STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

July 18, 2006 Agenda ID #5838

and

Alternate Agenda ID #5842

Ratesetting

TO: PARTIES OF RECORD IN RULEMAKING (R.) 04-01-025, R.02-06-041, APPLICATION (A.) 00-06-023 AND A.02-10-040

These are the proposed decision of Administrative Law Judge (ALJ) Kim Malcolm, previously designated as the principal hearing officer in this proceeding and the alternate proposed decision of President Michael R. Peevey. The proposed decision and the alternate decision will not appear on the Commission's agenda for at least 30 days after the date it is mailed.

Pub. Util. Code § 311(e) requires that the alternate item be accompanied by a digest that clearly explains the substantive revisions to the proposed decision. The digest of the alternate proposed decision is attached.

This matter was categorized as ratesetting and is subject to Pub. Util. Code § 1701.3(c). Upon the request of any Commissioner, a Ratesetting Deliberative Meeting (RDM) may be held. If that occurs, the Commission will prepare and publish an agenda for the RDM 10 days beforehand. When an RDM is held, there is a related ex parte communications prohibition period. (See Rule 7(c)(4).)

When the Commission acts on these agenda items, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the proposed decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure," accessible on the Commission's website at www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages.

Comments must be filed with the Commission's Docket Office. Comments should be served on parties to this proceeding in accordance with Rules 2.3 and 2.3.1. Electronic copies of comments should be sent to ALJ Malcolm at kim@cpuc.ca.gov. All parties must serve hard copies on the ALJ and the assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail or other expeditious methods of service. The current service list for this proceeding is available on the Commission's web site, www.cpuc.ca.gov.

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief
Administrative Law Judge

ANG:hl2

Attachment

ATTACHMENT

Digest of Alternate Proposed Decision

R.04-01-025 et al.: Re: Petitions to modify Decisions (D.) 05-10-043, D.05-10-015, D.04-01-047, D.02-06-023 and D.03-07-037 regarding gas hedging for the 2006-2007 winter season for Pacific Gas and Electric Company (PG&E), Southern California Gas Company (SoCalGas), and San Diego Gas & Electric Company (SDG&E).

Pursuant to Pub. Util. Code Sec. 311(e), the digest of the substantive differences between the proposed decision of Administrative Law Judge Malcolm and the alternate proposed decision of President Peevey is as follows:

PG&E, SoCalGas, and SDG&E filed petitions for modification of various decisions, proposing to exempt purchases of hedging instruments from the rewards and penalties associated with the incentive mechanisms. The utilities state that they intend to purchase hedging instruments to protect ratepayers from fuel price spikes this coming winter. The petitions also request approval of specific natural gas hedging plans and ask that all of the costs and benefits of the expanded hedging plans, and the gas hedging that has already taken place for the 2006-07 winter season, be allocated directly to core gas procurement customers.

Proposed Decision

The proposed decision declines to approve the confidential hedging plans proposed by PG&E, SoCalGas and SDG&E. The proposed decision requires that a portion of all purchases of hedging instruments be included as part of each utility's incentive mechanism. The authority provided in the proposed order allows each utility to account for 75% of hedging purchases outside its incentive mechanism and applies to all hedging purchases made for the 2006-07 winter season. The remaining 25% is to be included within the incentive mechanism. This accounting approach is authorized only for hedging purchases that cover gas costs during the winter months of 2006-07. Once selected, each utility must account for all hedging purchases using this allocation approach. Each utility must inform the Commission's Executive Director in writing no later than 15 days from the effective date of this order of whether or not it will take advantage of this option, rather than accounting for all hedging within its incentive mechanism. Once this notice has been provided, the utility's decision shall not be revocable. Each utility is authorized to spend up to but not more than $14 per customer for hedging purchases if it chooses to account for 75% of hedging purchases outside of incentive mechanisms. This limitation shall not include hedging instruments commonly known as "swaps." The proposed decision also requires that reports be submitted to the ALJ and the Energy Division and that these reports be made public.

Alternate Proposed Decision

The alternate proposed decision approves the confidential hedging plans of PG&E, SoCalGas and SDG&E1 for the 2006/2007 winter season in the manner requested by the utilities. The authorization provided in the alternate proposed decision will result in an increase for average residential customer's monthly bill by approximately $2.00.

The proposed alternate decision grants the emergency petitions and modifies the impacted decisions to authorize supplemental hedges in 2006-07. The level of the hedges and the expiration dates are contained in the confidential hedging plans. Costs, including costs incurred for hedging already entered into, are allocated to core gas procurement ratepayers. No costs or benefits are allocated to shareholders. In addition, each utility is authorized to spend up to $14 per core customer for the 2006/2007 winter season, or up to the amount requested in its petition for modification of D.05-10-015 on hedged instruments, whichever is lower. This limit shall not include hedging instruments commonly known as "swaps." The alternate proposed decision requires that reports be submitted to the Division of Ratepayer Advocates and the Energy Division on a confidential basis.

