office reports to the DME Regulatory & Risk Division Manager.
2.2.3 Back Office
The Back Office’s primary responsibility is to ensure that financial records of DM E’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
invoice checkout, 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:
1.
2.
3.
4.
5.
6.
7.
8.
Supports accounts payable and receivable operations.
Coordinates with City Finance the recording of all revenue and expenses in the
general ledger and other subsidiary ledgers when appropriate.
Coordinates the recording of posted cash receipts and revenues with City Finance
to the appropriate subsidiary ledger.
Settles transactions (verification, accounts payable/receivable)
Develops and maintain documentation outlining standard procedures for
performing the settlement functions described herein.
Notifies the Front Office, Middle Office, and the General Manager of any
discrepancies that result from the reconciliation process.
Oversees the safekeeping of transaction-related documents.
Maintains funding and reconciles and records activity in cash accounts held with
other ERCOT and other market participants.
The Back Office reports to the Executive Manager of Energy Services and Administration.
Page 14 5/xx/21
Exhibit 'A'
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 the General Manager’s designee,
pursuant to a written Delegation of Authority Memorandum or email copied to the middle
office can transact on behalf of DME in the wholesale energy market (see Transaction Limits
section of Appendix B);
•Personnel involved with DMIE’s energy management activities will ensure they obtain
competitive prices, transact based upon competitive market conditions 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 deemed necessary by the Front Office.
•DME may only transact in wholesale energy-market products authorized by this Policy and at
retail price levels stipulated in the current rate manual or as approved by the PUB or City
Council as applicable.
•
•
DMIE may only transact within transaction limits approved and defined in this Policy.
All energy transactions will be carried out on recorded phone lines, electronic trading
platforms, via electronic media (including email and other online methods) or other media
that can be recorded and documented;
•
•
Metrics for assessing DMIE’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
Page 15 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
validation and change control process. The models employed and associated processes shall
be described in detail in the EMO Procedures Manual.
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, with 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.).
Page 16 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
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
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:
Page 17 5/xx/21
Exhibit 'A'
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),
•
•
e
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 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,
when establishing an energy credit risk tolerance for a calendar year;
Page 18 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
•
•
•
•
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; and
Calculating and reporting the maximum expected loss if a counterparty defaults
(“counterparty credit exposure").
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 and credit exposure based upon the trades in place with each
counterparty and the market price for the net long or short positions with each is
measured every day by the Middle Office. At least semi-annually the credit strength of
each counterparty that DME is exposed to will be evaluated by the Middle Office, or
immediately if their business conditions change or their credit rating has been
downgraded and negative changes that have the potential to increase DME’s credit risk
will be reported to the RMC.
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
RIVIC
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. In addition to those activities mentioned in section 3.1, the
Middle Office manages DME’s credit function.
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
Page 19 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
approved counterparties;
Determining counterparty transacting parameters (“transaction limits") to
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 which is currently followed 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.
Page 20 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
SEcrioN 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 Chair 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 Risk Committee Meeting Updates
Minutes and meeting materials from quarterly RMC meetings will be distributed to the PUB and
Council for their review.
At a minimum, quarterly RMC meetings will include a review of the following topics:
Controls Compliance
Identification of any activities that have exceeded permissible limits. The General
Manager or the General Manager’s designee will provide details of the causes of
any limit violations, the measures taken to mitigate future violations and a
report of any disciplinary actions taken as a result of such violations.
Hedge Target Compliance
Provides an update on progress on executing latest hedge plan execution
timetable.
Portfolio Competitiveness
Provides a comparison of latest 12-month cost/MWH vs ERCOT spot markets (Day-
Ahead and Real-Time Market) and compares the market value of renewable
resources to their contract costs.
Credit Exposure
Identifies the credit limit for each counterparty, current level of exposure with the
counterparty, and remaining available credit. Also includes an update on current
ERCOT credit requirements and thresholds.
