New York Power Authority

 

 

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Governing Policies

 

For

 

Energy Risk Management

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Revision Date:                                       

 

Adopted by the Board of Trustees:                                             January 31, 2006

 

Supercedes Prior Policy of:                                          October 29, 2002

 


 

Table of Contents

 

 TOC \o "1-3"

Article I.. Purpose for the Energy Risk Management Program   PAGEREF _Toc534713848 \h 2

Section 1.01     Introduction.............................................................................. PAGEREF _Toc534713849 \h 2

Section 1.02     Scope............................................................................................ PAGEREF _Toc534713850 \h 2

Section 1.03     Risk Management Philosophy...................................................  PAGEREF _Toc534713851 \h 2

Article II.................................................... Energy Risk Management Policy        3

Section 2.01     Delegation of Authorities..................................................................... 3

(a)  Board of Trustees...................................................................................... 3

(b)  Energy Risk Management Committee................................................... 3

(c)  Controller’s Office and Office of Internal Audit................................... 4

Section 2.02     Activities................................................................................................ 4

Section 2.03     Reporting............................................................................................... 5

 


 

Article I.                       Purpose for the Energy Risk Management Program

Section 1.01     Introduction

The New York Power Authority (“NYPA”) is routinely exposed to energy price risk in the conduct of its operations.  In most cases price volatility imposes a substantial and direct risk (or opportunity) to the goals of NYPA’s business units as well as to their competitive posture.  Management of these risks is important to our success.

This Policy deals with the philosophy, framework, and delegation of authority necessary to govern the activities of NYPA related to its energy risk management program (“Program”). 

NYPA will conduct risk management activities in a manner that supports NYPA’s mission, mitigates energy-price exposure, and prevents unauthorized financial risk.  Subordinate to those goals, the objective of cost reduction and the achievement of financial goals will be pursued within the constraints stated herein and as further delineated by management. 

All Program objectives and activities will be conducted in accordance with this Policy.  Controls and procedures to be further delineated by management shall be in conformance with this Policy.

Section 1.02     Scope

This Policy applies to all transactions related to electrical energy, capacity, ancillary services, transmission, natural gas, and fuel oil or other products used for generation including physical and financial derivatives that impact NYPA’s energy market risk exposure.

Section 1.03     Risk Management Philosophy

The objective of the Program is to identify exposures to movements in energy prices; to understand the impact on the company’s financial statements and its economic well-being; and to mitigate the impact of those exposures where they might exceed NYPA’s appetite for risk, while maintaining adequate flexibility to improve financial performance.

NYPA will operate under a “non-speculative” philosophy.  The successful management of NYPA’s resources as outlined in its mission statement requires predictability in financial performance related to its core business dealings.  Hedging activities will be conducted to secure more certainty in this regard.  As an ancillary objective, the diligent measurement and awareness of risk factors will enable both optimization of operating decisions and optimization of physical assets thereby enhancing financial performance.  Hedging will be conducted with a clear recognition of the hierarchy of risk management objectives:

1.      Match Core Business Objectives:  Secure fixed or floating price structures or related options on associated underlying commodities for energy products procurement and energy sales that are best suited to core business objectives. 

Under no circumstances shall transactions be executed for energy volumes in excess of those anticipated for serving customers or managing the performance of NYPA’s generating assets.

2.      Mitigate Risk: Given volatile energy markets, manage energy and energy product procurement costs and revenues toward the mitigation of potentially unfavorable results and the promotion of results that fall within acceptable, favorable boundaries.

3.      Improve Financial Performance: Where practical and with deference to objectives #1 and #2, reduce costs or increase revenues through optimization of existing positions or optimization of existing positions used for hedging thereby enhancing net revenues.

 

Article II.                   Energy Risk Management Policy

Section 2.01     Delegation of Authorities

(a)                  Board of Trustees

This Policy has been established by NYPA’s Board of Trustees (“Trustees”), and the Trustees must approve any amendments to this Policy. 

