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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
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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.
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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
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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.
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Power Plant PortfolioWill have About 30,000 MWs
At Year-end in 22 states3 Canadian Provinces,
and the UK
About 15 millionhomes @ 2kw/home
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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
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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.
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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
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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
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Calendars:1. Compliance 2. Functional 3. Coordinated
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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
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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.
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…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
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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
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4
5
6
Deal ticket(Generated afterTAF is approved)
Trader QuotesBroker QuotesServices Quotes
StructuredTransactions
Standard Trades:Intra-month and
Forward
RiskControls
Tools
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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)
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StructuredTransactions
Standard Trades:Intra-month and
Forward
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Trader QuotesBroker QuotesServices Quotes 5
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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
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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
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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
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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
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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.
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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
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23Risk Controls is Independent of Commercial Business Units
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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
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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.
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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
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RMPP: Standard and StructuredTransactions
Board
Risk ManagementCommittee
Transactional AuthorizationLevels (Fuels, Mktg, and Trading)
Structured and Standard TransactionsNotional Limits
Portfolio Stop-Loss and Value-at-Risk Limits
Governance Governance
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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
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RMPP: Structured TransactionsDue Diligence, Communication, Cooperation, and
Collaboration
Board
Risk ManagementCommittee
Transactional AuthorizationLevels (Fuels, Mktg, and Trading)
Structured and Standard TransactionsNotional Limits
Portfolio Stop-Loss and Value-at-Risk Limits
CreditStructuringAccounting
ConfirmationMid-office
ManagementLegal
FAS 133 ReviewExternal AuditorsInternal Auditors
Others
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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)
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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
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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
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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…
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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…
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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…
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Calpine’s SAS technology permits us to stay focused on Continuous Process Improvement
Efforts
Board
Risk ManagementCommittee
Transactional AuthorizationLevels (Fuels, Mktg, and Trading)
Structured and Standard TransactionsNotional Limits
Portfolio Stop-Loss and Value-at-Risk Limits
MeasuringMonitoringFacilitating
ReportingEnhancingEnforcing
Credit
Structuring
Accounting
Confirmation
Mid-office
Management
Legal
FAS 133 Review
External Auditors
Internal Auditors
Others
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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