WHEREAS, in order to provide electricity to its customers economically, the City Light Department routinely buys and sells wholesale energy products; and

WHEREAS, the City Light Department's participation in wholesale energy markets necessarily exposes the City Light Department to risk, including market and credit risk; and

WHEREAS, the utility industry Best Practices require that the City Light Department have a clear and binding statement of policy to govern the management of those risks; and

WHEREAS, the utility industry Best Practices further require that such policies be endorsed by the City Light Department's governing body; NOW, THEREFORE,

BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SEATTLE, THE MAYOR CONCURRING, THAT:

Section 1. The Wholesale Energy Risk Management Policy as developed by the City Light Department's management and attached hereto as Exhibit A is endorsed by the City Council and is established as the City of Seattle's policy governing the conduct of wholesale energy risk management at the City Light Department.

Adopted by the City Council the ____ day of ____________________, 2008, and signed by me in open session in authentication of its adoption this________ day of ______________________, 2008. _________________________________ President ___________of the City Council

THE MAYOR CONCURRING: _________________________________ Gregory J. Nickels, Mayor

Filed by me this ____ day of ________________________, 2008. ____________________________________ City Clerk

Exhibit A: Seattle City Light Risk Management Policy 7/1/08 Version #5 t

EXHIBIT A:

SEATTLE CITY LIGHT Wholesale Energy Risk Management Policy August 25, 2008

Seattle City Light 700 Fifth Avenue, Suite 3300 PO Box 34023 Seattle, WA 98124-4023 Phone (206) 684-3200 * Fax (206) 684-3158

Table of Contents

1. INTRODUCTION 1 1.1. AUTHORITY 1 1.2. SCOPE 1 1.3. PURPOSE 2

2. ORGANIZATION & GOVERNANCE 2 2.1. INDEPENDENCE AND SEGREGATION OF DUTIES 2 2.2. ROLE OF THE SUPERINTENDENT 3 2.3. ROLE OF THE CHIEF FINANCIAL OFFICER (CFO) 3 2.4. ROLE OF THE RISK OVERSIGHT COUNCIL (ROC) 3 2.4.1. RISK OVERSIGHT COUNCIL STRUCTURE 4 2.4.2. RISK OVERSIGHT COUNCIL RESPONSIBILITIES 4 2.5. ROLE OF THE POWER MANAGEMENT DIVISION (PMD) 5 2.5.1. POWER MANAGEMENT DIVISION RESPONSIBILITIES 5 2.5.2. POWER MANAGEMENT DIVISION REPORTING RELATIONSHIP 6 2.6. ROLE OF THE POWER MANAGEMENT EXECUTIVE (PME) 6 2.7. ROLE OF THE RISK OVERSIGHT DIVISION (ROD) 6 2.7.1. RISK OVERSIGHT DIVISION RESPONSIBILITIES 6 2.7.2. RISK OVERSIGHT DIVISION REPORTING RELATIONSHIP 7 2.8. RISK POLICY APPROVALS AND AMENDMENTS 7 2.9. COMPLIANCE WITH LAWS AND REGULATIONS 8 2.10. MISREPRESENTATION & CONFLICT OF INTEREST 8 2.11. POLICY VIOLATIONS 8

3. RISK MANAGEMENT APPROACH 8 3.1. RISK MANAGEMENT PHILOSOPHY 8 3.1.1. MARKET RISK POLICIES 9 3.2. FORWARD HEDGING STRATEGIES AND PLANS 10 3.2.1. STRATEGIES 11 3.2.2. PLANS 12 3.3. RISK LIMITS 12 3.3.1. VOLUMETRIC LIMITS 13 3.3.2 RISK METRIC TOLERANCE LIMITS 13 3.3.3 RISK LIMIT CHANGES 13 3.4. DELIVERY POINTS 14 3.5. TRANSACTION TYPES 15 3.6. CREDIT RISK MANAGEMENT PHILOSOPHY 18 3.6.1. CREDIT RISK POLICIES 18 3.7. PROCEDURES MANUAL 19 3.8. RISK REPORTING 19 3.9. EXTERNAL ASSESSMENT 19

APPENDIX A 21 APPENDIX B 23 APPENDIX C CITY LIGHT'S ENERGY RISK MANAGEMENT ORGANIZATION CHARTS 24 APPENDIX D GLOSSARY OF TERMS 26 APPENDIX E COMPLIANCE STATEMENT 28

1. Introduction

City Light faces significant uncertainty regarding both the quantity of power available to the utility and the range of prices prevailing in the wholesale power market. Under all but the most extreme water conditions, City Light's supply of power exceeds its retail demand. This excess, or surplus, power is sold in the wholesale power market, and the revenue is used to offset costs that would otherwise be borne by City Light's retail ratepayers. City Light can sell its surplus power in the "spot market" as this surplus power becomes available, or City Light can sell some of its expected surplus power in the "forward market" for future delivery. Both practices involve risks. Waiting to sell surplus power in the spot market exposes City Light to the possibility of selling at low prices if the wholesale market is flush with power. Selling expected surplus power in the forward market mitigates this risk, but exposes City Light to the possibility of having to purchase power at high prices in order to meet these forward commitments (as well as retail demand) in the event actual supplies turn out to be significantly less than projected. The policies and procedures outlined below are designed to manage City Light's overall wholesale revenue risk by specifying a risk metric, a set of rules to guide decisions concerning the sale of power in the spot and future markets, and a clear statement of roles and responsibilities of City Light's divisions and personnel in the management of wholesale revenue risk.

