20040929Compliance Filing per O N 29102.pdf

An IDACORP Company
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BETSY GALTNEY
Regulatory Affairs Representative
Pricing & Regulatory Services
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September 28, 2004
Ms. Jean Jewell
Commission Secretary
Idaho Public Utilities Commission
PO Box 83720
Boise, Idaho 83720-0074
RE:Compliance Filing
Dear Ms. Jewell:
In Order No. 29102 issued in Case No. IPC-01-16, the Commission directed Idaho
Power Company to submit the Risk Management and Policy Manual and Risk Guidelines as
approved by the Idaho Power Company Board of Directors Audit Committee to the
Commission for final review and approval. On December 4 , 2002, the Company submitted
the Policy Manual and Risk Guidelines to the Commission.
Since that time, as required by the Policy, the Company, with input from the Customer
Advisory Group and the Idaho Public Utilities Commission Staff, has revised the Policy
Manual by adopting 2005-2006 Risk Guidelines. The September 2004 Policy Manual with
revised Risk Guidelines represents a collaborative effort among Idaho Power customer
representatives and the Idaho Public Utilities Commission Staff.
The Policy requires that any modifications to the Policy be filed with the Idaho Public
Utilities Commission upon approval by the Audit Committee of the Board of Directors of Idaho
Power. On September 16, 2004, the Audit Committee voted unanimously to approve the
revised 2005-2006 Risk Guidelines. Accordingly, attached to this Compliance filing is an
original and six copies of the September 2004 Idaho Power Company Energy Risk
Management Policy Manual incorporating the 2005-2006 Risk Guidelines as approved by the
Audit Committee of the Board of Directors. The policy has also been updated to reflect the
retirement of John Prescott from the Risk Management Committee and the appointment of
Mr. Jim Miller and Mr. Dan Minor to new positions within the Company.
Compliance Letter
September 28 , 2004
Page -
Three extra copies of this compliance filing are enclosed for Randy Lobb, Lisa
Nordstrom, and Terri Carlock. Copies have also been sent to the Customer Advisory Group.
Very truly yours
~~~
BG:ma
Enclosures
Randy Budge
David Hawk
Pam Eaton
Dan Kincaid
Francis McDonnell
Don Reading
Peter Richardson
Janice Stover
Lynn Tominaga
Ric Gale, IPCO (w/o attachment)
Bart Kline, I PCO (w/o attachment)
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IDAHO POWER COMPANY
ENERGY RISK MANAGEMENT
POLICY MANUAL
September 2004
II.
III.
IV.
TABLE OF CONTENTS
RISK MANAGEMENT POLICY INTRODUCTION AND SCOPE .......................
ESTABLISHMENT OF A COLLABORATIVE APPROACH WITH CUSTOMERS.
VI.
ENERGY RISK MANAGEMENT POLICY OBJECTIVES .....................................
ORGANIZATIONAL STRUCTURE ............. ................ ................."....... ......... ....... 5A. BOARD OF DIRECTORS ...............................................................................
AND THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
B. PRESIDENT, IDAHO POWER COMPANY.........
.......... .....
..................... ............ 5C. IPC ENERGY RISK MANAGEMENT COMMITTEE .............................................D. ENERGY TRANSACTIONS GROUP (FRONT OFFICE) .......................................E. RISK MANAGEMENT GRoup(MIDDLE OFFICE) ..............................................F. RESOURCE DISPATCH PLANNING .....
.............. ....................................... ......
G. POWER SUPPLY REPORTING (BACK OFFICE) ...............................................H. LEGAL AND REGULATORY SERVICES.. ........... .......... ............ ........ ........ ........ 9I. Long Term Resource Planning........ ......................................................... 9
MARKET RISK ..................................................................................................A. THE INTERIM RISK GUIDELINES - THE THREE TIER ApPROACH ...................1 0
(i) Tier One - System Risk Limit ...........................................................
(ii) Tier Two -Volumetric Limit (Deficiencies and Surpluses) .................
(iii) Tier Three - Floor Limit .....................................................................
(iv) Breach of Limits................................................................................
(v) Day-Ahead Risk Approach ...............................................................
THE PROSPECTIVE MARKET RISK ApPROACH ............................................
(i) Market Risk Definition....................................................................... 15
(ii) Market Risk Quantification................................................................ 15
(iii) System Risk Limit.............................................................................
(iv) Breach of System Risk Limit............................................................. 16
CREDIT RISK
........ ................... .............................. ............ ... ...... ..... ... ............. .
A. CREDIT EXPOSURE DEFINED ....................................................................B. COUNTERP ARTY CREDIT STANDARDS........................................................ 17C. EXTENSION OF CREDIT .............................................................................D. LIMIT EXCEPTION PROCESS AND VIOLATIONS.............................................E. CREDIT EXPOSURE REPORTING ................................................................
PROGRAM COMPLIANCE
.......... ............
............... ............ ....... ............ ............ 20VII.
VIII.SYSTEMS AND ACCOUNTING .................
........ ....... ............... ............... ..........
A. SYSTEMS.....
.......................... ......... .............. ............ ..... ......... .... ..... ........
B. ACCOUNTING FOR TRANSACTIONS ............................................................
DOCUMENTATION , NEW PRODUCT INITIATION ...........................................A. LEGAL DOCUMENTATION..................... ....... .... ........
............. ...... ... ... ........ ..
B. NEW PRODUCT INITIATION PROCESS............
............ ......... ............ ............
(i) Business Rationale ...........................................................................
(ii) Management Responsibilities ..... ..... ....... ............. ............ ..... ............ 24
IX.
MANAGEMENT REPORTING.. .................. .................. ........
............... ........... ...
A. DAILY AND WEEKLY REPORTS ..................................................................B. COUNTERPARTY AVAILABLE CREDIT REPORT.............................................C. EXCEPTION LOG........
....................... ..... .... ...... .... ......... ............ ............ ....
D. MINUTES OF THE RMC MEETINGS.............................................................
RESTRICTED ACTIVITIES AND DISCIPLINARY ACTION ...............................XI.
APPENDIX A: BOARD RESOLUTIONS .......... ..................
............................ ...........
28-
APPENDIX B: IPC RISK MANAGEMENT COMMITTEE MEMBERS.............................
APPENDIX C: AUTHORIZED SIGNATORIES ON BEHALF OF THE COMPANY.........
