Best practice in the Design of a Trading Organisation

1. Best practice in the Design of a Trading Organisation • Design full set of trading policies and procedures at start-up setting out: • policy framework • organisational structure • delegation of authority • credit (and market) risk control framework • procedures (to control transaction processes, internal control systems and significant changes to management information and other IT systems) in a single Policies and procedures (operating) manual, available to all staff • strategic issues must be resolved up front… • Then begin systems appraisal/selection immediately… • Are vendor packages which do all key trading functionality: trade capture, risk reporting and settlement, but bespoke systems may be preferable.. • And spreadsheet systems may be necessary initially if you want to get started quickly…

2. Execution Plan Our Overall Approach • Our approach envisages 3 Phases of Implementation • Phase 1: Introduction to Trading, development of outline manual and implementation plan. The phase will begin with a seminar to introduce trading concepts to the management of the new Trading organisation. During this Phase we will identified and seek to resolve with management/the Board some key strategic issues which must be made immediately before the detailed design and implementation process (Phase 2) can begin. We will also set out a range of other issues, in the form of an outline manual, which will need to be resolved in Phase 2. Finally, we will also set out an implementation plan for Phase 2 and 3. • Phase 2: Detailed design of Trading Organisation. This would include the design of a comprehensive risk management framework, organisation structure, specification of markets and instruments, establishment of a book and limit structure, definition of appropriate risk measurement methodologies, controls and reporting and IT systems appraisal and selection. At this stage we could also develop a business plan which will present the projected financials based upon the best available information; • Phase 3: Ongoing Assistance in the operation of Trading Organisation. This phase is likely to consist of trading systems development

3. Execution Plan Strategic issues for priority resolution in Phase 1 In Phase 1 we would work with management to set out the key strategic choices which the Board/Executive management must make, which will shape the design of the Trading Organisation in Phase 2. We will develop an outline policy manual (template) and identify priorities and issues for resolution The priority issues which need to be addressed in Phase 1 include: • Corporate vision. Definition of the role of trading within the organisation and how it fits into the existing corporate structure. • Trading mandate and objectives, taking into consideration corporate risk appetite. • the types of activity – such as asset backed trading and hedging, arbitrage, speculative trading etc; • the likely volumes of trade in these activities in the short and medium term; • the types of products to be traded in generic terms.

4. Execution Plan Other key issues in the design of a Trading Organisation In the outline manual we will also set out the key issues (and options), which should be resolved in Phase 2: • Role and responsibilities. Corporate governance arrangements, terms of reference for a Risk Management Committee, the role of the corporate treasury, and the terms of reference for key positions within the overall risk management framework. • Design of Organisational Structure. Establishment of Trading Organisation including the structure and composition of the front, middle and back offices, including the level of staffing required and job descriptions • Markets and instruments, the approach that should be taken to approve the types of trading instruments to be used and the markets in which each instrument can be traded; • The book structure, the outline structure of the books and the basis for transferring positions between books ; • Credit management and controls, which function should be responsible for credit risk management;

5. Execution Plan Other key issues in the design of a Trading Organisation (2) • Measurement and valuation. Identification of the key areas to be captured in reporting of risk, performance and monitoring of trading limits including outlining the possible methodologies to be used for measuring market risks and calculating Value at Risk/Profit at Risk; • Performance measurement, the basis of measuring performance and defining the criteria for good (or bad) performance; • Management reporting, the key reporting requirements critical for the effective management of Trading Organisation. This would include: a brief description of the content of the reports; their frequency of issue; the parties responsible for producing them; and who should receive the report; • Regulation Identification of the activities necessary to manage the interaction of Trading Organisation with regulatory authorities, including identification of areas of regulation for targeting for lobbying.

6. Execution Plan Phase 1 deliverables During the course of Phase 1 we would deliver: • Week 4 • Initial workshop with Trading Organisation management to discuss trading and concepts and initiate the process of strategic planning; • An outline “trading and risk management manual”, intended to set out the “recipe” for the development of more detailed policies, procedures, organisation and systems; • Week 8 • An plan for the implementation of the Trading Organisation; • Specification of profiles for key staff to assist in recruitment of key staff (who will be necessary for Phases 2 and 3)