1.1. AUTHORITY

The City Light Department of the City of Seattle ("City Light") operates under the authority of the Mayor and City Council of the City of Seattle ("City"). City Light is charged by the City with operating its power supply resources, transmission agreements and electric system to meet the power needs of its customers. The City recognizes that because of the nature of its customer demand and power supply portfolio, City Light will experience imbalances between the two and must therefore transact in the wholesale energy markets for energy services and products to achieve balance.

In adopting this Wholesale Energy Risk Management Policy ("Risk Policy") document by City Resolution (attached as Appendix A), the City approves this Risk Policy and delegates the authority and responsibility for its implementation to the Superintendent of City Light and his or her designees.

1.2. SCOPE

This Risk Policy applies to all physical wholesale energy purchases and sales, transmission services, and ancillary services pursuant to Seattle Municipal Code Section 21.49.130. Descriptions of physical transactions commonly utilized by the Power Management Division are maintained in the Wholesale Energy Risk Management Procedures Manual. This Policy expressly prohibits the use of financial energy derivative transactions.

1.3. PURPOSE

The purpose of this Risk Policy is to formally establish a Wholesale Energy Risk Management program and document the framework utilized by City Light to meet the electricity needs of its customers, manage the risks inherent in its wholesale energy markets portfolio, and minimize the variance in the value of surplus power and transmission assets. As such, this document describes City Light's energy risk management functional organization (Appendix C, City Light's Risk Organization), roles and responsibilities, and delegations of authority that will govern how City Light conducts business in the wholesale energy markets.

The specific operating procedures and parameters for implementing this Risk Policy are detailed in the Wholesale Energy Risk Management Procedures Manual ("Procedures Manual") to be reviewed and approved by the Risk Oversight Council ("ROC"), a body within City Light established by this Risk Policy that reports to the Superintendent. The existing procedures are attached for informational purposes only as Appendix B.

Please refer to Appendix D, Glossary of Terms, for definitions of terms contained in this Policy and used by City Light in its energy risk management efforts.

All City Light employees in relevant functional areas are expected to comply with, and acknowledge their understanding of both this Risk Policy and the associated Procedures Manual as it applies to their current position at City Light. For additional information please refer to Section 2.11. Policy Violations.

2. ORGANIZATION & GOVERNANCE

2.1. INDEPENDENCE AND SEGREGATION OF DUTIES

An effective risk management and compliance program requires clear segregation of duties, reporting lines, and incentives between functions and personnel who originate and manage risk, and those who analyze, monitor and report risk.

City Light has developed a risk management and risk oversight organizational structure to support this requirement (see Appendix C). The core elements of the structure for risk management purposes are:

* Superintendent * Chief Financial Officer ("CFO") * The Risk Oversight Council ("ROC"); * The Power Management Division ("PMD"); and * The Risk Oversight Division ("ROD").

The following sections define the wholesale energy risk management roles and responsibilities of the individuals and groups listed above.

2.2. ROLE OF THE SUPERINTENDENT

Concerning wholesale energy risk management efforts, the Superintendent is responsible for:

* Ensuring compliance with this Policy;

* Ensuring adequate internal controls exist to safeguard City Light's financial integrity and its retail customers with respect to wholesale energy purchase and sales activities;

* Ensuring that all wholesale energy purchase and sales activities are monitored by City Light staff not directly involved in executing the transactions;

* Resolving Risk Oversight Council vacancies in the best interests of the Utility; and

* Making final decisions on risk management issues when the Risk Oversight Council cannot reach a consensus.

2.3. ROLE OF THE CHIEF FINANCIAL OFFICER (CFO)

In regards to wholesale energy risk management efforts, the CFO is responsible for:

* Serving as the Chair of the Risk Oversight Council, leading the ROC meetings

* Briefing the Superintendent on City Light's risk exposures and ROC actions on a regular basis.

* Presenting requests for changes in volumetric and risk metric limits contained in this Policy to the Superintendent.

* Setting the counterparty credit limit threshold; this is defined as the maximum secured and unsecured credit limit that may be extended to any counterparty.

* Recommending to the ROC the methodology used to compute the credit that will be extended to any counterparty.

* Suspending transacting with a counterparty at any time due to concerns about the counterparty's credit-worthiness or ability to fulfill the terms of a transaction.

2.4. ROLE OF THE RISK OVERSIGHT COUNCIL (ROC)

The ROC has the authority and responsibility for approving and implementing the procedures and parameters contained in the Procedures Manual consistent with this Risk Policy. It is also responsible for setting City Light's target risk profiles, leading City Light's energy risk management efforts on a path of continuous improvement, and directing the development of City Light's risk management strategy.

2.4.1. RISK OVERSIGHT COUNCIL STRUCTURE

The ROC shall be comprised of the following City Light employees or their functional business equivalents: Chief Financial Officer (Chair), Power Supply and Environmental Affairs Officer, Director of Risk Oversight, and the Power Management Executive (non-voting), an observer from outside City Light to be appointed by the Mayor and at the Mayor's discretion (non-voting). The Power Management Executive is required to attend ROC meetings and be an active participant, but will not have a vote.

Any three of the four City Light members of the ROC will constitute a quorum. The ROC will make decisions and take actions by a simple majority vote. If the ROC reaches an impasse that cannot be addressed through a vote, the Chair will refer the issue to the Superintendent by the end of the next business day for resolution.