APPENDIX D: COUNTERPARTY CREDIT STANDARDS & AUTHORITY LEVELS .....
APPENDIX E: APPROVED INSTRUMENTS, MARKETS AND COMMODITIES ...........
APPENDIX F: RISK GUIDELI NES ........... .....................................................................
APPENDIX G: EMPLOYEE ACKNOWLEDGMENT FORM ...........................................
Risk Management Policy Introduction and Scope
Idaho Power Company ("PC" or "the Company ) is an investor-owned utility
serving customers in Idaho and Oregon.
The Company s customers and shareholders are exposed to a variety of market-
driven and operational risks. For customers , these risks can lead to a higher
cost of power. For shareholders, these risks can lead to a diminution in cash
flow and net income. By resolution of the Idaho Power Company Board of
Directors, (see Appendix A) the Company is mandated to engage in a program
on behalf of both customers and shareholders that systematically identifies
measures, evaluates and actively manages, and reports on the market-driven
risks associated with its operations.
The policies being established herein shall address the means by which the
Company will manage these risks in a manner consistent with the Idaho Power
Company Board of Directors' authorization to engage in such activity. On an
interim basis , reasonable discretion will be granted to the President to modify the
Policy. However, on a timely basis, any interim modifications authorized by
the President must receive approval by the Audit Committee of the Board
of Directors and be filed with the Idaho Public Utilities Commission
IPUC"
Every employee involved in the risk management process must sign the form
attached as Appendix G acknowledging individual responsibility to comply with
this Policy.
The Company shall create a risk management program that will overlay a control
framework on existing practices. Such program will consist of the
establishment of predefined risk parameters , a delineation of management
responsibilities, and a set of organizational relationships within the Company.
The program will further consist of the development and implementation of
transaction accounting systems and procedures for systematically identifying,
measuring, evaluating, and responding to the variety of risks inherent in the
Company s operations. The program s control framework will consist also of a
disclosure and reporting mechanism designed to keep the Senior Management
team responsible for supervising risk and all levels of management fully informed
of the operation s day-to-day status with respect to its performance parameters.
The implementation of these control measures, which are detailed in the
sections and appendices to this document will define and constitute the
Company s Energy Risk Management Program.
In addition to the policies set forth in this Policy, the President, officers , and all
employees involved in the energy exposure management activities of the
Company shall receive a copy of the Idaho Power Company Energy Risk
Page
Management Procedures Manual as that document becomes available. The
Procedures Manual exists to define the operational implementation of the
policies set out herein and to ensure compliance by employees of the Company
with the approved practices governing the Company s exposure management
activities.
Page 2
II.Establishment of a Collaborative Approach with Customers
Most of the risk management activity undertaken by PC will be on behalf of
customers. As a result, it is essential that IPC undertake to create and maintain
a collaborative approach with customers surrounding the framework of the risk
management program. The risk management program will be characterized
the following features:
PC staff will conduct an annual collaborative review and additional
workshops as needed with I PUC Staff and customer representatives to
enhance the understanding of the risk profile faced by IPC's customers;
PC will seek input from PUC Staff and customer groups with respect to
desired risk tolerances and solicit upfront support for proposed
implementation procedures;
IPC will provide IPUC Staff with regular updates on the status of the IPC
risk position and its impact on the accumulated power supply costs.
Page 3
III.Energy Risk Management Policy Objectives
The objective of the I PC energy risk management program is to protect against
adverse movements in net power supply costs faced by customers and
shareholders. The methods used to manage power supply costs are described
in Section V of this Policy. The least cost energy supply will be identified and
documented. However, the overall objective (to manage the cost of energy
supply with respect for the risk tolerance of the stakeholders) should complement
the Company efforts to achieve the lowest cost of energy supply within the
identified acceptable limits of risk.
In order to accomplish this objective, the risk management program will provide
Senior Management, directors, and customer representatives with a process to
quantify the sensitivity of the Company s power supply costs to movements in
energy markets and to manage the market-based risks.
The Company risk management program will not contain an element
whereby corporate risk management decisions are based on IPC'
uncertain expectations of future market price movements. Risk
management positions will not be established that create incremental aggregate
market exposure to the Company. Risk management positions can only be
established that reduce the Company s aggregate underlying exposure to market
price movements. The decision to enter or not enter into any proposed hedging
transaction will not be dictated by IPC's market price view.
The efficacy of the risk management program will be benchmarked against the
contribution made by the risk management activity to the containment of market
exposures within agreed-upon risk tolerances called "Risk Guidelines . Gains or
losses incurred on hedge positions in isolation will not be included in the program
compliance process.
Page 4
Any proposed transaction exceeding the maximum term stated in Appendix E
shall require authorization from the President prior to execution.
The President will request input from the PC Energy Risk Management
Committee in any decision-making process surrounding energy risk management
issues.
The President shall report at least annually to the Board of Directors to obtain
approval for the Company s policies, strategic direction, and program parameters
surrounding its risk management program activities. Further, the President shall
provide reports to the Audit Committee of the Board of Directors at least
quarterly on the nature and profile of the Company s market exposure and on the
results of the risk management program activities. Copies of these reports will
be maintained by the Legal Department with the risk management
docu mentation.
,PC Energy Risk Management Committee
A senior management team established by resolution of the Board of Directors is
responsible for providing advice and recommendations to the President on
energy risk management-related issues and providing senior level oversight of
the risk management program. This group called the IPC Energy Risk
Management Committee, or "AMC", shall be appointed by the President. Those
individuals serving on the RMC appear in Appendix B. Committee decisions are
based on an affirmative majority vote of a quorum of the RMC. A quorum
consists of at least 500/0 of the AMC membership (Appendix B). Decisions made
outside scheduled RMC meetings require a majority affirmative vote of the full
RMC membership, responding by electronic or other means.
The RMC may also request other parties to attend the meetings for expert
advice/consultation; however, those individuals will not be members of the RMC
or be entitled to decide any matters on behalf of the RMC.
The RMC shall report at least quarterly to the President to provide an update on
the energy risk management program activities.
