STATE OF CALIFORNIA GRAY DAVIS, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

October 8, 2003 Agenda ID # 2777

10/16/03 Item #37

TO: PARTIES OF RECORD IN RULEMAKING 01-10-024

Enclosed are the draft decision of Administrative Law Judge (ALJ) Walwyn and the alternate decision of Commissioner Peevey. They will appear on the Commission's October 16, 2003 agenda. The Commission may act then, or it may postpone action until later.

When the Commission acts on the draft decisions, it may adopt all or part of either the draft decision or the alternate as written, amend or modify either, or set them aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Pursuant to Rule 77.7(f)(9), comments on the draft decision must be filed by October 10, 2003 and no reply comments will be accepted.

Parties to the proceeding may file comments on the draft decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure." These rules are accessible on the Commission's website at http://www.cpuc.ca.gov. In addition to service by mail, parties should send comments in electronic form to those appearances and the state service list that provided an electronic mail address to the Commission, including ALJ Walwyn at cmw@cpuc.ca.gov. Finally, comments must be served separately on the Assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail, or other expeditious methods of service.

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief

Administrative Law Judge

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Attachment

COM/MP1/jf2/acb DRAFT Agenda ID #2866

Ratesetting

Decision ALTERNATE DRAFT DECISION OF COMMISSIONER PEEVEY
(Mailed 10/8/2003)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanism for Generation Procurement and Renewable Resource Development.

Rulemaking 01-10-024 (Filed October 25, 2001)

OPINION

1. Summary

This decision grants, in part, Southern California Edison Company's (SCE) request for interim authority to hedge a confidentially specified portion of its natural gas price risk associated with 2004 Qualifying Facility (QF) contracts. SCE seeks Commission approval in advance of the decision on its 2004 short-term plan in order to lower its customers' potential exposure to natural gas prices and obtain more certainty as to the cost of QF energy.¹ We reject the Office of Ratepayer Advocates (ORA) recommendation that the reasonableness of the price of SCE's hedges will be determined by using specified New York Mercantile Exchange (NYMEX) data sources. In response to the recommendation of The Utility Reform Network (TURN) that SCE review specific details of its hedging strategy and proposed actions with its Procurement Review Group (PRG) at the earliest possible date, we find that we agree with TURN's concern that SCE's request is overbroad but choose a different procedural remedy. Therefore, we direct that before buying a specific hedge, SCE conduct a cost-effectiveness test to ensure that there is value to ratepayers before entering into the transaction; we allow SCE to select which commercially available financial model it will use to meet this cost-effective standard.