The ROC shall meet no less than twice per calendar month. Attendance of ROC meetings shall be mandatory for appointed members. Member attendance shall be recorded in the ROC meeting minutes. Any member of the ROC can request an emergency meeting of the ROC to address circumstances or issues that may require immediate attention.

Alternates are not allowed on the ROC unless special circumstances limit a member's participation. Under those circumstances, the member may designate a temporary alternate provided, however, that the ROC must approve the alternate and the term for which the alternate will replace the sitting member. In cases where a member of the ROC leaves the employ of City Light, the Superintendent will resolve the Council vacancy on an interim basis at his discretion.

The Risk Oversight Director or his or her designee will act as Secretary to the ROC and will document all meetings and actions taken by the ROC in meeting notes that will be distributed to ROC members for their review and acceptance. ROC-approved meeting notes will be distributed by the Director of Risk Oversight to the Superintendent, ROC members, Mayor and Council central staff.

2.4.2. RISK OVERSIGHT COUNCIL RESPONSIBILITIES

The ROC is responsible for:

* Reviewing and approving the Procedures Manual and changes to it;

* Reviewing and approving risk management strategies and hedging plans to be implemented by the Power Management Division;

* Reviewing and providing comment to the CFO concerning the methodologies used to establish counterparty credit limits;

* Monitoring and assessing compliance with this Policy and associated procedures;

* Discussing and pre-approving limit exceptions when appropriate;

* Discussing Policy violations and taking corrective action to minimize related losses or increased risks as appropriate;

* Reviewing this Policy on an annual basis and recommending changes to the Superintendent by July 1;

* Discussing elements of energy risk management best practices and developing a City Light opinion of their specific practicality ; and,

* Conducting other activities relevant to the implementation and oversight of this Policy and related procedures.

* Providing a timely summary of ROC accomplishments for the past year and set of goals for the upcoming year to the Superintendent. This summary will also be provided to Mayor and Council staff.

2.5. ROLE OF THE POWER MANAGEMENT DIVISION (PMD)

The PMD is led by the Power Management Executive and manages the generation portfolio on behalf of City Light. It transacts in the physical wholesale energy market as needed to balance the supply of electricity to demand and to mitigate the risks inherent in managing the system, subject to the limitations established by this Risk Policy and the ROC and in accordance with established procedures.

2.5.1. POWER MANAGEMENT DIVISION RESPONSIBILITIES

The responsibilities of the PMD include:

* Meeting City Light's customer load obligation;

* Managing City Light's generating resources, contracts and transmission agreements to meet its hourly, daily, balance of month and forward month obligations;

* Extracting value from City Light's power supply portfolio and transmission contracts with due consideration of risk;

* Formulating and recommending risk mitigation strategies and hedging plans to the ROC that are consistent with City Light's objectives and this Risk Policy;

* Implementing strategies and hedging plans approved by the ROC; and,

* Other activities relevant to the daily management of a power system.

2.5.2. POWER MANAGEMENT DIVISION REPORTING RELATIONSHIP

The Power Management Executive, reports directly to the Power Supply and Environmental Affairs Officer of City Light.

2.6. ROLE OF THE POWER MANAGEMENT EXECUTIVE (PME)

Regarding the Wholesale Energy Risk Management Policy, the Power Management Executive is responsible for:

* Management of all power market activities conducted by City Light

* Development of hedging strategies and plans

* Discussing and reviewing City Light's power marketing activities with the ROC

* Ensuring Power Management Division staff complies with this Policy; and,

* Report risk limit violations to the Director of Risk Oversight and the ROC immediately

2.7. ROLE OF THE RISK OVERSIGHT DIVISION (ROD)

The ROD is led by the Director of Risk Oversight, and serves as the middle office in City Light's energy risk management organization. The ROD's responsibilities include preparing reports covering City Light's energy portfolio position, credit exposures, and policy and procedure compliance. The ROD also leads the development of business process and internal control improvements throughout the energy transaction lifecycle. The ROD will provide risk assessment input to the PMD, but will maintain a strict separation of duties. Under no circumstances will members of the ROD be given the authority to enter into wholesale energy transactions on behalf of the utility.

The Director of Risk Oversight will meet with the City Council or Council's staff as requested to review recent City Light risk management activities.

The Director of Risk Oversight will offer to appear before the Energy & Technology Committee or its functional equivalent on a quarterly basis to inform Council members of recent ROC activities and risk management project updates.

The Director of Risk Oversight will act as temporary chair of the ROC during the CFO's absence.

2.7.1. RISK OVERSIGHT DIVISION RESPONSIBILITIES

The responsibilities of the ROD include the following:

* Assess and monitor compliance with policy and established procedures;

* Report violations of limits or policy and recommend remediation as necessary;

* Monitor market and counterparty events in order to anticipate changes in City Light's risk profile;

* Develop, and propose practical improvements to processes and controls within the transaction lifecycle

* Recommend specific risk limits consistent with the utility's risk management objectives and risk tolerance;

* Engage the ROC in discussions regarding events or developments that could expose the utility to potential opportunities and losses;

* Conduct credit scoring and analysis of City Light's existing and proposed counterparties;

* Recommend credit limits for new and active counterparties to the Chief Financial Officer;

* Negotiate and manage counterparty credit enhancements;

* Assist the Accounting Division to ensure proper accounting treatment of transactions in the financial statements;

* Issue periodic reports on policy compliance, hedging plan status, market position, and risk profile (For additional detail please refer to Section 3.6. Risk Reporting);

* Report the utility's transaction prices daily to specific index price developers;

* Evaluate the effectiveness of the risk metrics employed;

* Validate and test models used in risk management to ensure that market and credit risks are accurately quantified; and,

* Research, develop, test, and implement risk measurement methodologies and models;

2.7.2. RISK OVERSIGHT DIVISION REPORTING RELATIONSHIP

The head of the ROD, the Director of Risk Oversight, reports directly to the Chief Financial Officer and also has a direct line of communication to the Superintendent.

