risk controls and use of sas tools at calpine controls and use of sas tools at calpine ... sas...

1

Risk Controls and Use of Risk Controls and Use of SAS Tools at Calpine SAS Tools at Calpine

Enrique Mejorada Ph.D.Enrique Mejorada Ph.D.VP Risk ControlsVP Risk Controls

Calpine CorporationCalpine Corporation

2004 SAS Forum InternationalCopenhagen, Denmark

June 16, 2004

2

Presentation ObjectivesBroadly describe and discuss:

– The risk controls framework and practices that we, at Calpine, use to monitor and assess compliance with:

• Risk Management Policies and Procedures (Including pertinent SOX elements) and

• established risk tolerance (volumetric limits, stop loss limits, VaR limts, etc.)

– How we use SAS technology to help us manage the complexities inherent in a large portfolio of physical plants --operating and under construction-- and financial energy assets in today’s business and regulatory environment.

– The SAS-Calpine partnership that has developed over the years.

3

Presentation SequenceI will very briefly touch on the following topics:

– Calpine – Definition of Risk Controls– People and Organization– SAS Tools Used in Risk Controls

• Base SAS• Data Warehouse• Risk Dimensions and ETS• SAS Portal• Collaborative Server• Enterprise Guide• Data Miner (pending)

– Governance: Risk Management Policies and Procedures– Portfolio organization and metrics

Conclusions and Lessons LearnedQuestions and Answers

4

Brief Calpine Profile

Headquartered in San Jose Ca; founded in 1984 and publicly traded since 1996.Listed on the S&P 500Has 88 power plants with about 22,000 MWs and will reach over 30,000s MW of peaking capacity by end of 2004.Owns 1 trillion cubic feet of proven Natural gas reservesUses clean proven technologies: natural gas combined cycle and about 800 MWs of geothermal in Northern CaliforniaAbout $8.9 billion in revenues, $1.4 billion in operating profits before depreciation and amortization. At YE 2003, $27 billion inAssets and $17 billion in long-term debt and capital lease obligations.To learn more about Calpine, please visit www.calpine.com.

5

Power Plant PortfolioWill have About 30,000 MWs

At Year-end in 22 states3 Canadian Provinces,

and the UK

About 15 millionhomes @ 2kw/home

6

1,000 MW Plant @ 100% Capacity Factor, 24 Hrs per day, and 7 Heat Rate1

DAILY MONTHLY YEARLY

Days 1 30.4 365Total Hours

24 730 8,760

MWh’s 24,000 730,000 8,760,000mmBTUs 168,000 5,110,000 61,320,000

BCF’s 0.168 5.11 61.32MWhs @ $10 Spark

Spread

$240,000 $7,300,000 $87,600,000

Note 1: Heat Rate = Fuel Efficiency = 7000 BTUs/kWh = 7 million BTUs/MWh

7

Risk Controls at Calpine is…

The entire framework of policies, procedures, people, and information systems needed:– To prudently manage market, credit, and operative

(operations and operational) risks resulting from• physical and financial, standard and structured transactions

– To ensure that risks are taken consistent with the company’s risk appetite.

Corporate function independent of business units, which execute physical and financial standard and non-standard transactionsA daily provider of key decision-support and risk assessments produced with SAS tools.

8

Corporate Risk Controls Organization

Tactical Quality Assurance Groups Quantitative Analysis Group Compliance Decision Support Groups IS Groups

Risk Controls GroupHouston: Independent Role

Monitors Compliancewith Risk Management Policies andProcedures

Chief Risk OfficerSan Jose, CA

Risk Management Committee

Board of Directors

CorporateRisk Controls

Group Resides inHouston, Texas

9

Groups in Corporate Risk Controls 1. The Compliance Group

2. The Tactical Quality Assurance GroupsConsolidated and West RegionCentral Region, Back-Office, and External Price VerificationInternational and East RegionCredit and General Services

3. The Quantitative Analysis GroupsForward Commodity PortfolioIntra-month Commodity PortfolioCredit Portfolio (3rd party transactions)Financial Portfolio (currency swaps, interest rate swaps, etc.)