(b)                 President and Chief Executive Office and The Energy Risk           Management Committee

The ERMC shall consist of the President and Chief Executive Officer; the Chief Operating Officer; the Executive Vice President, Secretary and General Counsel; the Senior Vice President and Chief Financial Officer; the Senior Vice President - Power Generation; the Senior Vice President – Marketing, Economic Development and Supply Planning; the Vice President - Chief Risk Officer; and such other officers as the President and Chief Executive Officer shall appoint. The ERMC shall be chaired by the President and Chief Executive Officer, or by the Vice President – Chief Risk Officer in his absence.  The ERMC shall provide the President and Chief Executive Officer with advice as to the energy risk management activities of NYPA. Any necessary policies not explicitly delineated in this Policy shall be developed by the President and Chief Executive Officer, in consultation with the Energy Risk Management Committee (“ERMC”), must be approved by the Trustees, and, following such approval, shall be promulgated by the President and Chief Executive Officer.  The President and Chief Executive Officer is granted the following authority, provided, however, that any determinations made pursuant to paragraph (3), below, must be approved by the Trustees prior to such determinations becoming effective:

  1. To ensure that all energy-hedging activities of NYPA are in accordance with this Policy. 
  2. To establish procedures for the administration of the Program.
  3. To initially determine upon consultation with the ERMC and then update as deemed appropriate NYPA’s projected net revenue.
  4. To determine restrictions and risk boundaries based upon the projected net revenue goal.
  5. In order to react and adjust to the impact on the projected net revenue goal from daily changing market conditions, the President and Chief Executive Officer or his designee shall take such risk management actions as he deems necessary or advisable to meet the projected net revenue goal.
  6. To delegate management responsibilities, prescribe permissible instruments and controls, and review the effectiveness of all aspects of the Program.
  7. To establish, upon consultation with the ERMC, transaction authorities for NYPA staff. 

(c)      Controller’s Office and Office of Internal Audit

The Controller’s Office and Office of Internal Audit shall each conduct independent review of Program activities, particularly assuring the proper administration of controls and restrictions as to activities implemented under this policy.  In fulfilling its role, the Controller’s Office shall obtain independent counter party statements and timely receipt of primary documentation of transactions including confirmations.  The Controller’s Records shall not depend solely on verbal confirmations or representations derived from the Book, as described below, maintained by those involved directly with the administration of the Program.

Section 2.02     Activities

Permissible instruments for the purposes of risk management shall be restricted to the products and instruments specified by the President and Chief Executive Officer, upon consultation with the ERMC subject to the following restrictions.

Risk management transactions may include the following:

  1. Hedging the cost of energy and energy products to be procured for normal business purposes.
  2. Hedging the price of energy and energy products sold by NYPA.
  3. Hedging the margin between energy procured and energy produced where NYPA owns conversion capacity (e.g., “spark spread”). 
  4. Hedging the geographic cost differential for energy procured in order to reduce price uncertainty at the location of desired use (e.g., “basis” hedge between Henry Hub and Transco Zone 6 City-gate Natural Gas).
  5. Dynamic Hedging (i.e., unwinding of hedges) will be permitted for the purpose of limiting the divergence of fixed position values from market opportunities, or to secure credits embedded in previous hedge transactions.  This type activity or optimization of hedge positions will be subject to explicit constraints set by the President and Chief Executive Officer.
  6. Contracts to provide energy, capacity and or ancillary services.

Section 2.03     Reporting

Maintenance of timely reports is critical to an orderly Program.  At a minimum, in the case of NYPA energy risk management, this shall include a record of transactions; volumes and values of fixed and open positions, both physical and financial; the linking of financial hedges with physical volumes; and quantification of the company’s exposure to market volatility. These shall be maintained in accordance with directives set by the President and Chief Executive Officer in consultation with the ERMC.

 

Periodically, but no less than annually, the President and Chief Executive Officer or his designee shall provide to the Trustees a report regarding policies and procedures established under this Policy, as well as Program results, and Policy compliance.