ALJ/TRP/gd2 Date of Issuance 1/25/2010

Decision 10-01-023 January 21, 2010

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Address the Gas Utilities' Incentive Mechanisms and the Treatment of Hedging Under Those Incentive Mechanisms.

Rulemaking 08-06-025 (Filed June 26, 2008)

DECISON FOR AN INCENTIVE FRAMEWORK
TO MOTIVATE OPTIMAL USE OF NATURAL GAS HEDGING

DECISON FOR AN INCENTIVE FRAMEWORK TO MOTIVATE OPTIMAL USE OF NATURAL GAS HEDGING 1

1. Summary 2

2. Procedural Background 4

3. Framework for Addressing the Issues 6

3.1. The Role of the Proposed Settlement in Relation to the Whole Record 8

3.2. Uniformity Versus Utility-Specific Policies 8

4. The Role and Significance of Hedging in Managing Price Volatility 10

4.1. Operation of the Incentive Mechanisms in Relation to Hedging Costs 15

4.2. Exclusion of Winter Hedging from Incentive Mechanisms Since 2005 17

5. Should Hedging Risks and Benefits Be Shared by Utility Investors? 19

5.1. Parties' Positions Apart from the Settlement 19

5.1.1. Utilities and TURN Pre-Settlement Proposal 20

5.1.2. SoCalGas Separate Benchmark Proposal 22

5.1.3. DRA Pre-Settlement Proposal 24

5.1.4. Shell Proposal 26

5.2. Discussion 30

5.2.1. Introduction 30

5.2.2. Merits of Adopting a Separate Index Versus
Uniform Risk Sharing 31

5.2.3. Merits of Shell's Proposed Solicitation Process 34

5.2.4. Merits of Risk/Reward Sharing of Hedging
Costs/Gains As Incentives to Management 34

6. Adopted Treatment of Hedging Incentives for Specific Utilities 44

6.1. Adopted Treatment for PG&E 44

6.1.1. Sponsoring Parties' Positions Based on
the Proposed Settlement 45

6.1.2. Other Parties' Responses to the Proposed Settlement 46

6.1.3. Discussion 47

6.2. Adopted Treatment for SoCalGas/SDG&E 51

6.3. Treatment for SWG 59

7. Fixed Price Tariff Option to Reduce Price Volatility 61

7.1. Discussion 64

8. Comments on the Proposed Decision 64

9. Assignment of Proceeding 65

Findings of Fact 65

Conclusions of Law 68

ORDER 69

APPENDIX A - Settlement Agreement (Public Version)

APPENDIX B - SoCalGas 75%/25% Winter Hedge Allocation

DECISON FOR AN INCENTIVE FRAMEWORK
TO MOTIVATE OPTIMAL USE OF NATURAL GAS HEDGING