Page 21 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
4.3 Transaction Valuation
DME’s financial records will be maintained in full accordance with generally accepted accounting
principles (“GAAP”), Government Accounting Standards Board (GASB) 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.).
As noted in Section 2.2.2, 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 pricing information (Section 2.2.2, item 2, page 13) in a timely and
consistent manner, along with maintaining and updating transaction data and information
sources used for trade evaluation (Section 2.2.2, item 1, page 13). 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 (Section
2.2.2, items 1 and 2, page 13).
Page 22 5/xx/21
Exhibit 'A'
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 DMIE 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, emails, texts, etc. may be reviewed to ensure
appropriate conduct or to review transactional information.
5.2 Commercial Interests and Trading for Personal Accounts
All DIVIE 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.
Page 23 5/xx/21
Exhibit 'A'
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 the second quarter of the City’s fiscal year.
Page 24 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
SECTION 6 CREDIT RISK POLICY
6.1 Introduction
The purpose of this credit risk policy is to establish a consistent process whereby the credit risk
of future financial loss due to counterparty physical or financial non-performance is significantly
diminished for energy purchases and/or sales. This objective will be accomplished by a pre-
contract qualification and renewal review process for all energy suppliers and/or purchasers in
combination with effective on-going monitoring systems and established limits. Any energy
transaction conducted by DME will comply with this Credit Risk Policy.
6.2 POLICYOVERVIEW
In general, all energy suppliers and/or purchasers will be subject to a financial review in
accordance with DME’s standards for determination of creditworthiness. Evaluation of a
counterparty’s financial health and its ability to deliver its product or to pay is crucial. Such
review procedures prior to contract execution are designed to protect DME from undue
exposure to losses that could arise from an insolvent counterparty not being able to pay for
energy that they have purchased or to cover replacement costs incurred for term contracts that
have positive economic value in relation to current market prices. A credit review cannot be
viewed as the only mechanism to prevent any and all losses, but it can help identify those
counterparties where performance has been a problem in the past or may present a problem in
the future. Established limits combined with proper monitoring systems will help enable DME
to effectively mitigate possible losses due to counterparty insolvency.
Page 25 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
Appendix A PORTFOLIO RISKS
As an electric utility, participation in physical and financial energy markets exposes DME and its
customer/owners to the risks of cost and pricing uncertainty, revenue and commodity market
volatility, and uncertainty in meeting budget targets and the Energy Cost Adjustment (ECA)
component of its retail rates. 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 execute unforeseen transactions during 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 customer/owners. These risks include volume-related
and price-related risks.
A.1.1. 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 immediate
time frame and 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 that is inherent in the ERCOT and physical
natural gas markets. 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
Page 26 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
DME is the uncertainty associated with the amount of load DME will be required to serve.
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. Generation levels from renewable energy resources are
based upon the weather conditions experienced at the location of the renewable
resources. 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.1.3. 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.
Page 27 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
A.2.2. Funding Risk
Funding risk is related to credit risk. This term refers to the risk that DMIE 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. In the event of significant funding risk associated with
the default of a counterparty or the inability of the DEC to produce energy resulting in
large replacement energy costs, the City of Denton’s reserves would be required to
provide cover costs.
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 DMIE’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.3.2. DENTON ENERGY CENTER OUTAGE RISK
A forced or unexpected outage of the DEC when the output from the units are anticipated
to be used to hedge market price risk due to lower than expected renewable energy
generation is an operational risk. This risk is mitigated by a) preventative maintenance
programs designed to minimize forced outages b) not over-committing energy and
capacity from the DEC during times of likely high prices, and c) the purchase of out-of-
the-money call options.
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.
Page 28 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
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.
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.
A.4.4 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 PU RA. 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.
Page 29 5/xx/21
Exhibit 'A'
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. The
establishment and management of risk books enables the EMO to focus on the optimization of
individual risk consistent with the approved Hedge Plan.