The RMC has been charged by the President with oversight responsibility for the
following aspects of the risk management program:
Development of energy risk management policies and procedures;
Communication with external customer groups with respect to risk
management issues and the solicitation of upfront support for any risk
management initiative from these external groups;
Authorization of strategic hedging program guidelines under which hedges
are to be established;
Page 6
Authorization of specific commodities and derivative instruments to
utilized;
Resolution of any disputes concerning the appropriate application of the
Policy that may arise;
Development and authorization of appropriate systems for recording,
monitoring and reporting the commodity exposure inherent in the
Company s operations and the risk management activity undertaken to
alter the underlying risk profile;
Recommendation to the Board of the appropriate Risk Guidelines based
on the collaborative process with customer representatives;
Authorization to permit modification to hedging activities associated with
Tier constraints;
Authorization to permit the deferral of risk mitigation activity should a Risk
Guideline be breached;
Authorization of term hedging activity required under the Policy.
With the assistance of the Middle Office function responsible for the
quantification of risk (as outlined in Section IV-E), the RMC will also
r~sponsible for the monitoring of compliance with the Policy. To the extent that
the RMC believes that compliance is not being maintained or risk tolerance
parameters have been breached , they are required to give written direction to the
appropriate officers or employees of the Company to take such action on the
Company s behalf to bring it into compliance with the Policy. Such action shall
be taken based on an affirmative majority vote of a quorum of the RMC.
The RMC's mandate also includes the ongoing general assessment of the
appropriateness of the Company strategies for energy risk management
activities, taking into account current and expected future economic conditions
and their effect on the general business environment, both internally and
externally. The policies described in this document cannot be altered
except by approval of the President.
The RMC or any officer of the Company may request that the President make
change in this Policy or its appendices. Such requests shall include an
explanation of the application and benefit of the proposed change to the
Company. For new risk management products, the explanation should also be
in accordance with the New Product Initiation Process described in Section IX
this Policy. For any change in a policy or procedure described in this Policy to
become effective , it must be approved by an affirmative vote of the President.
However, on a timely basis, any interim modifications authorized by the
President must receive approval by the Audit Committee of the Board of
Directors and be filed with the IPUC.
The RMC shall meet at least once a month , or more frequently as requested by
the Chairman of the RMC. The purpose of the meetings will be to review and
approve the current risk management activities of the Company. Minutes of the
Page 7
RMC meeting will be kept as an accurate record of the actions of the RMC.
Minutes will include a discussion of decisions made by electronic mail
correspondence between members of the RMC regarding power transactions
and other action relevant to RMC authority.
Energy Transactions Group (Front Office)
The execution of day-ahead and real-time transactions will be conducted by the
Energy Transactions Group. The execution of RMC-approved term transactions
for periods beyond the day-ahead timeframe will be performed by a member of
the Transactions Group called a Transaction Specialist. The Policy and
accompanying Procedures Manual will identify a largely automated approach to
the implementation of hedge transactions, with very limited discretion. However
if errors occur in executing RMC hedge orders, those hedges will be unwound
immediately by the Transaction Specialist upon discovery and any such
unwinding will not require prior RMC authorization.
Risk Management Group (Middle Office)
The monitoring and reporting of lPG's risk positions will be conducted by the Risk
Management Group or its designee. This Risk Management Group shall serveas an independent compliance group for the Company energy risk
management program, providing periodic revised forecasts of power supply
costs based on current forward market conditions and the potential variance in
the power supply costs forecast based on different pricing and resource
availability scenarios. The designee is responsible for measuring, evaluating,
and reporting to the Company s management and the RMC the amount of
exposure faced by the Company and its customers through its portfolio of
ongoing operating exposures and outstanding risk management transactions.
The Risk Management Group oversight responsibilities will include the following:
Involvement in corporate decisions that impact the Company s exposure
to market and operational risks;
Development and maintenance of the process and systems to identify,
quantify and report the market risks embedded in the operations of the
Company;
Quantification of market exposures from a corporate perspective;
Determination of credit ratings to counter parties;
Ensuring that limits prescribed in this Policy are not exceeded;
Monitoring approved counterparty credit exposures for risk management
transactions undertaken by IPC;
Notification to the RMC as soon as market risk or credit risk limits are
exceeded;
Review of transactions involving new commodities new delivery points
and/or new risk management structures. This review will consider
Page 8
potential liquidity constraints and the ability to monitor the position through
time, following the guidelines established for the New Product Initiation
Process described in Section IX; and
Preparation of reports with respect to current positions, including the
forecast power supply costs and the potential variability in power supply
costs.
Resource Dispatch Planning
IPC staff is responsible for the development of resource availability forecasts and
load forecasts. This data will be used to optimize the resource dispatch plan.
Power Supply Reporting (Back Office)
The Power Supply Reporting function within IPC will have the following
responsibilities:
To make and receive payments under all transactions;
To control the flow of confirmations for term transactions;
To maintain the appropriate accounting of hedge transactions;
Legal and Regulatory Services
The I PC Legal Department will assist in the counterparty documentation process
outlined in Section IX of this Policy. The IPC Pricing and Regulatory Services
Department will have the responsibility to co-ordinate the collaborative approach
with customer representatives and to ensure the receipt of appropriate risk
management information by PUC Staff.
Long Term Resource Planning
Longer term resource acquisition policies will continue to be governed by the
Integrated Resource Planning (IRP) process. The planning coordination
between the RP and the risk management policies will be reviewed and
discussed with customer representatives and Commission Staff in conjunction
with the annual establishment of risk management guidelines described below.
The Risk Guidelines as adopted each year will reflect a collaborative effort
between Idaho Power, customer representatives, and the Idaho Public Utilities
Commission Staff. The Company will consider both demand-side and supply-
side options consistent with the IRP in the annual Risk Guideline development
process. The IRP process will operate under the direction of the RMC.
Page 9
Market Risk
The quantification of market risk for electric generation and distribution
companies is a complex process. The Policy calls for the development of a risk
quantification framework over time while recognizing the need in the interim to
define a risk management implementation strategy prior to the establishment of
the requisite risk quantification system. The Market Risk section of the Policy
begins by outlining the interim market risk management approach and is then
followed by a description of the risk management approach and guidelines that
IPC will strive to implement over the medium term as the technology to monitor
the I PC risk position in a more advanced fashion is employed.
