Pasadena Utility to Update Energy and Credit Risk Policy

Pasadena Water and Power is revising its Energy and Credit Risk Management Policy, last adopted in 2018, to address evolving market conditions. The policy update aims to maintain stable retail electric rates while providing competitive pricing for customers.

An informational update on the policy will be presented to the City Council’s Municipal Services Committee meeting on Tuesday, July 9, which is open to the public. 

The current risk policy implements best practices by setting energy risk limits and exposure amounts within specific tolerance levels for energy procurement operations. It also addresses the need for monitoring and reporting energy procurement activities due to highly volatile natural gas and wholesale power markets.

“PWP’s Risk Policy objectives are to provide stable retail electric rates to retail customers and provide competitive rates by optimizing the energy procurement portfolio,” PWP Acting General David M. Reyes said in a memorandum to the committee. The policy seeks to reduce exposure to unexpected costs within an acceptable range.

Reyes’s memorandum shows the existing policy is divided into seven areas addressing the risk framework for Pasadena Water and Power’s power supply activities. The policy also emphasizes the department’s goals of providing superior customer service and reliable electricity at competitive rates in an environmentally sustainable manner.

The policy implements structured controls and policies centered on clearly defined segregation of duties, delegation of authority, and risk management controls. It also establishes risk structure, parameters, limits, and reporting mechanisms to communicate underlying risk to management.

The policy also defines allowed transactions, corresponding transactional limits, approved transaction types, enabling agreements, and transaction executing authorities with their respective terms and lead times. Its scope is limited to activities in PWP’s power supply portfolio and excludes general business risks such as fire, accident, general liability, and risks of catastrophic failure, environmental or regulatory exposures.

To mitigate financial risk in procurement and portfolio optimization, the policy sets limits on potential losses in relation to energy reserve funds. Load forecasting and contracted resource availability help reduce exposure and potential financial losses within policy thresholds.

The policy prohibits speculative transactions, emphasizing that only transactions related to serving load requirements are permitted. Implementation and effectiveness are governed by active PWP staff participation through the Energy and Credit Risk Management Committee.

PWP’s risk reports on energy procurement activities are presented monthly to the Municipal Services Committee, with timely updates provided to the General Manager. The utility also conducts economic conflict-of-interest reviews and provides annual Federal Energy Regulatory Commission (FERC) Anti-Market Manipulation training to relevant staff.

Within PWP’s structure, The Front, Middle, and Back Offices of the Power Supply Business Unit and Finance and Administration Business Unit function independently, with the Middle and Back Offices providing oversight of energy transactions conducted by the Front Office.

“Overall, PWP promotes and fosters a culture of risk awareness surrounding energy procurement activities and strives to limit our financial exposure related to the inherent risk in the operation of the City of Pasadena utility,” Reyes said in the memorandum.

Tuesday’s meeting begins at 4 p.m.