4. The Decision-Support GroupsAnalysis, Reporting, and DevelopmentMarket Intelligence and Price Reporting

5. The Systems Groups (Dotted line)Data warehousing maintenance, programming, and supportRisk Dimensions modeling and analytical supportPortal ReportingCollaborative server (eTAF) programming and support

10

Calendars:1. Compliance 2. Functional 3. Coordinated

11

Daily Risk Controls Cycle in a Trading and Marketing and Sales Environment

RiskControlsGroup

Risk Taking& Mitigating:

Standard dealsStructured transactions

RiskTolerances:Volumetric,P&L losses,

VaR

Risk Monitoring, Modeling, Measuring,and Reporting against compliance requirements

ComplianceQuality AssuranceQuantitative AnalysisDecision Support IS Support

Risk ManagementPolicies andProcedures

12

Risk Controls Tools1. SAS Data Warehouse. Central, easy to query, data

repository of all transactions and prices,2. Risk Dimensions. Analytical tool used to independently

verify MtM, verify open volumetric positions, compute VaR analyses, stress tests, etc.,

3. SAS Portal. Tool used to disseminate risk assessment reports via an intranet throughout Calpine

4. Collaborative Server. Intranet tool (Intraspect) that allows capture, collaboration, and approval of non-standard transactions.

5. SAS Enterprise Guide. Point and click querying and programming tools used for data analysis, programming and reporting.

13

…From Trades to Valuation, P&L Verification, and Risk Metrics– Data Flow and Capture

WRO Desk

ERO DeskTransactions

Confirmations

Portfolio CaptureNucleus Risk Decomposition

Risk Factors:Market quotes and

Extension of fwd curves

Valuation

RiskMetrics

Risk DimensionsVolatilities, Correlations;

And Positions, Models

Curve MangerVolatilities, Correlations;

And Positions, Models

Profitability:Accrual

MtM

Profitability:Accrual

MtMValue at Risk

Scenarios, etc.

1 Forwards2 Swaps3 Options4 Basis, etc

Forward PricesSpot PricesInterest RatesExchange RatesVolatility

Back OfficeScheduling

Mid-Office

IndependentRisk Controls

14

SAS Technology Being Deployed or Adapted Since January 2001

SAS DataWarehouse SAS Risk

DimensionsHigh-end Analytics

SASPortal

Daily Reports

Intraspect /Collaborative

Server

NucleusDeal Capture

And Valuation

CurveManager

StructuredTransactions

1

23

4

5

6

Deal ticket(Generated afterTAF is approved)

Trader QuotesBroker QuotesServices Quotes


Standard Trades:Intra-month and

Forward

RiskControls

Tools

15

Mirrors Transaction Data Flow

SAS DataWarehouse SAS Risk

DimensionsHigh-end Analytics

SASPortal

Daily Reports

Intraspect /Collaborative

Server

NucleusDeal Capture

And Valuation

CurveManager

StructuredTransactions1

2

Deal ticket(Generated afterTAF is approved)

3


Standard Trades:Intra-month and

Forward

6

4

Trader QuotesBroker QuotesServices Quotes 5

16

Calpine’s technology leverages SAS RD and Data Warehouse Analytical Capabilities

PROPRIET

Corporate Data Warehouse

SAS Analytics and SASRisk Dimensions

1. Risk Limits Monitoring2. Monte Carlo Simulation3. VaR by Counterparty4. Historical VaR5. Stress tests6. Time Series Analysis7. Exploratory Data Analysis8. Volatility estimations9. Correlation estimations10. Volumetric/Price/ Weather Response functions (in progress…)11. Component VaR