The Interim Risk Guidelines Risk Guidelines The Three-Tier
Approach
In the interim , IPC will define market risk as the exposure to adverse movements
in regional power prices, in conjunction with adverse hydro conditions. The risk
management horizon covered by this Policy will be centered around PCA year
periods. Risk will be tracked for the current PCA year and will be tracked for the
subsequent PCA year beginning on October 1 st, thus a maximum of 18 months
will be tracked.
The proposed implementation strategy would have three risk limit structures or
tiers. The first level of exposure limit would be tied to estimates of the impact
the low-water/high-price scenario on the accumulated power supply costs. The
second exposure limit would be a monthly volumetric exposure limit. The third
tier takes advantage of low-price market conditions when the benefit to
customers of participating in a further price decline falls below the benefit of
avoiding the impact of any subsequent price rise.
The RMC may authorize modifications to hedging activities associated with each
Tier constraint to recognize more efficient market transactions (Le. buy for a
quarter instead of individual months or establish or remove hedges in exact
increments).
The Risk Guidelines (Appendix F) as adopted each year on or around October
1 st, will reflect a collaborative effort between Idaho Power, customer
representatives, and the Idaho Public Utilities Commission Staff.
Page 10
(i)Tier One System Risk Limit
The Company will set an upper tolerance limit for the negative variance between
the Baseline Expected Cost Forecast ("BECF") and the low-water/high-price
scenario called the System Risk Limit (see Appendix F). The Company will
manage the low-water/high-price scenario within the System Risk Limit. The
parameters for the estimation of the BECF are as follows:
Established on or around October 1 of each year;
Based on expected water conditions and based on system conditions on
or around October 1;
Based on forward market prices on or around October 1 to estimate
purchase power costs and the revenue from any forecast surplus;
Tied to revenue and costs for system purchases or sales including
cogeneration and fuel (FERC accounts 547102, 555,447, and 501).
The parameters for estimation of the low-water/high-price scenario are
follows:
Low-water is based on current snowpack and 500/0 of normal precipitation
through the remainder of the current runoff season;
The high-price is calculated on the basis of a 950/0 confidence interval
move based on a lognormal distribution and implied volatility levels
sourced from the marketplace. Only one time in 20 would one expect to
witness a rise in price greater than the high-price estimation;
The high-price is applied only to those months where a deficit is forecast
under a low-water year scenario. The forward market price will be applied
to all other forward months.
On at least a monthly basis or more frequently if mandated by the RMC, updates
will be run on the low-water/high-price scenario and the expected cost forecast.
The revised expected forecast will be used for the second and third tier limit
structure but does not form a component of the first tier limit analysis.
If the variance between the updated low-water/high-price cost scenario and the
BECF is greater than the System Risk Limit established by the RMC, forward
purchases will be executed to reduce the risk below the variance limit. The
parameters governing the execution of hedge transactions are as follows:
PC will establish hedges first on the nearest-month deficit positions and
will continue to move out along the forward curve until sufficient hedges
have been established so that the variance between the low-water/high-
price scenario and the BECF has fallen below the limit. The rationale for
this approach is to take advantage of more attractive liquidity
characteristics in near-term forward months;
Page 11
Hedges will be established in minimum tranches;
Revisions to the low-water/high-price scenario may create a situation
where Tier One hedges may be considered for removal. The Risk
Management Group will assess hedges eligible for removal and make
recommendations to the RMC. Tier One hedges will only be considered
for removal in minimum tranches (as defined in Appendix F) when both
Tier One variance remains within limits after the hedge is removed, and 2)
volumetric position of the hedge-initiating hydro-case (expected or low)
after removing the hedge is closer to balanced (net position may not
change from long to short). Caution should be exercised in the removal of
hedges such that subsequent Tier One violations do not become highly
probable. When removal of Tier One hedges is warranted , nearby
months will be liquidated first.
Tier Two -Volumetric Limit (Deficiencies and Surpluses)(i i).
IPC will limit its heavy-load ("HL") and light-load ("LL") volumetric exposure for
any month during the PCA year in question to a maximum number of MW as
indicated in Appendix F. The parameters around this limit structure are as
follows:
Deficiencies are managed to the expected water scenario;
Surpluses are managed to the low-water scenario;
Hedges would be established in minimum MW tranches to bring I PC back
below the Volumetric Limit;
Revisions to the forecast may create a situation where Tier Two hedges
may be considered for removal. The Risk Management Group will assess
hedges eligible for removal and make recommendations to the RMC.
TierTwo hedges will only be considered for removal in minimum tranches
(as defined in Appendix F) when both 1) Tier One variance remains within
limits after the hedge is removed , and 2) volumetric position of the hedge-
initiating hydro-case (expected or low) after removing the hedge is closer
to balanced (net position may not change from long to short, or short to
long);
Positions will be determined on a flat basis for both HL and LL without
regard for hourly shaping at this time;
Positions will be determined based on "in-the-money" resources. Peaking
units which are deemed to be uneconomic based on current forward
prices would not be included in the determination of total resources;
The initial establishment of position limit hedges will commence on or
around October 1 and must be executed by December 31 of the year prior
to the upcoming PCA year. Positions will be established in a ratable
fashion. The rationale for execution flexibility is not to take advantage
price views but to ensure the orderly execution of these forward positions
in the marketplace.
Page 12
For those months where forward-market liquidity exists for multiple-month
blocks (e.g. quarterly) rather than single-month blocks, IPC will initially
manage the exposure on a quarterly basis. For example, if one was
deemed to be in deficit one month 300 MW and in surplus 150 MW in
each of the two other months in the quarter, the quarterly position would
be deemed to be flat and no hedging would be required. If the net
quarterly position was in excess of the volumetric limit, a quarterly hedge
would be established on this net position. As liquidity improves to the
point where the monthly block trades on a discrete basis, the hedge
management will be shifted to an examination of monthly positions on a
stand-alone basis with the appropriate monthly hedge positions
established.
(ii i).Tier Three - Floor Limit
This tier facilitates the establishment of hedge positions when it is deemed that
the benefit of maintaining participation in a further price decline is less than the
benefit of reducing the exposure to a potential upside price movement. These
positions are not established based on a price view PC fully recognizes that
after these positions are established, there is some probability that prices will fall.
However, to reiterate, the ability to avoid any negative exposure to a potential
price rise is deemed to be more valuable than the retention of further downsid~
price participation.
The tier involves the establishment of HL and LL price targets for forecast
deficiency positions under both the expected scenario and the low-water
scenario. The limits are described in Appendix F.