B.1 Risk Books
Load Book
A Load Book captures all trades associated with procuring energy to serve city load,
including hedge transactions and ERCOT day-ahead and real-time market settlements.
Renewables Book
The Renewables Book captures the value of all transactions associated with long-term
renewable energy positions and hedging the cost of renewable PPAs and associated
ERCOT day-ahead and real-time market settlements
Optimization Book
After hedge is placed, if positive MtM is realized and market is in fundamental or technical
reversal, EMO will be authorized to “optimize” the original hedge. Such optimization
trades are subject to the limitations contained in this Risk Policy and shall be conditional
trades as specified in the Hedge Plan.
Congestion Book
The purpose of the Congestion Book is to track the purchase of CRRs and associated
financial instruments (see Section B.5.2 below), which are purchased in ERCOT auctions
or in the ERCOT Day Ahead Market and used to hedge against transmission congestion
risk
DEC Book
The DEC Book includes hedge transactions associated with the Denton Energy Center and
associated ERCOT day-ahead and real time market settlements. Natural gas supply
transactions whether physical or financial will be housed in this risk book.
Cash Book
The Cash Book includes records all physical sale and purchases to ERCOT.
Page 30 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
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 12-36 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.
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, including optimization
trades) 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. For the avoidance of doubt, under the
Page 31 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
current DME rate structure, the CRT applies to the total average cost per kWh on an annual
average basis for the residential class. A CRT in excess of 1 cent per kWh outside the 12-month
rolling average will be reported to the RMC as soon as it becomes known to DME.
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”2 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
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 within 2 weeks, and with the City Council and PUB
as noted in the table below within 30 days after meeting with the RMC, 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
$19.0 millionRolling 12 months (in aggregate)$15.0 million
B.4 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
2 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.
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).
Page 32 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
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 hedging transactions as soon as practical, but
generally no later than the next business day.
The hedge plan provides a guideline for hedging action of the DM E’s loads, renewable resources
and the Denton Energy Center as a function of time for the next three years.
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:
•
•
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 customer/owners.
Speculative transactions are those transactions not intended for hedging purposes and
are strictly prohibited. For the avoidance of doubt, Optimization Trades as described in
the Hedge Plan, are not classified as speculative transactions. 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 three years 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 ETRM system of record.
Further, all transactions may be conducted on recorded phone lines, electronic trading platforms,
or other media that can be recorded and documented. Confirmations of transactions will be
compared with the ETRM transaction records by Middle Office, verified and executed by Middle
Office personnel. 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
Page 33 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
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.
2021 changes to the Power Transactions table (B.5.1) are required to enable the EMO to execute
the Hedge Plan. Increasing terms of transactions authorized beyond the three-year energy hedge
transaction window are need for the following reasons:
Liquidity of individual months that become available for hedging as the lst month rolls off
and what was the 37th month forward becomes the 36th month. The market will not likely
trade the individual 36th month and EMO will need to transact as a calendar deal or a
quarterly deal, if market conditions warrant.
1
2. As the renewable portfolio is firmed up with additional solar resource that become
commercial/operational in January 2021, EMO will be exploring the potential of swapping
the actual physical output for a financial or physical fixed hourly shaped product for a
term that is greater than three years.
