Background

The CPIM as approved in D.04-01-047 provides PG&E with a direct financial incentive to procure gas supplies and transportation at the lowest reasonable cost by determining shareholder rewards or penalties based on comparisons of total gas costs to a monthly market-based benchmark. PG&E's performance is calculated annually and any incentive award or penalty is then recorded in the Core Sub-accounts of the Purchased Gas Account (PGA).

Because CPIM is linked to monthly gas price benchmarks, PG&E argues that it has limited incentive to fix the prices of natural gas for an extended period of time, or to expend dollars to hedge a significant portion of the company's natural gas purchases on behalf of core gas customers. Nonetheless, PG&E has hedged its core gas purchases to some extent both this year and last. What concerns the company is that if its spending on hedges (option premiums) exceeds the upper level of the applicable CPIM deadband, then its shareholders face the risk of penalty. Of course, the shareholders also face the possibility of reward if the hedges enable the company to realize a cost of gas below the monthly index price.