Revisions to the forecast may create a situation where Tier Three hedges may
be considered for removal. The Energy Transactions Group will assess hedges
eligible for removal and make recommendations to the RMC. Tier Three hedges
will only be considered for removal in minimum tranches (as defined in Appendix
F) when both 1) Tier One variance remains within limits after the hedge is
removed, and 2) volumetric position of the hedge-initiating hydro-case (expected
or low) after removing the hedge is closer to balanced (net position may not
change from long to short).
(iv).Breach of Limits
The low-water/high-price scenario may result in a breach of the System Risk
Limit for two reasons:
Adverse power market movements, changes in load forecasts , reduced
thermal availability or reductions in hydro availability could serve to
increase the forecasted year-end power supply costs;
Page 13
Increasing power price volatility.
The Volumetric Limits could be breached by altered forecasts of hydro
availability.
The Floor Limits may be beached if circumstances do not allow a transaction
specialist to enter into time-sensitive transactions.
Guideline violations should be addressed in the following order: Tier Two; Tier
Three; Tier One. Tier Two hedges are executed at market to bring the current
surplus/deficit position within volumetric Guidelines. Tier Three purchase
volumes would be in addition to Tier Two activity, but only where prices below
the Guidelines can be achieved. Tier Two and Tier Three purchases reduce
and could possibly eliminate, a pre-existing Tier One violation. Addressing a Tier
One violation before Tier Two and Tier Three would very likely result
superfluous transactions, with the potential to needlessly increase power supply
costs.
the risk analysis reveals that hedging action is required under any of the three
tiers, the IPC Transaction Specialist must enter into RMC approved cost-
effective risk management transactions that reduce positions below the risk
limits. If market conditions prevent efficient execution of the requisite risk-
reducing transactions, or if forecast results for outlying months rely too heavily on
estimated weather and hydro conditions , the PC Transaction Specialist will
approach the RMC for a deferral of the execution of these transactions. Prior to
approving this deferral, the RMC must be provided with justification for deferring
the risk-reducing activity.
All members of the RMC and the President will receive daily notification and
ongoing reports detailing any limit breach, until this breach is rectified. The RMC
will also be notified via the Exception Log of any exceptions to normal execution
and clearing of transactions.
(v).Day-Ahead Risk Approach
It is the policy of IPC that it will enter each day in a forecast flat position
whenever possible. Day-ahead transactions will be established to reduce or
eliminate whenever possible any hourly surplus or deficit positions. The
objective of this policy is to mitigate customer and shareholder exposure to the
extreme volatility that can occur on a real-time basis.
However, in some circumstances it will be prudent to retain a surplus/deficit
position entering the day of delivery. Forward power products (including day-
ahead products) are not typically available to match a utility retail demand
profile , which varies by hour throughout the day. Thus, a "balanced" position
Page 14
forces some deficit hours and some surplus hours. Market and system
conditions can combine in situations where a totally "balanced" position is
anticipated to be detrimental in terms of cost or risk. The Energy Transactions
Group will document the need for and the results of a planned unbalanced day-
ahead position. The RMC will periodically review the tactics for effectiveness
and order continuation or suspension of individual tactics based on results.
The Prospective Market Risk Approach
(i).Market Risk Definition
In the future , market risk will encompass a broader definition than the definition
used for the interim approach. Market risk for the Company will be defined as
the uncertainty with respect to power supply costs caused by changes
anticipated market pricing for natural gas, power, generation unit outages, hydro
availability, transmission constraints and customer load. Market risk will be
defined in quantitative form as power supply costs-at-risk ("PCAR"
).
The PCAR
measures the extent to which the power supply costs may deviate from forecast
expectations within a statistically defined confidence interval based
movements in market prices, generation resources and customer load.
(ii).Market Risk Quantification
Determining the Company s PCAR involves complex arithmetic modeling. It will
be the responsibility of the I PC Risk Evaluation function to develop and refine the
optimal quantitative model that generates a PCAR estimation that is credible
reproducible and can be determined in a timely fashion.
There are several parameters associated with the PCAR calculation that will be
governed by the Policy:
Holding Period. The PCAR will be based on a holding period through the
conclusion of the relevant exposure period. The current-year risk
calculation will be through the conclusion of the current PCA year. The
subsequent year risk calculation will be through the conclusion of the
subsequent PCA year. Risk associated metrics will be defined based on
industry practice in determining holding periods.
Confidence Interval. The PCAR will be based on a confidence interval
defined in an appendix.
The selection of other modeling parameters will be at the discretion of the
Risk Management Group. This discretion will apply to a number of parameters
including:
Page 15
The anticipated volatility in model inputs like power prices, natural gas
prices , fuel oil prices, transmission constraints, load and generation
statistics, foreign exchange and interest rates;
The distributional characteristics of these variables;
The correlation between the input variables.
fundamental component of the Company s ongoing risk analysis is the
updated forecast of the year-end power supply costs based on current
expectations of future power and natural gas prices, load and generation
resources over the remainder of the exposure period. The updated end-of-year
power supply costs information is required to manage the Company s risk profile
because it provides Senior Management with ongoing snapshots of performance
versus budgeted expectations.
(iii).System Risk Limit
IPC will calculate on an as needed basis the current forecast year-end power
supply costs and also the PCAR. These two amounts will be summed and
compared against the System Risk Limit.
(iv).Breach of System Risk Limit
The sum of the forecast year-end power supply costs and the PCAR can
increase above the approved System Risk Limit for several reasons:
Adverse market movements alterations in load or reductions
generation availability could serve to increase the forecasted year-end
power supply costs;
Increasing volatility in the parameters impacting power supply costs can
lead to an increase in the PCAR.
Should the sum of the forecast year-end power supply costs and the PCAR
reveal that the System Risk Limit has been breached, the PC Transaction
Specialist must enter into cost-effective risk management transactions that
reduce the year-end forecast power supply costs plus the PCAR below the
System Risk Limit. If market conditions prevent efficient execution of the
requisite risk-reducing transactions; the PC Transaction Specialist will approach
the RMC for a deferral of the execution of these transactions. Prior to approving
this deferral, the RMC must be provided with justification for deferring the risk-
reducing activity.
All members of the RMC will receive daily notification and ongoing reports
detailing any risk limit breach until this breach is rectified.