3. The Hedge Optimization book will require immediate execution of term transactions if a
stop is hit or a market reversal occurs. Such market condition must be reacted to
immediately as delays associated with waiting for Risk Committee, Asst. GM or GM
approval could cost rate-payers significant additional ECA charges and/or opportunity
costs
Page 34 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
B.5.1 Bilateral or Financial Power Transaction Limits
Title Term Lead Time Transaction
Size (MW)
Cumulative Volume
Limits (MWh)
City Council No Limit I No Limit No Max No limit
City Manager or RMC < 5 Year 1 < 7 Years 300
10,000,000 per 5
Full Calendar Years
rolling average
DME General Manager < 4 Year 1 < 5 Years 150
8,000,000 per 5 Full
Calendar Years
rolling average
Assistant General Manager -
Power Supply
16,000,000 per 3
Full Calendar Years
or 36-month rolling
average
< 3 Years 1 < 4 Years 100
Manager, EMO
Market Operations Manager
Energy Analytics Manager < 12 Mo.th 1 < 24 Months 100
24,000,000 per 36
month rolling
average
Market Operations Supervisor
Market Operations Lead
<3 M,,th 1 < 24 M')nth 50 6,000,000 per
month
Senior Energy Market Analyst
Senior Market Operator
Market Operator < 1 M,,th 1 < 2 M')nth 150 1 1,250,000 per week
Notes:
•Transaction Size 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'I, as well as ancillary services. Financial derivatives may be over the counter
•
Electric Power Futures, Heat Rates and Options on Electric Power and CRRs or Exchange
Traded Products
4 As used here, a derivative is a contract that derives its value from the performance of an underlying asset or
index
Page 35 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
• Authorization for approval of these transactions may be delegated. If transaction
authority is delegated downward, volumetric limit applies to approving authority.
B.5.2 Congestion Management Transaction Limits
Title Auction
Type
Annual &
Monthly
CRR Auction
Period
Any month or
TOU offered by
ERCOT (5 years)
Approved
Instruments
CRR
Time
Period
Time of Use
Source/Sink
Combinations
All ERCOT
Resource Nodes.
all ERCOT Hubs
and Load Zones
DME General
Manager
Assistant
General
Manager -
Power Supply
Annual &
Monthly
Any month or
TOU block
offered by
ERCOT (SEQ 6
or less)
CRR I
Resource Nodes,
Primary Hub and
Load Zone
Energy Analytics
Manager
Annual &
Monthly
Any month or
TOU block
offered by
ERCOT (SEQ 3
or less)
CRR I
Resource Nodes,
Primary Hub and
Load ZoneManager, EMO
Daily
N/A
Point to Point
Obligations/Options
Hourly
Market
Operations
Manager
Monthly Any month or
TOU block
offered by
ERCOT
(Monthly
Auction)
CRR I
Resource Nodes,
Primary Hub and
Load Zone
and
Senior Energy
Market Analysts Daily N/A Point to Point
Obligations/Options
Hourly
Senior Market
Operators
Daily N/A Point to Point
Obligations/Options
Hourly Conventional
Resource Nodes,
Primary Hub and
Load Zone
Notes:
• Annual CRR auctions occur monthly for successive 6-month periods (called "sequences"
or SEQ) with progressively increasing amounts of transmission capacity available for
Page 36 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
purchase in 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, 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, 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 37 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
North Zone
FIgure 1 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 upto 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
auctions5.
5 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 38 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
B.5.3 Physical or Financial Natural Gas Transaction Limits
Title Term
No Limit
Lead Time
No Limit
Transaction Size
(MMBTU)
City Counci No Max
City Manager or RMC $ 3 Years $ 5 Years
246,000,000 per 36
month rolling
average
DME General Manager $ 3 Years $ 5 Years
200,000,000 per 36
month rolling
average
Assistant General Manager -
Power Supply $ 3 Years $ 5 Years
150,000,000 per 24
month rolling
average
Manager, EMO
Market Operations Manager $ 12 Months 1 < 36 Months
50,000,000 per 3
month rolling
average
Energy Analytics Manager
Market Operations Supervisor
Senior Energy Market Analyst
$ 3 Months $ 24 Months 1 2,000,000 per month
Senior Energy Market Operator
Energy Market Operator
$ 1 Month $ 2 Months N/A
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
Page 39 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
• 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)
Vintage
No Limit
$ 5 Years
5,750,000< 3 Year
Title
City Council
City Manager
DME General Manager
Assistant General Manager
Supply
Power $ 3 Years
Manager, EMO
Market Operations Manager < 2 Years 3,750,000 No Max
Energy Analytics Manager
Page 40 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
