Risk Management – Participating in Cap and Trade Auctions

VERONICA HICKSFEBRUARY 19, 2014

New Regulations – New Risks• Administrative Risk

• Internal Controls

• Market Observations

• Managing a Commodity

Register for Auction

• Social Security Number• Driver’s License Number• Home Address and Telephone• Personal Bank Account Statement

TRAINING

•Mock Auction

•Regulations

•Bidder’s Conference

FINANCIAL

•Letter of Credit delivered

•Payment for Allowances

•Overlapping time periods

Internal Controls

• Segregation of duties

• Develop bidding strategy

• Execute strategy

• Validate execution

• Report to management and stakeholders

Auction 1 ResultsNovember 2012

Vintage 2013 Allowances

• 23 million allowances for sale and sold

• Slightly more demand than allowances

• Reserve : $ 10.00 Settlement: $

10.09

Vintage 2015 Allowances

• 39.45 million allowances for sale

• Only 14% sold

• Reserve and Settlement : $ 10.00

Market Observations – Auction 1

• Dominated by entities with compliance requirements

• Demand closely matching allowances

• Uncertainty about lawsuits

• Concern about long term viability

• Lack of resources

• Absence of hedging policies

• Ties up capital

Auction 5 Results November 2013

Vintage 2013 Allowances

• 16.6 million allowances for sale and sold• Twice as many bids than allowances• Reserve: $ 10.71 Settlement: $ 11.48

Vintage 2016 Allowances• 9.5 million allowances for sale and sold• Reserve: $ 10.71 Settlement: $ 11.10

Market MaturingAuction 5• Up to 14% of bidders from non-compliance entities

• Bids strongly outpaced available allowances Secondary Market• Prices less volatile

• Volume of allowances trading has skyrocketed

• 200,000 allowances trading late 2012 to over 2 million in 2014

Balancing the Risk:Management of Allowance

Inventory

• CDWR has pool of low cost allowances from first auction

• Auction reserve price rises CPI + 5% each year• Trade / sell a 2013 vintage allowance on the

secondary market ?• Differential as high as $ 4.37. Currently @ $ 1.75

per allowance

Alignment with risk policy and business function?

Summary

• Need dedicated resources• Clear separation of duties• Alignment with your risk

tolerance• Manage the commodity

Veronica Hicks

Chief, State Water Project Power and Risk Office

California Department of Water Resources

Veronica.Hicks@water.ca.gov

916.574.1295

Sacramento, California