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VI.Credit Risk
Credit Exposure Defined
Credit exposure is defined as the risk that a counterparty to a transaction will be
unable to fulfill its present and future financial obligations to the Company. This
credit exposure would extend to counterparties with whom the Company trades
physical commodities, as often payment for the delivery of the product does not
occur until after delivery has been made in full. In addition , substantial
unrealized gains or losses may accrue in physical contracts prior to any delivery
obligation. Credit exposure also exists for Over-the-Counter (OTC) traded
derivative transactions, as the value of outstanding contracts can escalate
substantially over time without the counterparty having to post or deposit any
security in the form of the payment of collateral.
Managing credit exposure becomes an important component in the overall risk
management program. The creditworthiness of trading partners, both in the
physical and financial marketplace , becomes a function of both qualitative and
quantitative factors, centered on the credit rating assigned a counterparty by the
major credit rating services or an internal evaluation of the counterparty s ability
to pay. Information relating to the credit standing of any given trading partner
can be determined by factors such as its credit rating published by one of the
commonly recognized rating agencies , market intelligence, electronic news
releases and other public information sources.
Counterparty Credit Standards
Credit exposure to any given counterparty consists of three components. The
first is the traditional measure of credit risk - accounts receivable due from the
counterparty for the current and next month sales. The second is the cost of
replacing the instrument in the marketplace today, defined as a trading position
current or "mark-to-market" value. The third is an estimate of the future
replacement cost of a transaction known as potential exposure, which is
additional exposure created from the increase in the mark-to-market in the event
prices shift in a certain direction.
The current replacement cost of a transaction evaluates the actual risk to the
Company that a counterparty will fail to perform on its financial commitments.
This is the current value of the transaction to the Company based on the
movement in the price of the underlying market relative to the contract price, and
can be either a positive or a negative amount. If' the market value of the
transaction is negative (Le., the Company owes money to the counterparty
based on a mark-to-market valuation) then there will be no current replacement
cost exposure. Quantification of current exposure to a counterparty is a function
of a mark-to-market calculation.
Page 17
Potential credit exposure to any counterparty is calculated by stressing prices to
extremes of recent history. If the resulting (total) exposure is in excess of the
maximum allowable limit for the applicable rating class, mitigation is required.
Exceptions require advance RMC approval. The Risk Management Group will
use a methodology resulting from the following price scenarios:
. 2000/0 of current forward prices (1000/0 increase in prices)
750/0 of current forward prices (250/0 decrease in prices)
These price scenarios will be revisited as prices change from current levels. For
example, if prices rise from the current levels, the low-price scenario will
adjusted to reflect a more realistic downward move (ie). If prices are high the
potential for downward movement is greater and the decrease might need to be
shifted to a 750/0 decrease in prices.
It is important in an analysis of credit exposure to determine whether netting
applies to the counterparty with whom the Company has a number of open
positions. Gross exposure measurement weighs equally the absolute value of
both positive and negative exposures, while netting allows a consolidated
measurement of the net exposure. Exposures will be netted whenever the
contracts with the counterparty provide for this practice.
Monitoring credit information of counterparties and assigning counterparty credit
limits shall be performed by the Risk Management Group. Credit and term limits
for each category of counterparty are defined in the Appendix D. Calculation
and distribution of the counterparty credit analyses are to be performed
independent of the execution function, ensuring appropriate segregation of
duties within the Company.
Extension of Credit
The Company will enter into transactions with a counterparty only when the
potential exposure, when added or netted with the current credit exposure with
the same counterparty for such transaction, will not exceed the maximum limit
and term based on the assigned credit rating assigned to that counterparty. It is
the responsibility of the Risk Management Group to communicate, on a daily
basis , the amount of available credit for each counterparty to the
Transaction Specialist.
Page 18
Limit Exception Process and Violations
The I PC Transaction Specialist will immediately suspend initiation of additional
business with individual counterparties where that specific counterparty s credit
limit has been reached or exceeded. This situation might occur due to
increase in volatility and/or market price movements adversely impacting the
counterparty s position with the Company. The Risk Management Group must
approve any exceptions to the counterparty credit limit prior to any new
transactions. Exceptions are not to be requested or approved after the proposed
transactions has been entered. The Risk Management Group must bring any
approved credit exceptions to the attention of the RMC at its next meeting.
Under no circumstances is the IPC Transaction Specialist permitted to knowingly
increase the credit exposure to a counterparty that has exceeded its approved
level of credit with the Company until the Risk Management Group reviews the
credit limit and grants written authorization. Violations of the Credit Exception
process will be reported to the RMC to determine corrective action.
Credit Exposure Reporting
Reporting of credit exposures should provide management with relevant
accurate and timely information about counterparty credit exposures and
approved lines of credit. Reporting of credit exposure against pre-defined limits
shall be done daily by the Risk Management Group.
Page 19
VII.Program Compliance
Every employee involved in the risk management process must sign the form
attached as Appendix G acknowledging individual responsibility to comply with
this Policy.
Audit Services will periodically evaluate the process and procedures of the
Policy.
Page 20
VIII.Systems and Accounting
Systems
An information system (the "System ) shall be maintained to identify, track
quantify and report all outstanding elements of the Company s portfolio that are
subject to variances in power prices, and hydro availability. The System will
track both market risk and credit exposure over the time horizon delineated in
this Policy. It is the responsibility of the Risk Management Group to implement
and monitor the System to ensure that the integrity, timeliness, and accuracy of
the information provided are consistent with the Company s requirements for
control over the risk portfolio.
Accounting for Transactions
For external reporting, audit, and control purposes, the process of accounting for
transactions is a key element that must be adhered to at all times and is
described in greater detail in the Company Energy Risk Management
Procedures Manual.
Page 21
IX.Documentation, New Product Initiation
Legal Documentation
To ensure an appropriate level of control, the following policies shall govern
documentation of external transactions that involve the establishment of pricing
mechanisms for power:
Physically-settled transactions shall be governed by the Company
standard agreements or such other agreements that reflect
generally accepted commercial practices for the underlying
marketplace and the Company criteria for physically-settled
transactions. These agreements will typically be the WSPP
agreement for electricity transactions.