7. Execution Plan Key Phase 2 tasks The key tasks we will undertake in Phase 2 are: • Resolution of key policy issues (as set out in the Phase 1 outline policy manual) • Design of key trading risk management procedures. We will work with Trading organisation staff to set out the key high level procedures which will be required to manage trading risks. The procedures are likely to include deal capture and logging, required notifications to Market and System Operators, and the production of key management reports. • IT Systems and infrastructure. In Phase 2 we would seek to appraise different trading systems and select a vendor (or make the decision to opt for a bespoke system). We discuss this task in more detail in the following slides. • Staffing and training in Trading and Risk Management. Definition job descriptions for all staff (in addition to any priority descriptions written in Phase 1), assistance with recruitment as required, identification of appropriate training for Trading Organisation staff by level and responsibility. • Regulation. Assistance in the identification and initiation of strategies to address critical elements of regulation affecting trading activities • Business plan development (for the Trading organisation)

8. Execution Plan IT Systems and infrastructure: Systems architecture • The systems architecture defines the footprint of each application in the target trading solution. This is defined in two ways: Modify architecture based on selected system(s) Develop target architecture • Identify manual processes • Identify data sources and required flows • Determine candidate software • Identify technology platform, hardware and software standards • Incorporate best practice • Assess impact of short-listed system(s) on desired architecture • Make necessary adjustments to target architecture to facilitate selected system(s) • ‘Logical‘ architecture • ‘Physical’ architecture

9. Execution Plan Phase 2: Summary of deliverables • Specific deliverables will include: • A full policies and procedures manual; • Detailed organisation & profiles for specialist staff and assistance in recruitment; • Documentation to support decisions on IT Systems and infrastructure: • A business requirements documents • A detailed set of technical requirements that the systems must fulfil • Documentation of systems selection decision • Documentation to record the required systems architecture • An implementation plan for Phase 3 • Specific training activities • A Business plan for the Trading organisation

10. Execution Plan Phase 3 tasks • PwC can offer business support services during the initial phases of operation, the scope of which will be analyzed in Phase 2. These services could include: • development/implementation of chosen trading system(s) • operation of certain administrative activities; • continuing development of risk management and control activities; • updating of business strategies as market develops; • other activities to be identified.

11. Execution Plan Phase 3: Summary of deliverables • Specific deliverables will include: • A full policies and procedures manual; • Detailed organisation & profiles for specialist staff and assistance in recruitment; • Documentation to support decisions on IT Systems and infrastructure: • A business requirements documents • A detailed set of technical requirements that the systems must fulfil • Documentation of systems selection decision • Documentation to record the required systems architecture • An implementation plan for Phase 3 • Specific training activities • A Business plan for the Trading organisation

12. Section 1 Trading Mandate Section 2 Roles & Responsibilities Risk Management Framework Responsibility for Risk Management Risk Management Committee Terms of reference for key risk management positions Section 3 Risk Categories Market risk Credit risk Operational risks Other risks Section 4 Approved Counter-parties Section 5 Instruments & Markets Approved market & instrument matrix Authorised Trader matrix Approval of new trading instruments & markets Approval of structured transactions Section 6 Authorisation & Limits Book & Limit structure Profit at Risk (PaR) Limits Exposure Limits Transaction Limits (Stop Loss Limits) (Credit controls / procedures) (Currency Limits) Section 7 Forecasting & Risk Measurement Forecasting: Capture Open Position Demand Forecasting Generation Forecasting Long term contracts (volume) Risk Measurement: PaR Stress Test Determination of Forward Curve Back Testing & Validation “Quick Start” TemplateOverview of policies and procedures

13. Section 8 Management Reporting Transaction Reports Risk Management & Position Reports Exception Reports Performance Reports Section 9 Operational Procedures Process Maps for trading organisation EMC procedures Risk Management procedures Section 10 Systems Systems upgrades / changes to existing systems Data Management Contingency Planning Section 11 Document Control & Compliance Ownership Document Control Change Procedures Compliance “Quick Start” TemplateOverview of policies and procedures

14. Markets Non-Europe UK Germany Other Europe Electricity Gas Electricity Gas Electricity Gas Electricity Gas         Trading strategy Risk Management methods and controls         Systems implementation/ configuration      Services Policies and Procedures         Performance measurement         Trading function development         Specialist assurance services    Similar Projects III. Similar Projects

15. Similar Projects III. Key Clients • Experience reflects projects that ETRM has led or played a central role in: Non-Europe UK Germany Other Europe • ScottishPower • National Grid Company • PowerGen • London Electricity • InterGen • Centrica • TXU/Eastern • Conoco • Amerada Hess • Enron (in administration) • Shell • PreussenElektra • ENBW • DB Energie • Neckarwerke Stuttgart • Nordic Powerhouse • (HEW/Vattenfall) • Contigas • Several Statwerke • Verbund • Norsk Hydro • Union Fenosa • UNA • GdF • CEZ • EGL • Statkraft • Electricite de France • ENI • EdP Brazil • Pacificorp

