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Home My WebLink About20110812PAC to PIIC 43 Attach.pdfRisk Management Policy Review of Major Policy Changes October 2006 ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 1 of 15 AgendaAgenda • Overview of energy & risk management activitiesgyg • Review major changes in new policy – New ownership and business model –Transaction approval processTransaction approval process – Revised role of risk management – Risk oversight committee Position management–Position management – VaR methodology – Stop-loss limits Credit–Credit – Compliance • Question & answer session ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 2 of 15 Policy OverviewPolicy Overview •All personnel in energy and risk managementAll personnel in energy and risk management activities must certify to abide by the risk management policy – Energy management activities • Activities to manage customer demand or load, generation resources trading hedging and credit for all energyresources, trading, hedging, and credit for all energy commodities – Risk management activities • All activities of PacifiCorp Energy, risk management, and credit risk management to identify, manage, and control the various risks associated with the energy aspects of PacifiCorp EnergyPacifiCorp Energy ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 3 of 15 Ownership & Business ModelOwnership & Business Model • PacifiCorp ownership has changedp p g – MidAmerican Energy Holdings Company, Inc. (MEHC) purchased PacifiCorp from Scottish Power on March 21 2006on March 21, 2006 • PacifiCorp business model has changed –MEHC places direct accountability for generation and p y g energy trading function decisions on the PacifiCorp Energy president –Scottish Power relied on a complex approval processScottish Power relied on a complex approval process often requiring input and approval from multiple committees See Section 1 (pg 4) ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 4 of 15 Transaction Approval ProcessTransaction Approval Process •Risk management is no longer a step in theRisk management is no longer a step in the transaction approval process • Risk management, in its role on the new risk g , oversight committee (ROC), advises the PacifiCorp Energy president on new instruments • Once an instrument is approved, commercial & trading may transact within delegated authorities ( i & ff i i i d)(signature, tenor, & effective transaction period), position, credit, VaR, and stop-loss limits See Corporate Governance and Approvals Document and SAP® for signature authority ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 5 of 15 Revised Role of Risk Management g (pg 13, 15-16) •The risk oversight committee is an advisoryThe risk oversight committee is an advisory committee which will assist the PacifiCorp Energy president in the review and approval of: – The risk management policy – Risk management methodologies or changes in th d l imethodologies – The approved instruments list –The risk profile (including maximum market and credit–The risk profile (including maximum market and credit risk capital amounts), limits, and strategy of commercial & trading See Section 11 (pg 13) ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 6 of 15 Risk Oversight CommitteeRisk Oversight Committee •ProcessProcess – Risk oversight committee advises PacifiCorp Energy president – PacifiCorp Energy president may accept recommendation and make the decision In the event of disagreement the PacifiCorp chief–In the event of disagreement, the PacifiCorp chief executive officer reviews all information and makes the decision – Decision authority rests with PacifiCorp Energy president and PacifiCorp chief executive officer See Section 11 (pg 13) ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 7 of 15 Risk Oversight CommitteeRisk Oversight Committee •MembershipMembership – CFO of PacifiCorp, chairperson VP of PacifiCorp Energy C&T–VP of PacifiCorp Energy C&T – VP PacifiCorp Energy legal department Managing director of PacifiCorp Energy–Managing director of PacifiCorp Energy finance Risk management director–Risk management director – Credit risk management director See Section 11 (pg 13) ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 8 of 15 Position ManagementPosition Management •Position management horizonPosition management horizon – To better manage position and net power costs, PacifiCorp Energy changed its position management horizon from 24 to 48 months – Also applies to value-at-risk calculation • Position limits structure changed – Provides more flexibility for position t th ti t d li imanagement as the time to delivery increases – Requires greater degree of position management as time to delivery increasesmanagement as time to delivery increases See Appendix F for limit values ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 9 of 15 VaR MethodologyVaR Methodology •PacifiCorp Energy changed several keyPacifiCorp Energy changed several key assumptions of its VaR calculation –New calculation (as of August 2, 2006)( g , ) • 48 months • 95% confidence interval 1 d h ldi i d•1-day holding period – Old calculation •24 months•24 months • 99% confidence interval • 5-day holding period See Appendix D for VaR methodology, Appendix E for VaR limits ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 10 of 15 Stop-Loss LimitsStopLoss Limits • PacifiCorp Energy could be within its VaR limit p gyandlosing portfolio value day after day • PacifiCorp Energy is adopting stop-loss limits to allow management to specify a maximumallow management to specify a maximum amount of losses it is willing to sustain • Front office, middle office, and risk management tl fi i t l d tare presently refining tools and processes to implement stop-loss limits • PacifiCorp Energy will be required to close ac Co p e gy be equ ed to c ose(flatten) positions to prevent exceeding stop-loss limits See Appendix F for stop-loss limits ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 11 of 15 CreditCredit • Credit limits based on current exposurep • Credit capacity based on potential credit exposure – Deals <3 years utilize capacity at 125% – Deals > 3 years utilize capacity at potential peak exposure (PPE)exposure (PPE) • Credit capacity allocated from credit matrix • Deals that fall outside of the matrix require q justification and approval from president • Cost of credit calculated for certain deals See Appendix C ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 12 of 15 ComplianceCompliance •The risk management policy requires allThe risk management policy requires all employees to comply with the following: – All applicable laws and regulations (local, state, and federal) – Letter and intent of the risk management policy FERC St d d f C d t–FERC Standards of Conduct – FERC Codes of Conduct MEHC Guide to Business Conduct–MEHC Guide to Business Conduct – PacifiCorp Trading Compliance Manual –Sarbanes Oxley Acty See Section 17 (pg 18-23) and Appendix A ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 13 of 15 ComplianceCompliance • Compliance is mandatoryp y • Risk management monitors compliance • Internal audit conducts compliance audits A k i di t i P ifiC•Ask your immediate supervisor or manager, PacifiCorp Energy management, PacifiCorp Energy legal, or risk management if you have questions about how to comply ith t i l ti f thi liwith or report violations of this policy •Employees must sign & return Appendix A by Wednesday, November 1, 2006y • Official risk management policy location: \\pccfil01\data\Shared\Policies & Procedures\Risk Management\Management\ See Section 17 (pg 18-23) and Appendix A ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 14 of 15 Questions & AnswersQuestions & Answers ID PAC-E-11-12 PIIC 43 Attachment PIIC 43 Attach PIIC 43.pdf Page 15 of 15