The Power Supply Reporting group, with assistance from the Legal Department
is responsible for negotiating original documentation with all counterparties and
having it signed by the appropriate officer of the Company as soon as possible
following initiation of transactions, and in any event within ninety days of the
initial transaction activity with a counterparty. If the appropriate Document is not
signed within 90 days, the RMC will be notified through the Counterparty Credit
Analysis report with an explanation as to why the Document has not been signed
and an estimate as to when a Document may be signed. If the transaction is
pending execution of a Document and has a contract term beyond the current
PCA year, the RMC will be notified immediately following the transaction in the
form of the Counterparty Credit Analysis report if a document has not been
signed.
All confirmations for transactions with a counterparty that has not signed a
Document must provide that the Company may terminate the physically-settled
or financially-settled transaction if a Document cannot be negotiated and signed
within a defined time frame of 90 days.
Confirmations of transactions payment advice and all other correspondence
sent by counterparties with regard to risk management transaction activity and
the transfer of money, either by wire transfer or by mail, shall be directed to the
attention of the Treasury Department. This is done with the intent of maintaining
a level of segregation of responsibility from the risk management function within
the Company.
Only those signatures that appear in Appendix C - Authorized Signatories can
bind the Company to confirmations and/or master contracts with external
counterparties.
Page 22
New Product Initiation Process
A new product is a pricing mechanism, commodity or commodity delivery point
that is sufficiently different from the slate of instruments and markets previously
approved under this Policy that it has a notably differing risk profile or it requires
different systems, operational procedures or accounting treatment.
A new product would also include those instruments that may be transacted on
one-off" basis , which would be implementation of a derivative instrument or
entry into a commodity market that, despite the anticipation of being transacted
just once, would still fit the definition of a new product.
The purpose of defining a process for the introduction of a new product or
instrument is to ensure that the exposures associated with it are thoroughly
reviewed and understood by the RMC. On an interim basis , the President must
approve the use of all new products or the entry into different commodity
markets prior to execution of any such transaction by the Company, with formal
ratification by the Board of Directors on a quarterly basis. Products approved for
trading are listed in Appendix E, and any new products that receive approval
would be added to the list as an amendment to that Appendix.
The IPC Transaction Specialist has the responsibility to define the rationale for
each of the new products introduced to the Company in a formal presentation to
the RMC demonstrating that the new product meets certain criteria. In the
presentation to the RMC, a business case should be put forth that includes the
following:
(i)Business Rationale
A written description of the product, which includes the purpose , function
expected profitability and benefit to the Company;
An analysis of the appropriateness of the new product in relation to the
Company s overall strategy;
An analysis of the availability of liquidity in the marketplace for the new
product;
A comparison or differentiation from an existing approved product;
Internal evaluation of the exposure profile of the product, including
detailed stress testing of the product over a broad range of market
scenarios and the associated exposure implications;
Demonstration of the in-house expertise to manage and support the new
product; and
Page 23
Assurance that an assessment of the potential risks has been completed
by the appropriate departments within the Company.
(ii)Management Responsibilities
A brief description of the responsibilities of the various departments within
the Company who will have any manner of contact with the new product;
Proposed credit and market exposure implications and proposed limits;
Proposed reporting requirements , including any changes to existing
procedures and systems requirements growing from the addition of this
new product; and
Legal, taxation and internal audit review, as necessary, for associated
implications to those departments.
No product or geographic region other than those listed in Appendix E are
authorized until the President has approved them.
The Risk Management Group in conjunction with IPC trading must immediately
report any transactions that involve any commodities or markets that are not pre-
approved to the RMC via an immediate publishing on the Exception Report.
Page 24
Management Reporting
This Policy describes various reports to be generated by different groups within
Company. The following table describes those reports, their normal frequency,
distribution , and the originator of the report:
Report Content Distribution Normal Originator
Frequency
Daily Position (A)RMC Members Daily I PC Risk
Report President Management
IPC Transaction Group
Specialist
Risk
Management
Group,
Power Supply
Reporting
Weekly (A)RMC Members Weekly I PC Risk
Position President Management
Report IPC Transaction Group
Specialist
PC Risk
Management
Group,
Power Supply
Reporting
Counterparty (8)RMC Members Daily Risk
Available IPC Transaction Management
Credit Report Specialist Group
Risk
Management
Group
Exception (C)RMC Members As required Risk
Report President Management
Power Supply Group
ReportinQ
Minutes of (D)RMC Members Within a RMC Secretary
RMC Meeting Risk reasonable time
Management after RMC
Group meeting
Page 25
Daily and Weekly Reports
Daily and Weekly Reports are intended to summarize the open positions and
exposures of the Company. They will include:
I. forecast end-of-year power supply cost balance and a comparison to the
System Risk Limit (Tier One limit) using the methods described in Section
V. of this Policy (Weekly, or more frequently as events warrant)
ii. monthly average MW volume for on-peak and off-peak and a comparison
to monthly average MW position limits (Tier Two limit comparison)
(Weekly, or more frequently as events warrant)
iii. current exposure and credit availability to each counterparty (Daily) and
iv. summary of executed term transactions since the publication of the previous
report (Daily)
Counterparty A vailable Credit Report
The counterparty credit analysis contains:
i. available credit by counterparty
ii. notes of credit violations, counterpartys that either exceed or are
approaching fifty percent (500/0) of their Available Credit limit, changes in
ratings or credit limits
Exception Log
The Exception Log records all exceptions to normal execution and clearing of
transactions, including amendments to existing transactions. The detail included
in the report shall include:
i. date exception took place
ii. type of exception
iii. individual responsible for exception counterparty involved (where
applicable)
iv. steps taken to rectify the noted exception
v. date and documentation of corrective action taken
Minutes of the RMC Meetings
Documented minutes of the RMC meeting, including discussion and
recommendations , will be assembled within a reasonable period of time after
every RMC meeting.
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XI.Restricted Activities and Disciplinary Action
To ensure that all employees adhere to guidelines and limitations specified in
this Policy, disciplinary action will be taken in the event of a breach of Policy.
Depending on the nature and extent of the Policy breach, such disciplinary action
may lead to termination of employment and criminal prosecution.
The use and disclosure of the financial results, material facts , or information
produced through the Risk Management Program is considered to be sensitive
confidential business information. The disclosure of any confidential information
associated with the Risk Management Program , beyond the disclosure
authorized in this Policy and the accompanying Procedures Manual
prohibited.
