Discussion

In Investigation (I.) 01-06-047, we reviewed the reasonableness of Southwest's gas purchase practices, and although a GCIM was discussed, D.02-08-047 in I.01-06-047 did not adopt any gas purchase incentive mechanism. Later in A.02-02-012, we again reviewed Southwest's gas purchases, and encouraged Southwest to file an application to establish a GCIM. In response to our encouragement, Southwest's proposed GCIM establishes a reasonable benchmark from which to measure the success of gas purchases, provides incentives to reduce gas purchase costs for ratepayers and shareholders, and provides ratepayers with protections from unreasonable gas purchases.

Our review of the proposed GCIM indicates it meets our purposes for a gas purchase incentive mechanism for Southwest. First, the GCIM establishes reasonable benchmarks⁴ through a volume-weighted average based on actual trading points and published gas prices, thus protecting ratepayers by establishing objective standards of measurement. Second, the GCIM provides relatively narrow tolerance bands (2% and 3% of the benchmark price) within which to determine additional costs or savings, thus sharpening the purpose of the incentive mechanism. Third, the allocation of additional costs and savings is balanced in favor of ratepayers. Although additional costs are shared on a 50-50 basis, savings are allocated 75% to ratepayers, and only 25% to shareholders. Fourth, the cap on shareholder rewards of 1.5% of actual commodity costs means that the mechanism will not unreasonably reward shareholders, should gas costs suddenly decline. Fifth, the GCIM provides Commission oversight through reporting requirements and advice letter filings, subject to further review for reasonableness, before either additional costs or savings are passed on to ratepayers. Sixth, through the storage reserve target level of 80% of capacity, the GCIM provides that Southwest will endeavor to dispatch gas supplies into and out of storage in a manner that provides the greatest economic benefit to ratepayers based on available market information. Finally, establishing a GCIM for Southwest will reduce or eliminate the need for the Commission, and its staff, to investigate, analyze, and participate in proceedings regarding the reasonableness of Southwest's gas purchases.