Appendix C ORGANIZATIONAL STRUCTURE
Energy Management Organization Front Office
Market Operations Mgr Energy Analytics Manager
Market Operations Supervisor
&
Sr Energy Market Analyst
SR ERCOT Transmission Analyst
&
Sr Energy Market Analyst
Sr Energy Market Intelligence Analyst
&
Energy Market Intelligence AnalystSr Energy Market Operator
&
Sr Market Operations Specialist
Sr Business Intelligence Analyst
&
Business Intelligence Analyst
Sr Energy Market Intelligence Analyst
&
Energy Market Intelligence Analyst Sr SCADA Analyst EMO
&
SCADA Analyst EMO
Business Data Scientist (DBA)
Page 41 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
Energy Management Organization Middle Office
DME General Manage
Executive Manager, Risk & Compliance
Risk Control Ana
Energy Management Organization Back Office
DME General Manage
Executive Manager, Energy
Services/Admin
Business Analysts
Page 42 M/21
Exhibit 'A'
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 City Manager’s
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
Page 43 5/xx/21
Exhibit 'A'
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
Financial
a. Fixed-price & Index-price purchases and sales
b. Exchange traded, bilateral or OTC Call or Put options6
c. Ancillary Services
d. ERCOT Congestion Revenue Rights (CRRs), Point to Point Obligations (PTPs) and
other similar congestion management transactions
2.
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 may be 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
Financial
a. Exchange traded, bilateral or cleared futures and Exchange or OTC swaps
2.
6 For example, fixed & indexed, hourly, Time of Use, daily monthly, annual options
Page 44 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
b. Exchange traded, bilateral or cleared and or OTC Call or Put options7
c. Index options
OTHER AUTHORIZED ENERGY-RELATED COMMODITY TRANSACTIONS
Physical Renewable Energy Credits (RECs) associated with energy that has already been
generated within the last 3 years.
7 Ibid.
Page 45 5/xx/21
Exhibit 'A'
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.
During the second quarter of the Fiscal Year, DME shall submit a confidential updated Hedging
Strategy to the RMC for managing the key components of its energy portfolio (load,
renewables, congestion risk and the DEC) 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 may require several iterations to the Hedging during each year due to
market conditions. The RMC shall provide an update of its current Hedging Strategy to the
PUB and Council as soon as practical after it has been approved. The Hedge Plan is a
confidential strategy document and, if requested, will be presented to the PUB and City Council
in closed session.
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. All hedge strategy documents shall be confidential and not
subject to the open record requirements due to the proprietary and commercial sensitivity
of the plans. On occasion, it will become apparent to DME management that additional
transactions to reshape expected monthly forward positions are necessary given changes in
Page 46 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
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.
Changes to the Hedge Plan outside the annual review and approval of the Energy Risk Policy
does not require approval of the PUB and City Council. However, all transactions
undertaken will still comply with the authority limits contained in this Energy Risk Policy .
Page 47 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
Appendix F 2021- 2022 DME HEDGE PLAN
Hedge Plan Overview
The management of price and volume risk associated with the obligation to provide reliable,
economically priced wholesale electric energy to the customers of Denton Municipal Energy
(“DME") is one of the main responsibilities of DME. This responsibility is both a short term and
long-term activity. Understanding the potential risks and their impacts along with executing
hedging transactions (trades) that reduce or eliminate price risk while providing stable and
predictable wholesale energy costs is the objective of the Hedge Plan.
The Hedge plan is a comprehensive analysis and a tactical plan for managing the risks associated
with the provision of energy and ancillary services required to meet the demands of the City of
Denton, its residents and its businesses. Because the Hedge Plan lays out the specific risks and
the plans to manage those risks into the future, it is a confidential document containing market
sensitive information and is protected pursuant to Texas Government Code Section 551.086.
The Hedge plan is however a component of the DME Risk Policy and this summary is included to
describe the purpose and methods that will be utilized by the EMO to remove risk from the
power supply portfolio.