2.8. RISK POLICY APPROVALS AND AMENDMENTS

This Risk Policy will become effective upon the expressed approval of the City. Each year prior to July 1, the ROC will review the elements of this policy and present any recommended changes to the Superintendent. In reviewing the policy and recommending modifications, the ROC will consider any material changes in the markets in which City Light transacts, in City Light's business activities and in the financial circumstances of the utility. Recommendations shall include a complete description of the reason for such changes and their anticipated impact.

2.9. COMPLIANCE WITH LAWS AND REGULATIONS

Employees shall comply with all applicable laws and regulations including, but not limited to, Anti-Market Manipulation rules established by Congress and the Federal Energy Regulatory Commission. Employees should be familiar with the relevant laws and regulations and seek clarification from the City's legal department as required. The City's legal department shall maintain up-to-date legal and regulatory guidelines that govern the purchase and sale of all authorized products, and train employees as needed. However, it shall remain City Light's responsibility to ensure that its employees are adequately trained.

2.10. MISREPRESENTATION & CONFLICT OF INTEREST

City Light personnel shall not withhold or conceal information regarding transactions or risk management activities from any person responsible for the accurate recording and reporting of such activities, nor shall they misrepresent any such information.

Employees shall always put the interests of City Light ahead of any interest they may have in entities with which they transact. Further, employees authorized to place or execute wholesale energy transactions on behalf of City Light may not engage in such activities for their personal accounts. Employees will disclose to their supervisor any interest in an entity that could reasonably be construed as preventing them from acting solely in the interests of City Light. Failure to do so is a violation of this Risk Policy.

2.11. POLICY VIOLATIONS

All persons engaged in the implementation, management, or administration of these policies and associated procedures, as detailed in the Procedures Manual, will sign the Statement of Compliance (see Appendix E), stating that they have read, understood and agree to comply with them.

Any person found in direct violation of these policies and associated procedures may be subject to disciplinary action, including possible termination, at the discretion of the ROC.

3. Risk Management Approach

3.1. RISK MANAGEMENT PHILOSOPHY

City Light's current power supply portfolio consists primarily of hydro-based generation (approximately 90%). Historically, City Light's combined generation output has exceeded its retail customer demand by approximately 40% on an expected annual basis. Hydro uncertainty, coupled with wholesale energy market price volatility, leads to significant variability in City Light's net wholesale revenue from the sale of that surplus.

To manage this revenue risk and thereby protect the interests of the ratepayers, City Light hedges its exposure by buying and/or selling physical energy and associated products in the wholesale energy market up to 18 months prior to, and all the way up to, the hour of delivery. While City Light's principal objective is to ensure that it meets its retail customer demand obligation, it tries to do so in a way that generates additional value from its generation portfolio, with due consideration of risk.

By participating in the wholesale energy market, City Light is exposed to, and needs to manage, a variety of risks including:

* Market price risk the risk of loss due to wholesale price changes;

* Credit/performance risk the risk of loss due to default or failure to perform on contracts by counterparties;

* Volumetric risk the risk of loss due to unpredictable variations in the output of the generation fleet or in retail demand;

* Modeling risk the risk of loss due to a model's failure to match reality sufficiently well;

* Operations riskthe risk of loss due to physical assets failing to perform; and,

* Operational (Commercial) risk the risk of loss due to flawed or inadequate business processes.

While all of these are under the jurisdiction of the ROC, only the approaches to market and credit risks are discussed here.

3.1.1. MARKET RISK POLICIES

The following market risk policies shall govern City Light's participation in wholesale energy markets. Specific limits, methodologies, reports, operational procedures, and approval processes are detailed in the Procedures Manual.

* City Light will meet its native retail customer demand obligation with a high level of certainty

* Subject to the constraints of the system, City Light shall not engage in any transactions that are purely speculative in nature or that cannot be tied directly to managing its underlying power supply position.

* City Light will ensure that it has full knowledge of its position in all transacted products and the resulting exposure, and understands the implications of its hedging activities.

* Only personnel authorized by the Superintendent can transact on behalf of City Light in the wholesale energy market.

* City Light may only transact in physical wholesale energy-market products approved by the ROC.

* City Light may only transact within limits approved by the ROC. The limit structure shall be based on parameters such as volume, timing, and/or risk metrics, as deemed appropriate by the ROC.

* Metrics for assessing City Light's market risk exposure will be specified, measured, monitored and reported on a regular basis.

* All wholesale energy transactions will be carried out on recorded phone lines or electronic trading platforms.

* On a daily basis, all wholesale transactions will be captured in the official system of record,

* Models and inputs for valuation and risk measurement shall be subjected to a validation and change control process. The models employed and associated processes shall be described in detail in the Procedures Manual.

* Periodic risk and policy compliance reports will be delivered to the ROC, Superintendent, and Mayor and Council staff.

