ALJ/SAW/jva ALTERNATE DRAFT Agenda ID #4972

Alternate to Agenda ID 4940

10/6/2005 Item 18a

Decision ALTERNATE DRAFT DECISION OF ALJ WEISSMAN
(Mailed 9/28/2005)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Rules to Ensure Reliable, Long-Term Supplies of Natural Gas to California.

Rulemaking 04-01-025 (Filed January 22, 2004)

ORDER MODIFYING DECISION 04-01-047 IN RESPONSE
TO THE PETITION OF THE PACIFIC GAS AND ELECTRIC COMPANY

Summary

In response to events stemming from Hurricane Katrina, on September 13, 2005, Pacific Gas and Electric Company (PG&E) filed a petition requesting that the Commission authorize, on an emergency basis, a modification of Decision (D.) 04-01-047.¹ That decision, among other things, approved the current version of PG&E's Core Procurement Incentive Mechanism (CPIM). PG&E argues that emergency action is needed to protect its core gas customers from natural gas price spikes in the coming winter and in subsequent winters.

Core customers are residential, small business and other customers that have elected to purchase natural gas from PG&E. The CPIM rewards or penalizes PG&E based on its success in keeping its purchases of gas for core

customers at or below a monthly market benchmark price. PG&E asserts that the requested modification would allow the company to undertake an expanded level of hedging of its natural gas purchases on behalf of its core gas customers. Hedging is a form of price insurance that, in this case, would guarantee that the price exposure of core customers for the hedged portion of core gas supply would not exceed a certain level. As is true with all insurance, there is a cost involved in obtaining this protection.

The day after PG&E filed its petition, the assigned administrative law judge issued a ruling setting an extremely expedited schedule for this matter. PG&E and other natural gas utilities had to file comments on September 19, 2005. Other parties were given two more days to file their comments, and reply comments were due September 23, 2005. Numerous parties answered the call, and provided their recommendations for ruling on PG&E's proposal.

In this decision, we decline to approve or reject PG&E's confidential hedging plan. Instead we expand the tolerance band for PG&E's CPIM during the 2005-2006. This will provide greater protection for PG&E shareholders and greater flexibility for the utilities' managers as they attempt to find the right mixture of flowing gas, physical hedges, and financial hedges to protect core customers during the volatile conditions that we all expect to prevail during the coming winter.

We want PG&E and other utilities to employ hedges to the extent they are likely to be beneficial to core customers. It is critically important that the utilities have the flexibility, in the coming months, to make those hedging decisions quickly and that they not be constrained by specific, pre-approved hedging plans. By expanding the tolerance band, we provide the shareholders with greater protection, so that the utility will not hesitate in acquiring appropriate hedges.