Conclusion

PG&E has expressed the desire to acquire additional financial hedges to protect its core customers for natural gas purchase related to the coming winter and beyond. We encourage PG&E and other core-serving utilities to employ a balanced strategy of purchasing flowing gas, as well as physical and financial hedges. While PG&E has not provided solid evidence that its current procurement incentive mechanism fails to protect shareholders for the purchase of appropriate price hedges, we acknowledge the existence of conditions that provide the potential for particularly high gas prices this winter. We expand the tolerance band for PG&E's 2005-2006 CPIM period in order to provide greater shareholder protection in the face of potential price volatility.

With prices at unusually high levels, it is important that any utility pursuing hedges have great flexibility. This will allow the utility to respond to sudden changes in market conditions. The approval of a detailed hedging plan would serve to restrict such flexibility and would require expert market judgment upon which the Commission cannot rely, especially in response to an expedited petition. For these reasons, we will continue to rely on the incentive mechanism, adjusted to provide greater shareholder protection this winter, to guide utility purchases. We will consider further changes to the incentive mechanism to apply to future years in a separate application, which PG&E has announced plans to file.