III. The Current Incentive Mechanisms

Each of the three utilities currently purchases natural gas on behalf of core ratepayers and accounts for those purchases in a regulatory mechanism that allocates liability between utility shareholders and ratepayers, providing an incentive for each to purchase low cost gas supplies. Each utility incentive mechanism differs from the other to some extent but all are intended to provide incentives because shareholders are allocated a share of the gains or losses associated with natural gas purchased compared to a monthly market gas price benchmark. A "deadband" around the benchmark delineates the range of costs to be borne by ratepayers and shareholders. These incentive mechanisms replaced the reasonableness reviews of the utilities' gas procurement activities that the Commission previously conducted. SoCalGas' Gas Cost Incentive Mechanism (GCIM) was approved in D.02-06-023 for SoCalGas, and SDG&E's Performance Based Ratemaking (PBR) was approved in D.03-07-037. The Commission approved the current version of PG&E's CPIM in D.04-01-047.

All three utilities have argued that their respective gas purchasing incentive mechanisms discourage them from entering into arrangements that fix the prices of natural gas for an extended period of time, or expending dollars to hedge a significant portion of the company's natural gas purchases on behalf of core gas customers. The utilities have hedged their core gas purchases to some extent for this year and in previous years. However, they contend that if their spending on hedges, such as option premiums, exceeds the upper level of the deadband in their procurement mechanisms, then their shareholders face the risk of large financial penalties.