7. Fixed Price Tariff Option to Reduce Price Volatility
As an alternative way to providing customers with price volatility protection, another possible proposal discussed by parties was to develop a fixed price tariff that could be offered on an optional basis. A version of this concept had previously been offered by SoCalGas over 10 years ago in A.96-03-060. The Commission issued D.96-08-037 which remanded SoCalGas' proposed fixed price option and a related level pay plan to the assigned ALJ for further proceedings. In D.97-04-029, the Commission approved the level pay plan but rejected SoCalGas' proposed fixed price plan.
Under its original proposal, SoCalGas would conduct a quarterly pre-registration process to determine the likely level of hedges needed to be purchased, and then set a proposed fixed price for customers (based on one of three load variability patterns). Customers would then have 48 hours to accept the proposed load-specific rate for the succeeding 12 months. Any usage over 150% of the customer's peak consumption month for the previous 24-month period would be billed at standard tariff rates.32
Although that proposal for a fixed price plan was rejected by the Commission, DRA suggested that a similar approach could possibly be reconsidered, allowing customers to choose among pricing plans based on their own risk preference. The previous proposal caused concern that the utilities would profit from a higher fixed price. The proposal would have offered the choice initially for commercial customers. DRA suggested that a revised version of the earlier proposal now could include a different portfolio for different customers.
SoCalGas acknowledges the theoretical appeal of an optional tariff program that allows customers a choice of payment options. Customers who value the stability offered by hedging could receive it; while customers who do not place the same value on price stability would not be required to pay for hedging. SoCalGas states that it would not be opposed to proposing a revised fixed-price option via advice letter filing, application, or in a later phase of this proceeding, but expresses certain caveats regarding such an approach.
SoCalGas raises concerns as to the logistics of establishing a quarterly pre-registration process and accepting elections from its 6.3 million core residential customers. SoCalGas believes that the logistical challenges of such an undertaking would be much greater than the challenges anticipated in the 1996 version of the proposal. SoCalGas also raises concerns as to the potential for increased customer service staffing that would be needed to run the program, and whether charging customers for the increased staffing would make the costs of such a program unattractive to customers.
SoCalGas also questions whether a fixed price program really offers much more benefit to customers than is already available through its tariff option known as the "Level Pay Plan" (LPP) which is available to its residential and master-meter core customers and smaller C&I customers. Under the LPP, monthly gas bills are calculated based on forecasted average annual consumption and costs over a 12-month period, with billing adjustments every six months to minimize the accumulation of large variances between the amounts billed versus owed. The LPP averaging process is intended to enable core customers to smooth out the variations between monthly gas bills.
SoCalGas contends that for the vast majority of its core customers, bill stability which is already available through the LPP, may be much more important than the ability to fix a commodity price for a particular period of time, such as 12 months. Yet, less than 5% of SoCalGas customers currently avail themselves of the LPP. SoCalGas believes, however, that the availability of the LPP could be emphasized even more than is already being done.
Customers' interest in paying for a fixed price option also would depend upon how much of a premium such fixed price protection would cost. SoCalGas observes that forward natural gas premiums can be substantial. For example, as of February 20, 2009, NYMEX prices for March 2010 were trading at a 45% premium to March 2009 NYMEX prices.
DRA questioned the goals of the hedging programs, and suggested that retail bill volatility can be addressed through the utilities' tariff option such as the LPP noted above.
7.1. Discussion
We conclude that the concept of an optional fixed price tariff raises more questions than it resolves, and the potential difficulties with implementing such an option outweigh its potential advantages. Among the issues raised by the fixed price tariff option are: (1) what conditions a customer would have to meet to qualify for this option (e.g., minimum term commitment), (2) effects on customers' ability to switch to core aggregation, (3) estimating the separate demand for different portfolio risk characteristics, and (4) Commission oversight requirements, etc. Moreover, this option would still leave unresolved the question of what level of hedging is appropriate for the fixed price portfolio, and what degree of price risk would be appropriate for customers.
We agree that some of the benefits of a fixed price tariff may be realized through the existing LPP billing plan. Increased efforts toward making customers aware of the availability of the LPP plan may be helpful in maximizing the potential usefulness of this program as a tool in mitigating volatility in customers' bills.
We further conclude, however, that the LPP does not substitute for the potential protections and benefits of price stability available through an effective hedging program. The LPP is merely a means of deferring the timing of a core customer's retail bill payment, but has no effect on mitigating the volatility of the underlying supply portfolio costs, themselves. Therefore we conclude that an effective hedging program is still of value, as part of a broader program which can include the LPP option.
32 See D.97-04-029, mimeo. at 2-3.
