3. Framework for Addressing the Issues
As a starting point for addressing the issues, we explain our framework for review and analysis. The record in this proceeding has been developed through written comments and a technical workshop. No evidentiary hearings were held. The comments consist of separate proposals for hedging treatment applicable to each of the three utilities as well as a proposed settlement that is applicable only to PG&E.
In order to lay a proper foundation for evaluating the respective proposals, we start with a review of the role and significance of natural gas hedging as a tool within the larger context of providing reliable service at reasonable cost. Next, we proceed with an analysis of how different approaches to hedging cost recovery affect incentives for effective management of hedging as part of an overall gas procurement program. We consider parties' general arguments on a conceptual basis based on their pre-settlement positions. Based on these arguments, we reach certain general conclusions regarding the appropriate incentives applicable to natural gas hedging. Within this context, we then separately consider the particular incentive treatment applicable to each utility. For PG&E, we consider this issue in the context of the proposed settlement that has been offered in relation to the record as a whole. For SoCalGas and SWG, we separately consider the appropriate incentive treatment apart from the proposed settlement.
Based on the regulatory treatment applied since 2005, the utility recovers its actual net costs of hedges (net of any gains) on a dollar-for-dollar basis from core customers up to its preapproved limits. For PG&E, based on the settlement approved in Decision (D.) 07-06-013, hedging plans are approved via expedited advice letter filing with the Energy Division. The Commission conducts no retroactive reasonableness review. The Energy Division conducts only compliance reviews at the beginning and end of each hedge season. For SoCalGas, hedging plans are approved via application filing.
Our goal is to achieve a regulatory framework that promotes ratepayers' best interests. In considering whether the status quo produces an appropriate alignment of ratepayer and shareholder interests, one consideration is to review past results of the utilities' use of hedging as a tool to protect ratepayers against extreme price volatility. In this regard, we note that the utilities have incurred net losses for hedges since 2005. In order to evaluate whether the existing system is working optimally, however, we cannot simply tabulate the gains or losses as a result of past hedging strategies. Since hedges are entered into based on uncertainty as to future gas prices, an after-the-fact assessment of hedging performance may not reveal whether the hedges were prudent at the time they were executed. Given the limitations inherent in relying on after-the-fact results to evaluate the effectiveness of hedging, we recognize the importance of management incentives to promote effective hedging.
3.1. The Role of the Proposed Settlement in Relation to the Whole Record
The settlement presented in this proceeding applies only to PG&E and is not offered as a proposal to resolve disputes relating to SoCalGas or SWG. Accordingly, we do not rely upon the Proposed Settlement as a basis to resolve issues relating to SoCalGas or SWG. We independently consider the merits of the record exclusive of the Settlement for purposes of resolving issues relating to SoCalGas and SWG.
Parties' pre-settlement arguments continue to apply in considering how to resolve issues relating to hedging incentives for SoCalGas and SWG. Accordingly, we review parties' pre-settlement positions: (1) to evaluate the reasonableness of the settlement position relating to hedging policies for PG&E only in relation to the whole record; and (2) as a basis to evaluate substantive proposals relating to hedging policy for SoCalGas and SWG apart from the settlement.
3.2. Uniformity Versus Utility-Specific Policies
One of the issues in this proceeding is whether, or to what extent, the Commission should establish uniform statewide hedging guidelines and policies for all California gas utilities. The Commission has established broad statewide energy policies applicable to all California energy utilities as articulated in the Energy Action Plan which identifies, among other goals, ensuring reliable long-term natural gas supplies at reasonable cost. Natural gas service is essential to every Californian's general welfare and to the health of California's economy.
We recognize that broad themes apply on an industry wide basis, and the policies we adopt are designed to promote broad consistency among the utilities where applicable. On the other hand, we appreciate that each utility faces different operational and market constraints. We recognize that differences exist in the incentive designs and hedging practices among the utilities, based for example, on location-specific variations in market or operational factors. Even though particular utilities' hedging strategies differ, there is still value in formulating broad regulatory goals on a consistent basis where fundamental principles of fairness and equity are involved.
We also recognize, however, that setting rigid statewide standards for hedging practices by all gas utilities would not be in the public interest. Whatever standards may be adopted must accommodate different conditions facing individual utilities. Mandating a one-size-fits-all approach to hedging would unduly constrain the utilities from responding to different conditions within their different service territories. Each utility takes different approaches to protect its customers from undue price volatility. PG&E and SoCalGas both utilize hedging, but under different guidelines and constraints. Each utility serves a different service territory and has access to different sources of supply subject to differing infrastructure constraints and conditions. SoCalGas has more storage inventory compared to PG&E. PG&E contracts for more interstate capacity relative to its summer capacity, while SoCalGas holds about the same amount of capacity throughout the year. Winter weather in SoCalGas' and San Diego Gas & Electric Company's (SDG&E) service territories is milder than in PG&E's service territory.3 PG&E has spent almost three times more in hedging than SoCalGas in recent years, yet PG&E has fewer core customers to protect.4 The colder winter weather is one possible explanation for some of PG&E's higher level of expenditures resulting in its core customers consuming more gas in the winter.
SWG utilizes a "Volatility Mitigation Program" (VMP) which involves fixed price contracts entered into for price mitigation to protect against extreme price increases. The VMP purchases are flowed through to customers, and thus have no impact on incentive rewards or penalties.5
The policies adopted in this decision thus take into account the fact that each utility faces different conditions, and allows the flexibility for each utility to utilize hedging tailored to its own circumstances.
3 DRA Opening Comments dated October 3, 2008 at 2.
4 According to PG&E's website, there are 4.2 million customers while SoCalGas has 5.1 million customers.
5 In D.05-05-033, SWG was granted approval of a gas cost incentive mechanism (GCIM). In response to other utilities' requests that prompted D.05-10-015 and D.05-10-043, SWG stated that since it had recently begun operating under its first GCIM cycle, it had already implemented its hedging program for the 2005-2006 period and did not recommend suspending its program.