16. Team Structure Profile of key ETRM staff • Charles Jenne • Partner in Energy and Utilities for PwC consulting and UK sponsoring partner for Energy Trading. Currently leading a large team in the design and implementation of the reorganisation of a leading UK company (with international coverage) in order to create a focus on merchant energy activities. • In addition to energy trading, long track record on advising on energy market and transmission access design and implementation in the UK and in Europe. Also leads our regulatory advise to major clients (and has been engaged as a personal regulatory advisor to the ScottishPower Executive Team). • Soren Lautrup • Director for Energy Trading and Risk Management for PwC consulting in Europe. Leads PwC's European ETRM team specialising in advising power and gas companies on issues such as trading strategy, development/implementation of risk management frameworks, risk valuation and systems integration. • Recently, directed PwC's work on energy trading and risk management for several large clients in the UK, Spain, Austria, the Nordic region and Brazil. Prior to joining PwC, led industry-wide negotiations on long term vesting contracts, which underpinned the subsequent privatisation of generators and distribution companies in the State of Victoria, Australia. • Robin Kent • Principal Consultant with ten years hands-on experience of Energy trading across Crude Oil, Oil Products and Natural Gas with both Shell and Conoco. Robin was Manager, UK Natural Gas Supply and Trading and was directly responsible for developing their supply and trading department for the new UK gas market. • Since joining PwC, Robin has led a 12 month implementation programme of a new trading function to support National Grid Company’s Balancing Services in preparation for the New Electricity Trading Arrangements. Currently he is leading a major overhaul of the trading and risk management strategy and organisation for a major international energy company.

17. Team Structure Profile of key ETRM staff • Espen Odderbo • Principal consultant with over 8 years industry experience in the Nordic power sector. Joined PwC from Statkraft SF where he was responsible for trading related business development, having also been the company‘s trading manager for nearly 3 years and and also responsible for structured deals. • Since joining PwC, advised a number of clients in the Norwegian power sector and is also the managing director for ePower (electronic multi broker electricity exchange). Most recently advised a leading Norwegian based international company on risk management issues. • Amanda Woodbine • Principal Consultant with over 12 years of commercial experience in the UK and international energy sectors. Joined PwC from BP Amoco, where, as Director of Business Development, she led multifunctional internal and joint venture teams in identifying and negotiating a wide variety of high value commercial deals across the entire gas value chain. Amanda also initiated and developed BP Amoco’s UK gas trading business. . • Since joining PwC, advised clients in the UK, Germany, Austria, Spain, as well as internationally on energy trading and risk management, commercial strategy and negotiations. Recently, she has been advising a large integrated utility on the design and implementation of a power trading and risk management organisation. • Andrew Chattrabhuti • Principal Consultant with over 8 years consulting experience in the energy sector • Has advised both UK and overseas clients on trading and risk management, commercial strategy and a range of contractual issues. His key experience includes advising a leading UK power company with key aspects of the restructuring of their trading organisation and the development of trading performance measures. • He has managed a trading organisation start-up implementation for Electridade de Portugal.

18. Team Structure Profile of key ETRM staff • Hans-Peter Balle • Principal consultant with over 16 years experience in the UK and international energy sectors. Hans Peter has worked extensively in the areas of trading, risk management and central markets. Prior to joining PwC, he was with Shell Energy and Exploration with responsibility for natural gas contracting. • Currently working with EdF on the design and implementation of an auction process for the 6GW capacity auction. • Stephen Halliday • Principal Consultant with over 10 years of experience in the power sector. Stephen joined PwC from Seeboard where he was the Electricity Trading Manager. • Since joining PwC Stephen has advised both UK and overseas clients on trading and risk management, commercial strategy and a wide range of contractual issues. Key assignments include acting as lead advisor to a large German utility on the implementation of a trading system; development and implementation of a risk management framework for a UK based international utility and secondment in Eastern/TXU’s middle office. Currently Stephen is seconded to the CFO of a large international power company where he is advising on the establishment of an integrated risk management framework for local and overseas operations. • Danny Burgess • Senior Consultant recently recruited by PwC. He has over 10 years of trading experience in the international financial markets and helped set up the global trading capability for a top Japanese investment bank. • Since joining PwC, Danny has been involved in the design of a new organisation structure for the energy trading activity of a major UK power company and has undertaken a major overhaul of the credit risk management for another UK power company.