3.2. FORWARD HEDGING STRATEGIES AND PLANS

Successful management of the price and volumetric risks faced by City Light requires analysis, monitoring, and communication. Analysis of published hydrological and weather forecasts and market price data serve as key inputs to several internally developed models and ensure that the appropriate data is converted into useful information.

One of the statistical models used for this purpose is the Finance Division's Cash from Operations model, which produces a statistical distribution of revenues from the sale of surplus power. The average of the 5% worst outcomes in this distribution is called the "5% Tail Risk" metric, and the objective of City Light's hedging practices is to minimize this risk, or, in other words, to maximize average wholesale revenue in the worst 5% of wholesale revenue outcomes. This is a conservative risk metric and the use of it is intended to protect the utility and its ratepayers against the worst outcomes.

In seeking to achieve this objective, City Light is guided by the utility's Cash from Operations Model. The amount of forward sales or purchases projected by the model to optimize the 5% tail risk metric can vary significantly from week to week with changes in forecasted wholesale prices and/or changes in City Light's projected volume of surplus power. In order to avoid frequent adjustments in the utility's forward position, and taking account of the fact that any attempt to model future uncertainty is fraught with difficulties, City Light may hold forward positions that modestly depart from the optimal forward position that is projected, on a weekly basis, by the Cash from Operations Model.

As the water year progresses, increased certainty in our level of resources is attained. As greater certainty is achieved, the risk tolerance level for the 5% Tail Risk metric is reassessed and approved by the ROC through the planning process described below. Changes to the 5% Tail Risk metric value are closely monitored to ensure City Light remains within its accepted level of risk tolerance.

The 5% Tail Risk metric calculation process is a cross functional effort. The Power Management Division (PMD) provides the hydro forecast input for the Cash From Operations Model, the Finance Division owns and runs the model, and the Risk Oversight Division leads the communication of the metric's results with City Light's stakeholders. In addition, a Working Group led by the Director of Risk Oversight and comprised of Power Management, Finance, and Risk Oversight Division personnel work on the continued refinement of the model, while keeping a close eye on changes in the risk metric value.

Consistent with market risk policies defined herein and the risk limits defined below, the Power Management Division, in concert with the ROC, will develop annual hedging strategies with underlying hedging plans as a means to manage the volumetric and price risks faced by the utility. This will be achieved by hedging the resource portfolio with the aim of maximizing the value of the 5% Tail Risk metric taking account of the considerations described above.

The following two sections describe the requirements for formal written communication of City Light's hedging strategies and detailed hedging plans.

3.2.1. STRATEGIES

Prior to July 1, of each year, the Power Management Executive shall submit a written hedging strategy for the upcoming calendar year to the ROC for review and approval. The Strategy will include:

* A timeline for presenting specific hedging plans for managing the expected surplus resource position throughout the upcoming year ;

* A recommendation for the years' initial 5% Tail Risk metric limit;

* A plan for resetting the 5% Tail Risk metric limit for the years' subsequent hedging plans to incorporate the utility's increased certainty of resources and prices during the course of the year;

* Price targets and triggers, and transaction types anticipated to be used in the hedging plans for the year.

3.2.2. PLANS

As a calendar year's hedging strategy is finalized by the end of July of the preceding year it will have a 17 month life. Due to the amount of uncertainty concerning the hydrological conditions over such a time period, the document will require approximately five to six hedging plans to be developed and approved during this time period. Hedging plans are designed to contain specified effective dates and cover a particular transacting period of time in the future. Each hedging plan will:

* Refer to the specific hedging strategy document it is applicable to;

* Be labeled or numbered consistent to the applicable hedging strategy;

* Have a specified start and end date;

* Cover a clearly specified forward time period;

* Document a volumetric limit for purchases and sales;

* Document transaction types to be used to carry out the Plan;

* List price triggers that will enable hedging activity within the Plan's limits to be completed earlier than that which is contained in the Power Management Division's purchase and sales orders to their Power Marketing staff.

The Power Management Executive may, at any time, request that the ROC consider changes to the current Hedging Strategy or Plan. Any approved changes to the Hedging Strategy or Plan shall be recorded in the ROC meeting minutes and an updated written Hedging Strategy or Plan document will be prepared as soon as practical incorporating such changes.

3.3. RISK LIMITS

The Power Management Division will manage City Light's exposure consistently with the Risk Limits as defined below. These limits override the hedging plans. Under normal operating conditions, if such limits are exceeded, the Power Management Division will take immediate corrective action. Corrective action will start with written notification to the ROC of any limits that are exceeded, the reasons and conditions that caused such exceedance and the actions being undertaken to return the utility to within approved risk limits. The Chair of the ROC will then notify the Superintendent in writing of the risk limit violation and the cause of the occurrence. The Power Management Division's corrective action may include purchasing power to eliminate forecasted deficits in any month or calendar quarter or re-balancing City Light's forward portfolio position through a combination of purchases, exchanges or other products available from the market. There may be occasions when it will be necessary to change the risk limits listed below. The process for changing these risk limits are documented in Section 3.3.3 "Risk Limit Changes"

3.3.1. VOLUMETRIC LIMITS

3.3.1a Prompt Month

At no time will the Power Management Division enter a month carrying a net combined energy deficit of more than 50 average megawatts under expected operating conditions.

