Background
In Decision (D.) 04-03-034,1 Southwest's last general rate proceeding, the Commission encouraged Southwest to establish a GCIM as a means to reduce gas costs for ratepayers, and as an incentive to shareholders to benefit from improved gas purchase procedures. On November 12, 2004, Southwest filed Application (A.) 04-11-009 (Application) requesting Commission approval of a proposed GCIM, and also expedited ex parte action on the Application.
Southwest states that its proposed GCIM will establish objective standards to measure gas procurement performance, and a methodology to share annual savings and costs between Southwest's shareholders and customers. The proposed GCIM will set a volume-weighted performance benchmark to determine the savings or costs resulting from differences between the benchmark and Southwest's actual annual gas costs. Southwest explains that its GCIM proposal is a result of extensive collaboration with the Office of Ratepayer Advocates (ORA) during the past several months, and that its GCIM proposal is patterned after existing gas cost incentive mechanisms currently authorized for other California utilities. Southwest requests Commission approval of the GCIM that is detailed in proposed tariff sheets appended to the Application.
On December 15, 2004, ORA filed a response to the Application, noting that it has been involved with the review and development of Southwest's GCIM proposal, and as a result, ORA supports Southwest's proposal as submitted. ORA points out that under the proposed GCIM methodology, gas commodity costs are compared against market prices represented by indices used in the benchmark. Furthermore, the commodity benchmark also includes a component for purchases under Southwest's "Volatility Mitigation Program" (VMP) which are fixed price contracts entered into for price mitigation. The VMP purchases are flowed through, and thus have no impact on GCIM rewards or penalties.2 Transportation and storage costs are also flowed through and do not impact the GCIM.
ORA explains that the shared savings or costs occur when the actual purchased costs are outside of either the upper or lower tolerance bands calculated as a percentage of the annual gas cost benchmark. The upper tolerance band is the GCIM benchmark plus 3% of the gas commodity benchmark, while the lower tolerance band is the GCIM benchmark minus 2% of the gas commodity price benchmark. Costs exceeding the upper tolerance band are shared 50%-50% between shareholders and ratepayers. If purchased gas costs are below the lower tolerance band, 75% of the savings go to ratepayers, and 25% go to shareholders. In addition, there is a "cap" on shareholder rewards equal to 1.5% of the respective actual commodity costs.
As further explained by ORA, the proposed GCIM also includes a storage capacity target of 80% by November 1,3 reporting requirements including an annual GCIM compliance filing, and a requirement for an advice letter filing to reflect shared savings or costs requesting authorization for the appropriate accounting entries.
ORA states there are no disputed issues of fact, and that it believes hearings are not necessary.
No other responses to the Application have been received.
1 See p. 74. 2 VMP purchases are limited to 25% of the forecasted annual gas supply. 3 The GCIM requires Southwest to have storage reserves filled to a target level of 80 percent of capacity by November 1, of each year. Failure to meet the 80 percent target requires Southwest to explain the variance to core customers in the annual GCIM filing.