The Hedge Plan does not provide a comprehensive description of the day-to-day activities of the
EMO, but rather provides a description of the risk reduction transactions that will be authorized
for the EMO to execute. The intra-day optimization of positions for the benefit of customers
and the required scheduling and interaction with ERCOT in its role as the transmission reliability
entity of Texas will continue to be the primary focus of the EMO.
The uncertainty of load and renewable energy generation in any temporal period coupled with
the changing price for power at each delivery point (generation and load) every five minutes and
the variability of natural gas price for the DEC make a single algorithm to determine hedge
actions impossible. Consequently, de-risking the supply and demand component of DME’s
positions must be accomplished by looking at each position independently. Maximizing value
and minimizing price risk to customers for each position is manageable and quantifiable and as
such the Hedge Plan will be executed on a position by position basis. The main positions include:
Load; Renewable Energy Generation and associated basis or congestion positions; and the
Denton Energy Center Position.
This Hedge Plan sets forth the types of risk reducing transactions that are recommended, the
detailed execution strategies and the optimization strategies that will be employed by DME
through the EMO department. All recommendations are based upon the risk positions that DME
owns and their relative risk is the current forward markets. Forward markets change daily and
Page 48 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
on an intraday basis and the Hedge Plan is intended to permit sufficient flexibility to the EMO
personnel, consistent with the Risk Management Policy, to react to these market changes.
However, the Hedge Plan sets specific targeted volumes for hedging each position by certain
dates and with an objective for each set of trades entered into to reduce risk. The DME middle
office will monitor compliance with the mandated activities in the Hedge Plan and will report on
the compliance status on a daily basis to the front office and DME management. Any violations
of limits or requirements in the Hedge plan and Risk Policy will be reported to the Risk
Committee along with any recommended mitigation and disciplinary action if required.
Page 49 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
Appendix G NEW PRODUCT/MARKET INSTRUMENT
APPROVAL CHECKLIST
Checklist Items IPrimary
Accountability
Benefits
Identify and describe the benefits of using the new product [Mm
Risk
Understand and document the payoff profile of the new product
Identify and analyze credit risk of new product
Develop methodology for measuring credit risk of new product (mark-to-
market, potential exposure, stress exposure.
Identify prospective counterparties for new product/instrument and
determine credit suitability.
Approve new product valuation methodology.
Determine if staff, systems, and management skill sets are sufficient for
valuing and transacting new product.
Determine physical disposal or financial settlement requirements.
r
I
Middle Office
r
Middle Office
I
I
Front Office & Back
Office
Middle Office
I
Determine stress test requirements for new product.
Define how stress testing must be performed (frequency, scope,
independent source).
Financial
Define the capital requirements (exchange margin or collateral) of the
new product.
Determine contract documentation required.
r
Middle Office
r
Middle Office
Accounting, Tax, and Regulations
Identify applicable U.S. and local regulatory restrictions for new product.Back Office/City
Finance
I
Back Office/City
Finance
Determine regulatory compliance requirements, if any, for new product.
Page 50 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
Review accounting policies and approve proposed treatment.Back Office/City
Finance
a
Finance
a
Finance
Determine audit requirements.
Consider tax consequences of new product.
Policy
Verify counterparty authority to enter into contract for new product.
Develop and implement monitoring and review procedures to ensure
Policy compliance.
Define procedures and responsibilities for independent verification of
positions and market valuation inputs (prices, and volatilities if
applicable).
Determine impact on position/risk limits/hedge targets
Determine and define procedures for confirmation and reconciliation of
new product.
Verify that all groups involved in new product transaction procedures can
handle anticipated transaction volume.
Determine and define management reporting requirements.
I
I
c
I
Middle Office
Middle Office
M
Page 51 5/xx/21
Exhibit 'A'
Energy Risk Management Policy
Appendix H 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. I understand that my violation of the Risk Policy may result in
disciplinary action that may include termination of my employment with the City of
Denton
Signature of Employee
Date
Page 52 5/xx/21