3.3.1b Forward Month's Resource Requirement

The Power Management Division will take corrective action if, at the 75% level of confidence, there is a forecasted net combined system energy deficit for any future calendar quarter over the upcoming 12 month period. The corrective action shall reduce said deficit to zero at the 75% level of confidence.

3.3.1c Forward Sales Limit

The Power Management Division will not sell forward a quantity of more than 1,750,000 megawatt hours over a rolling four full calendar quarter year period.

3.3.2 RISK METRIC TOLERANCE LIMITS

For the current calendar year, the PMD will conduct its hedging activity to maintain the Utility's position within a $10 million Risk Tolerance Band (RTB) around the calculated 5% Tail Risk metric. For the prompt year (the year immediately following the current calendar year), the Utility's position will remain within a $15 million RTB around the 5% Tail Risk metric.

The prompt year's RTB will change to current year's RTB with the first calculation of the 5% Tail risk metric in the month of November. (Note: This coincides with the start of the Utility running the prompt year model on a weekly rather than a monthly basis).

Under normal operating conditions, in the event the approved 5% Tail Risk metric limit is exceeded or would become exceeded if the remainder of the active hedging plan was executed, planned hedging activity will stop until a revised Plan is approved by the ROC.

3.3.3 RISK LIMIT CHANGES

The risk metric and volumetric limits described above may be exceeded from time to time for reasons beyond City Light's control including, but not limited to unexpected or extreme market events (weather, system constraints, prices), resource underperformance, and other conditions (prolonged plant outage, transmission line availability). To ensure that the limits contained in this Policy can be changed in a timely manner, the following protocol will apply:

1. Should the ROC desire to have an existing limit changed, a request to revise a limit along with a corresponding justification for the requested change shall be communicated to the Superintendent in writing and logged in the minutes of the ROC.

2. The Superintendent will approve or disapprove the requested change in writing within 2 business days of receiving such request.

3. If approved, the chair of the ROC will promptly transmit the request, with all necessary supporting information to the chair of the City Council's Energy and Technology Committee (ETC) or its functional equivalent.

4. The chair of the ETC, after consulting with the other members of the Committee, will notify the chair of the ROC and the Superintendent in writing within two business days of the ETC's decision. An email through the City's email system will suffice as written notification. If the chair of the ETC does not respond within this time period, the requested change to the limit will be deemed to have been approved by the ETC.

5. During the period from the breach of the risk limits to two business days following the notification of the chair of the ROC by the ETC of its decision, the PMD will not be considered in violation of the risk limits.

Should the Superintendent disapprove the requested limit change per Section 3.3.3.1 above, the Chair of the ROC will notify the Power Management Division to transact as needed in order to bring City Light's portfolio of forward positions back into approved risk limits.

Should the Superintendent be unavailable to respond in the time frame required by this Policy (Section 3.3.3.2 above), the chair of the ROC will transmit the request directly to the chair of the ETC.

On an annual basis, timed to coincide with the exit conference of the annual external assessment of policy compliance (refer to Section 3.9 "External Assessment"), the limits contained in this policy as modified during the course of the year per this Section will be reviewed and reaffirmed by the City Council's Energy & Technology Committee.

3.4. DELIVERY POINTS

City Light may transact in the Western Electricity Coordinating Council markets at the following points of delivery:

* Mid Columbia (Mid-C)

* Points of Interconnection with the Bonneville Power Administration (BPA), Avista Utilities, Idaho Power, B.C-U.S. Border, Pacificorp, Alberta Power Pool, and Puget Sound Energy

* California Oregon Border (COB)

* Nevada Oregon Border (NOB)

* Palo Verde (PV)

3.5. TRANSACTION TYPES

The following table summarizes the authorized products for each of the three transacting segments of the Power Management Division.

Day-ahead through Product Real-Time Balance of the Forward (Intraday) Month

Electrical Energy Yes Yes Yes

Reserve Transactions Yes Yes Yes

Transmission Basis Yes Yes AR

Transmission Yes Yes Yes

Transmission Losses No No Yes Provider

Capacity Yes AR AR

Exchange Options No AR AR

Interruptible Physical No AR AR Put

Energy Exchanges Yes AR AR

Parking No AR AR

Lending No AR AR

Scheduling Services AR AR AR

Voltage Regulation AR AR AR

Reactive Regulation AR AR AR

Imbalance Regulation AR AR AR

AR = Approval required by the Manager of corresponding transacting segment.

Electrical Energy: The sale or purchase of wholesale electric energy with the following general attributes: a fixed commodity quantity; a defined commodity price; and, a point of delivery within the allowed geographic boundaries as specified under Section 3.4 Delivery Points.

Reserve transactions are the sale or purchase of capacity for a fee with the right to delivery of energy, up to the amount of the capacity reserved during the period covered by the contract. The commodity price is either fixed or indexed to Mid-C, COB, or Palo Verde. The point of delivery is fixed.

There are two specific sub-categories of capacity differentiated by the noticed required for delivery of the energy:

Spinning Reserves: Capacity trades where the buyer may call for delivery of the commodity with 5 minutes notice;

Operating Reserves: Capacity trades where the buyer may call for delivery of the commodity with 15 minutes notice;

Transmission Basis: The simultaneous purchase and sale of energy with one or more counterparty but at different points of delivery.

Transmission: The sale or purchase of rights to transmission capacity. These transactions have a fixed capacity, a fixed price per unit of capacity, and fixed path.

Transmission Loss Provider: Providing transmission losses for a counterparty in return for a fee plus payment for the energy required to meet the obligation.