Risk Management and Trading Support

1 Decision Support2. Market Intelligence

TOOLS

17

SAS technology allows us …Slice, Dice, Graph, Summarize, and Model Portfolio

Components by Relevant Dimensions

Through Time

PricesVolatilities

CorrelationsP&LDelta

GammaThetaVega

Regions

Counterparties

DeliveryPeriods

Financial Instruments

Power and Gas

Traders

Spot and Forward:On PeakOff Peak

Weekends

Basis Indices

18

SAS Technology allows to move From Raw Data to

Market Knowledge Relatively Fast

Data Gathering

Data Validation and Clean Up

Data Analysis and Graphics

Correlations and Volatilities

Weather Sensitive Load Forecasts

Option Models and GreeksImplied Volatility Surfaces

Risk Assessment

Risk,Rewards and Risk Mgt. Risk Control based on Market Knowledge

Information AboutMarket BehaviorAnd Market Interrelationships

End-of-Day Prices and Positions Data

19

Sample SAS Portal ReportsMDDB VaR and MtM (Drill down tables and charts)Positions by Commodity and Delivery PeriodDaily MWh Forecasts by Power PlantSentinel (Daily summary of trading activity)Private Eye (Daily verification of trader quotes)Weekly Summary (Profitability, VaR, Hedge ratios, etc.)National Price Metric– Spark Spreads, Vols, CorrelationsWeekly Greeks Report (Portfolio deltas, gammas, etc.)Volatilities and CorrelationsVaR Back testing (VaR versus changes in MTM)VaR by Counterparty and Potential ExposureMany more analyses

20

Governance and Risk Controls

Calpine’s Board of Directors approves the Risk Management Policy.The Risk Management Committee (RMC) approves the Risk Management ProceduresManual and oversees commercial activities to ensure compliance with Calpine policies, risk tolerance, and objectives.Both, Risk Management Policies and Risk Management Procedures (RMPP), govern commercial activity, procedures, and ethicalemployee conduct.

21

Risk Controls, Governance, and Legal/Regulatory Environment

Risk Management Policies and ProceduresSOXDual Certification– Financial Statements– Control Environment

COSO FrameworkDemonstrate ComplianceProcess Documentation Standards– Complete– Accurate– Verifiable– Restricted

23Risk Controls is Independent of Commercial Business Units

24

Risk Controls Monitors or Assists others with:

Market and Liquidity Risks

Operative (operational and operations) Risks

Credit Risks

Volumetric Risks

Model and Measurement Risks

Regulatory/Legal Risks

25

RMPP: Summary of Key ElementsAdherence to trading within physical plant asset base.Risk Tolerance assessment (through SAS tools): – Notional volumetric power and gas limits by trade and

tier level.– Portfolio stop-loss limits (soft and hard)– Portfolio Value-at-Risk limits (soft and hard)

Trading personnel pre-assigned into tiered levels: – Six tiers for standard transactions, and– Three tiers for structured (i.e.,customized) transactions

Collaboration and Transaction Approval Form (eTAF) process for structured transactions must be completed electronically via the Collaborative server.

26

Risk Management Policies and Procedures -- Authorizations

Board

Risk ManagementCommittee

Authorized Markets, Products,and Instruments

Authorized Fuel, Marketing, and TradingPersonnel

Transactional Authorization Levels

Governance Governance

North America andEuropean energy and

weather markets

Electricity,Nat. Gas and LiquidsCrude, Distillates, and

Emission credits

27

RMPP: Standard and StructuredTransactions

Board


Transactional AuthorizationLevels (Fuels, Mktg, and Trading)

Structured and Standard TransactionsNotional Limits

Portfolio Stop-Loss and Value-at-Risk Limits

Governance Governance

28

Collaborative ServerIntraspect -- Structured Transactions

Used for collaboration on structured transactions and enterprise-wide, interdepartmental approval of transactions