Page 27
Appendix A:Board Resolutions
Resolution of the Board of Directors
Mandating an Energy Risk Management Program
for Idaho Power Company
In the normal course of conduct of its business activities, Idaho Power Company
PC" or "the Company ) and its customers are exposed to a number of
business and market-driven variables that can impact the cost of power. The
PC Board of Directors therefore deems it prudent for the Company to engage
energy risk management activities designed to systematically identify, measure,
evaluate and manage both the physical and financial exposures to business and
market-driven uncertainties within a defined and controlled framework
collaboration with customer representatives. It is the Board's desire to mandate
a program that conforms to its intent to create a risk management control
framework. Accordingly, the Board of Directors hereby enacts the following
resolutions:
117 order to authorize IPC to act in accordance with the Board's desire to develop
and maintain risk management control framework, the Board enacts the
following resolution:
Resolution 1: A Committee of Senior Management, called the Risk Management
Committee ("RMC") is hereby commissioned. The Board appoints
the Vice President of Power Supply to serve as Chairperson of this
Committee who will appoint its membership from time to time. The
RMC shall be comprised of a balanced composition of Senior
Management members ensuring that both the short-term and the
long-term business interests of IPC will be considered.
In order to establish broad guidelines that will govern the risk management
activities and define management responsibilities in accordance with Board
objectives for defined and controlled framework, the Board enacts the following
resolution:
Resolution 2: The RMC shall be responsible to the Board of Directors and is
charged with the overall direction , conduct control and
performance of an ongoing Energy Risk Management Program (the
Program designed to systematically identify, quantify and
manage the exposure of IPC and its customers to the uncertainties
related to the energy markets in which the Company is an active
participant. In the performance of this mandate, the RMC shall be
responsible for developing, documenting and communicating a
cohesive Energy Risk Management Policy Manual governing risk
management activities.
Page 28
Appendix A:Board Resolutions (continued)
In order to keep the Board apprised of the risk management activities and
Program parameters with defined regularity, the Board enacts the following
reso I ution..
Resolution 3: The RMC shall report annually to the Board on the nature of I PC'
exposure profile and on the results of the energy risk management
activities and annually to obtain approval of IPC's Energy Risk
Management Program.
July 18. 2002 IPCO Board Minutes
RESOLVED, That the Idaho Power Company Board of
Directors hereby authorizes the establishment of Risk
Management Committee (RMC) charged with the overall direction
conduct, control and performance of an ongoing Energy Risk
Management Program (the "Program ) designed to systematically
identify, quantify and manage the exposure of the Company and its
customers to the uncertainties related to the energy markets in
which the Company is an active participant and shall be
responsible for developing, documenting and communicating a
cohesive Energy Risk Management Policy Manual governing risk
management activities , and be it
FURTHER RESOLVED , that the Audit Committee of the
Board of Directors shall be responsible for the appointment of the
members of the RMC including the Chairperson of the Committee
provided , however, that the RMC shall be comprised of a balanced
composition of senior management for the Company ensuring
consideration of both short-term and long-term business interests.
Page 29
Appendix B:IPC Risk Management Committee Members
Darrel Anderson
Ric Gale
LaMont Keen
Bart Kline
Jim Miller
Dan Minor
Lori Smith (non-voting)
Page 30
Appendix Authorized Signatories on Behalf of the Company
LaMont Keen
James Miller
Dan Minor
Page 31
Appendix D: Counterparty Credit Standards and Authority Levels
Authority Levels
President, Idaho Power
Credit Limits more than $25 000 000
Chief Financial Officer
Credit Limits up to and including $25,000 000
Chief Risk Officer - Risk Management Group
Credit Limits up to and including $20,000,000
Manager, Credit Risk - Risk Management Group
Credit Limits up to and including $15,000,000
Counterpartv Scoring Table and Limits
Internal Credit
Rating
Maximum Exposure
Limit
Maximum Term
35 000 000
20 000 000
ears *
ears *
A- or hi her
BBB+ to BBB-
Below BBB-
The President may authorize maximum terms greater than two years.
Page 32
Appendix E: Approved Instruments, Markets and Commodities
Permitted Instruments
Physical Settlement
Underlying Markets:AII points of interconnection within the WECC
commercially manageable and useful to I
and/or its customers
Type:Fixed Price
Index Price (based on published indices, Le.
Dow Jones)
Term:Up to and including the prompt 18 months of
the forward curve (Transactions with start-date
or duration beyond 18 months require
President's approval)
Financial Settlement
Underlying Markets: Mid-Columbia power market
Palo Verde power market
Type:Fixed-tor-Float Swap (based on published
indices, Le. Dow Jones)
Term:Up to and including the prompt 18 months of
the torward curve (Transactions with start-date
or duration beyond 18 months require
President's approval)
Transmission (power) and Transportation (gas) capacity
Permitted Commodities
Electricity, Natural Gas, Coal , Fuel Oil & Diesel
Page 33
APPENDIX F:RISK GUIDELINES FOR THE 2004-2005 PCA YEAR
TIER ONE
System Risk Limit
Hedges Established
Hedges Removed
TIER TWO
Volumetric Limit
Hedges Established
Hedges Removed
TIER THREE
Hedges Established
Hedges Removed
$100 million
25 MW tranches
50 MW tranches
+/-
100 MW
25 MW tranches
50 MW tranches
25 MW tranches
50 MW tranches
The approved seasonal factors listed below will be applied to the
Floor Limit prices and rounded to the nearest dollar.
Floor Limits Heavy Load Light Load
Expected Forecast $30 $15
Low-Water Forecast $20 $10
The RMC may modify its hedging activities associated with each Tier constraint
in order to recognize more efficient market transactions (Le. buy for a quarter
instead of individual months or establish or remove hedges in the most efficient
increments)
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Appendix G: Employee Acknowledgment Form
Each employee involved in trading and the administration of the trading and risk
management process as described herein shall document in writing that he
she has:
Obtained, read, and understood a copy of the Idaho Power Company
Energy Risk Management Policy Manual;
Acknowledged by their signature that a violation of the Policy may
constitute grounds for disciplinary action including termination of
employment;
Understand the confidential nature of information generated throughout
the trading and risk management process , and agree to maintain such
information as confidential.
DATE:
Employee (print name)
Employee (signature)
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