Capacity: The delivery of energy to a single counterparty where the buyer has the choice of determining the amount and timing of when the energy deliveries will be made. Maximum deliveries and receipts are set by contract. Acceptable variations to the general terms of this transaction are:

* Buyer may be restricted as to amounts of delivery and which hours may be chosen for deliveries and/or seller may be allowed some choices.

* May be combined with a basis or transmission deal.

Exchange Option: The delivery and receipt of energy with a single counterparty during different hours of delivery and receipt on a single day. The buyer has the choice of determining the amounts and timing of the energy deliveries and receipts. Acceptable variations to the general terms of this transaction are:

Buyer may be restricted as to amounts of delivery and which hours may be chosen for receipts and deliveries and/or seller may be allowed some choices for receipts.

* May be combined with a basis or transmission deal

Interruptible Physical Put: The delivery to a single counterparty of energy where the seller has the choice of determining the amount and timing of when the energy deliveries will be made. Under certain conditions, the delivery may be interrupted. Acceptable variations to the general terms of this transaction are:

Seller may be restricted as to amounts of delivery and which hours may be chosen for deliveries and/or buyer may be allowed some choices.

May be combined with a basis or transmission deal

Energy Exchanges: Transactions of energy with a single counterparty at two different points in time and possibly location. The implicit price is in terms of the ratio of quantity delivered to quantity received.

Parking: A transaction in which the purchaser delivers energy to the seller on a pre-scheduled basis according to WECC Preschedule Calendar. The seller of the service is then required to deliver a like amount of energy on a real-time basis on the pre-scheduled flow day(s) to parties or locations specified by the purchaser.

Lending: A transaction in which the purchaser directs the seller to deliver energy to specific parties or locations on a preschedule basis according to WECC Preschedule Calendar. The purchaser then delivers a like amount of energy on real-time to the seller on the pre-scheduled flow day(s).

Scheduling, System Control and Dispatch Service: A transaction where the seller provides the service required to schedule the movement of power through, out of, within, or into a Control Area, usually including electronic tagging service. There may be a need for additional communication gear or other hardware. If purchased through an Open Access Transmission Tariff (OATT), this service can be provided only by the operator of the Control Area (Balancing Authority) in which the transmission facilities used for transmission service are located.

Regulation and Frequency Response Service: A transaction where the seller commits on-line generation whose output is raised or lowered (predominantly through the use of automatic generating control equipment) as necessary to follow the moment-by-moment changes in load. All transmission providers must offer this service, but others may offer it as well.

Reactive Supply and Voltage Control Service: A transaction where the seller supplies reactive power support based on the amounts necessary to maintain transmission voltages within limits that are generally accepted in the region. All transmission providers must offer this service, but others may offer it as well.

Energy Imbalance Service: A transaction where the seller provides the difference in energy between the scheduled and the actual delivery of energy to a load located within a Control Area (Balancing Authority) over a single hour. All transmission providers must offer this service, but others may offer it as well.

3.6. CREDIT RISK MANAGEMENT PHILOSOPHY

To protect its financial integrity, City Light will generally deal only with investment grade counterparties. However, on occasion for example during the runoff period City Light may find it necessary to sell to less creditworthy counterparties to avoid spilling water and thereby wasting the resource, but only if more creditworthy counterparties are unavailable.

City Light manages its credit risk by:

* Requiring a counterparty to be assigned a credit limit prior to transacting with it;

* Assessing counterparty creditworthiness and establishing credit limits for counterparties based on that assessment;

* Monitoring and assessing market and counterparty events to adjust credit limits as appropriate;

* Calculating and reporting counterparty credit exposures ; and

* Requiring Power Marketers transacting in the forward markets (full prompt month up to 18 months forward) to discuss term deals from a risk perspective with the Risk Oversight Division prior to deal entry.

3.6.1. CREDIT RISK POLICIES

City Light sells significant quantities of power in the wholesale market. Industry practice dictates payment no sooner than twenty days after the end of the delivery month, requiring that City Light extend credit to its counterparties. Further, as noted earlier, City Light seeks to manage its volumetric and price risk by transacting in the forward market, resulting in its extending credit for periods up to 18 months.

The following policies shall govern City Light's credit exposure management efforts. Specific limits, methodologies, reports, operational procedures, and approval processes will be detailed in the Procedures Manual.

The Chief Financial Officer sets the maximum secured and unsecured credit limit a counterparty may be given (Credit Threshold). The CFO also recommends to the ROC the methodologies used for establishing actual counterparty credit limits. The Risk Oversight Director will utilize these and any additional parameters documented in the Risk Procedures Manual to develop counterparty specific credit limits to present to the CFO for approval. Credit limits will be based on a number of factors including the counterparty's credit score that focuses on liquidity, profitability and cash flow. Except under 'must sell' circumstances, City Light will only consider extending credit to counterparties that have two full years of audited financial statements (with an unqualified opinion) and a minimum net worth of $2.5 million.

In establishing credit for counterparties, City Light may consider credit enhancements that meet the following criteria:

* Prepayment for the product or service. Prepayment is due at the time of deal entry;

* An irrevocable standby letter of credit for the benefit of City Light from a United States office of a commercial bank or trust company organized under the laws of the United States of America or a political subdivision thereof or a foreign bank with a branch office located in the United States with at least an "A" credit rating from two or more major credit rating agencies.;

* An acceptable payment guarantee from a parent or otherwise qualified entity having investment grade credit ratings of at least 'BBB' or 'Baa2' from S&P and Moody's, respectively. The Guarantor must meet City Light credit qualification requirements and qualify for the amount of credit support to be provided; or,

* Other credit enhancement deemed acceptable by the CFO.