Intraspect combines enterprise collaboration and knowledge management. It help us effectively support the eTAF process: – With cross-functional teams (legal, credit,trading,

structuring, etc) inside and outside the firewall– Through email -- the universal, mission-critical

enterprise application

29

RMPP: Structured TransactionsDue Diligence, Communication, Cooperation, and

Collaboration

Board





CreditStructuringAccounting

ConfirmationMid-office

ManagementLegal

FAS 133 ReviewExternal AuditorsInternal Auditors

Others

30

Portfolio Organization, Segmentation, and Metrics

International or DomesticMerchant or non-merchantStandard or non-standardPhysical or FinancialIntramonth or ForwardGeographicCommodity (Power or Gas)Business UnitsTraderCounterpartyVolumetric positions and ProfitabilityRisk Assessment (Value-at-Risk, Stress Tests, What ifs)

32

Sample Portfolio AttributesPower Plants (Natural Portfolio: Operation and Construction) Regions (West, Texas, Midwest, Southeast, Northeast, Calpine)Commodities (Power and Gas)Products (On-Peak, Off-peak, Weekend, Gas)Power Hubs about 40 and Gas Hubs About 60Delivery Periods by Curve: 42 (Jul’04-Dec’07), or 90 thru Dec’11

– Gas and Power Volumes by delivery period and Hub– Gas and Power Prices by delivery period and Hub– Gas and Power Volatilities by delivery period and Hub– Gas and Power Correlations by delivery period and Hub (I.e. power on

gas, gas on gas, power on power through delivery periods)Instruments (swaps, physical, options, spark spreads options, etc.)About Sixty-four Traders (Forward, Intra month, Schedulers)About 7000 transactions per month.CounterpartiesOthers

34

Thousand’sof

end-branches::::

Framework of Portfolio Elements(A case for a robust/flexible technology)

Northeast

West

Texas

CALPINE

On-Peak

Off-Peak

Weekend

Hubs DeliveryPeriods

Power Plants Products

Gas

Power

Gas

Instruments

Gas

Power

Prices,Volumes,

Volatilities,Correlations,

VaR,P&L,

Current & PotentialExposures

CounterpartiesCommodities

Storage

Swaps

Options

Jan 02

Dec 04

Dec 04

Jan 02

Tenn z6

HSC

ERCOT

Physical &Financial

REGIONSSixtyPer

Product

About Fifty

AEP

Reliant

Duke

BP

El Paso

Basis

Netting

36

Lessons Learned, “Gold Nuggets”, and Next Steps…

Stability of the Business Model has a direct impact and influence on the costs and life of the IS/IT solutions…It is very important to– “Get it right” at the business model level– Use flexible tools (such as SAS) that can be adapted

as the business model naturally evolves.

IS/IT solutions must be implemented with a “used and useful” standard…

37

Lessons Learned, “Gold Nuggets”, and Next Steps…

Profit and Loss Reconciliation can be a long, tough process, but very useful:

• Nucleus versus Risk Dimensions (We have created a symbiotic relationship of continuous improvement between both systems)

• Data warehouse proved and is extremely valuable!!

VaR validation at various levels• Enterprise-wide and regional• Portfolio (Natural, Hedge, etc.)• Counter party• Trader

Current and Potential Exposures with counterparties…

38

ConclusionsWe are very pleased with our SAS technology.– It is flexible and adaptable.– It supports ad hoc studies and research in addition to

production capabilities.It has been a difficult journey to get to the maturity level we have reached with SAS tools.We are confident our SAS technology will continue to serve us very well in the new energy business environment.Coordinated work with trained, experienced, committed personnel is absolutely essential…

39

Calpine’s SAS technology permits us to stay focused on Continuous Process Improvement

Efforts

Board





MeasuringMonitoringFacilitating

ReportingEnhancingEnforcing

Credit

Structuring

Accounting

Confirmation

Mid-office

Management

Legal

FAS 133 Review

External Auditors

Internal Auditors

Others

40

Additional Information

Calpine• www.calpine.com

Enrique Mejorada, VP Risk Controls• 713-830-8718 (direct)• [email protected]

Committee of Chief Risk Officers• www.ccro.org

COSO Framework• www.coso.org• www.erm.coso.org

INTRASPECT– Collaborative Server• www.vignette.com

mailto:[email protected]

risk controls and use of sas tools at calpine controls and use of sas tools at calpine ... sas...

Documents