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Risk Management – Participating in Cap and Trade Auctions

Risk Management – Participating in Cap and Trade Auctions. Veronica hicks February 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

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Risk Management – Participating in Cap and Trade Auctions

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  1. Risk Management – Participating in Cap and Trade Auctions Veronica hicks February 19, 2014

  2. New Regulations – New Risks • Administrative Risk • Internal Controls • Market Observations • Managing a Commodity

  3. Register for Auction Social Security Number Driver’s License Number Home Address and Telephone Personal Bank Account Statement

  4. Training • Mock Auction • Regulations • Bidder’s Conference

  5. Financial Letter of Credit delivered Payment for Allowances Overlapping time periods

  6. Internal Controls Segregation of duties Develop bidding strategy Execute strategy Validate execution Report to management and stakeholders

  7. 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

  8. 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

  9. 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

  10. Market Maturing Secondary Market Prices less volatile Volume of allowances trading has skyrocketed 200,000 allowances trading late 2012 to over 2 million in 2014 Auction 5 Up to 14% of bidders from non-compliance entities Bids strongly outpaced available allowances

  11. 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?

  12. Summary Need dedicated resources Clear separation of duties Alignment with your risk tolerance Manage the commodity

  13. 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

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