Metrics for measuring City Light's credit exposures will be specified, measured, monitored and reported by the Risk Oversight Division on a regular basis.

3.7. PROCEDURES MANUAL

The specific operating procedures and parameters for implementing the policies in this document are detailed in the Procedures Manual. Changes to the Procedures Manual will be reviewed and approved by the ROC for consistency with this Risk Policy.

3.8. RISK REPORTING

The Risk Oversight Division will produce the following periodic reports:

* A monthly report documenting City Light's compliance to this Policy.

* A weekly report summarizing the status of City Light's existing Hedging Plan, existing positions, forecast of resources and credit exposures.

These reports will be distributed to the ROC, Superintendent, and

Mayor and Council staff.

3.9. EXTERNAL ASSESSMENT

The Mayor's and Council's staff will consult with the Director of Risk Oversight regarding the selection of an external party to conduct a review of City Light's adherence to this Risk Policy. This compliance review will be performed and reported annually to the Mayor and Council. In alternate years the scope of this compliance review will be expanded to include an assessment of the adequacy of City Light's wholesale energy risk management controls.

Appendix A:

Resolution 31053

A RESOLUTION endorsing the City Light Department's Wholesale Energy Risk Management Policy and establishing it as the policy governing wholesale energy risk management at the City Light Department.

WHEREAS, in order to provide electricity to its customers economically, the City Light Department routinely buys and sells wholesale energy products; and

WHEREAS, the City Light Department's participation in wholesale energy markets necessarily exposes the City Light Department to risk, including market and credit risk; and

WHEREAS, the utility industry Best Practices require that the City Light Department have a clear and binding statement of policy to govern the management of those risks; and

WHEREAS, the utility industry Best Practices further require that such policies be endorsed by the City Light Department's governing body; NOW, THEREFORE,

BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SEATTLE, THE MAYOR CONCURRING, THAT:

Section 1. The Wholesale Energy Risk Management Policy as developed by the City Light Department's management and attached hereto as Exhibit A is endorsed by the City Council and is established as the policy governing the conduct of wholesale energy risk management at the City Light Department.

Adopted by the City Council the ____ day of ____________________, 2008, and signed by me in open session in authentication of its adoption this________ day of ______________________, 2008. _________________________________ President ___________of the City Council

THE MAYOR CONCURRING: _________________________________ Gregory J. Nickels, Mayor

Filed by me this ____ day of ________________________, 2008. ____________________________________ City Clerk

Appendix B Wholesale Energy Risk Management Procedures Manual

Appendix B is a 529 KB PDF document, requiring Adobe Acrobat or equivalent program to view.

Appendix C City Light's Energy Risk Management Organization Charts

Appendix C is an 82 KB PDF document, requiring Adobe Acrobat or equivalent program to view.

Appendix D Glossary of Terms

Risk Tolerance Band: An acceptable variance, in either direction (positive or negative), from the 5% Tail Risk's calculated optimal

position.

Calendar Quarter: Three month blocks of time, often referred to as "Q's". Q1 is comprised of January through March; Q2 contains April through June; Q3 contains July through September; Q4 contains October through December.

Cash From Operations: The net revenue expected from wholesale energy transactions, retail sales, other expenses and incomes.

Cash From Operations Model: The Financial Division's model that estimates net revenue available to fund capital requirements taking into account the variability of cash flows resulting from uncertainty of water conditions, market prices and system load.

Credit Risk: The risk of loss due to counterparty failure to perform contractual obligations including payment.

Hedge: Transaction entered into for a time period that covers the Prompt Month or further-forward time period for the purpose of reducing resource and/or price uncertainty or generating a return on City Light's investment in energy assets.

Hedging Plan: Specific plan of action derived from the Hedging Strategy.

Hedging Strategy: High level direction that serves as the framework for developing courses of action (Hedging Plans) that will lead towards achieving a goal.

Market Price Risk: The risk of loss due to changes in price

Modeling Risk: The risk of loss due to a model's failure to sufficiently match reality.

Operational Risk: The risk of loss due to flawed or inadequate business processes.

Operational Transaction: Procurement or sale transaction entered into for the purpose of managing resources

Operations Risk: The risk of loss due to physical assets failing to perform.

Procurement: Energy product purchase transaction in the Balance of Month or shorter time horizon for the purpose of serving City Light's native load.

Prompt Month: Closest calendar month that has not yet begun.

Volumetric Risk: The risk of loss due to variations in generation output and customer demand.

5% Tail Risk: The risk metric produced from the Cash From Operations Model. It is the average financial outcome of the worst 5% of all outcomes.

Appendix E Compliance Statement

Compliance Statement

The undersigned employee hereby acknowledges receipt and review of City Light's Wholesale Energy Risk Management Policy dated _____________ and corresponding Wholesale Energy Risk Procedures Manual version _________.

_____________________________________________.

The undersigned further acknowledges that this risk policy and corresponding risk procedures manual defines the standards of City Light's energy risk management efforts that the employee is expected to comply with, and that failure to comply with the Policy and procedures may result in, among other things, disciplinary action up to and including termination.

Acknowledged by: ________________________ Employee Name (Print) ________________________ Employee Signature ________________________ Date

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