(END OF ATTACHMENT)

ALJ/KLM/hl2 DRAFT Agenda ID 5838

Ratesetting

Decision PROPOSED DECISION OF ALJ MALCOLM (Mailed 7/18/2006)

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 Instituting Rulemaking to Require California Natural Gas and Electric Utilities to Preserve Interstate Pipeline Capacity to California.

Rulemaking 02-06-041
(Filed June 27, 2002)

In the Matter of the Application of Southern California Gas Company Regarding Year Six (1999-2000) Under Its Experimental Gas Cost Incentive Mechanism and Related Gas Supply Matters. (U 904 G)

Application 00-06-023
(Filed June 15, 2000)

In the Matter of the Application of San Diego Gas and Electric Company (U 902 G) to Modify and Extend Permanent Gas Procurement Performance-Based Ratemaking Mechanism.

Application 02-10-040
(Filed October 31, 2002)

(See Appendix A for List of Appearances.)

OPINION MODIFYING DECISION (D.) 05-10-043, D.05-10-015, D.04-01-047, D.02-06-023 AND D.03-07-037 IN RESPONSE TO THE PETITIONS OF PACIFIC GAS AND ELECTRIC COMPANY, SOUTHERN CALIFORNIA GAS COMPANY AND SAN DIEGO GAS & ELECTRIC COMPANY

TABLE OF CONTENTS

Title Page

I. Summary 2 2

II. Background 3 3

III. The Current Incentive Mechanisms 4 4

IV. The Utility Proposals 5 5

V. Parties' Responses to the Proposals 8 8

VI. Discussion 10 10

A. Emergency Nature of Petitions 10 10

B. The Need for Hedging Instruments for Natural Gas Supplies 11 11

C. Pre-Approval of Utility Hedging Plans 14 14

D. Appropriate Ratemaking for Hedging Programs 15 15

E. Utility Reporting 19 19

VII. Conclusion 20 20

VIII. Comments on Proposed Decision 21 21

IX. Assignment of Proceeding 21 21

Findings of Fact 21 21

Conclusions of Law 23 23

O R D E R 24 24

APPENDIX A: APPEARANCES

I. Summary

This decision addresses the emergency petitions of Pacific Gas and Electric Company (PG&E), Southern California Gas Company (SoCalGas) and San Diego Gas & Electric Company (SDG&E) to modify Decision (D.) 05-10-043,
D.05-10-015, D.04-01-047, D.02-06-023 and D.03-07-037. All three utilities seek to modify orders requiring them to account for all costs of natural gas procurement in natural gas purchase incentive mechanisms. The utilities propose to exempt purchases of hedging instruments from the rewards and penalties associated with the incentive mechanisms. The purpose of the proposed modification would be to relieve the utilities of the risks associated with the purchase of hedging instruments for natural gas prices. The utilities intend to purchase hedging instruments to protect ratepayers from fuel price spikes this coming winter. The petitions also request approval of specific natural gas hedging plans and ask that all of the costs and benefits of the expanded hedging plans, and the gas hedging that has already taken place for the 2006-07 winter season, be allocated directly to core gas customers.

The relief that the utilities request is similar to the relief that the Commission approved for all three utilities last winter season, which was sought and granted because of expected natural gas price spikes after Hurricane Katrina, and to a lesser degree from Hurricane Rita.

This decision declines to approve the confidential hedging plans of PG&E, SoCalGas and SDG&E. It encourages the utilities to purchase cost-effective hedging instruments to the extent those purchases might protect ratepayers from high natural gas prices for this coming winter. To provide a reasonable incentive for sound management decisions, this order requires that a portion of all purchases of hedging instruments be included as part of each utility's incentive mechanism. Each utility may choose to account for 75% of hedging purchases outside of its incentive mechanism and to account for 25% of the cost and returns from each purchase within the incentive mechanism for purchases of hedging instruments to protect against price spikes during the 2006-07 winter season. This modification substantially reduces the risks of hedging instruments to shareholders while providing some assurance to utility ratepayers that hedging purchasing strategies will be cost-effective. A utility that opts to account for 75% of hedging costs outside its incentive mechanism is authorized to spend up to $14 per customer on hedging instruments, excluding "swaps."

¹ These hedging plans will remain confidential as there is highly sensitive market information involved and if released, could work toward the detriment of utilities' ratepayers.

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 Instituting Rulemaking to Require California Natural Gas and Electric Utilities to Preserve Interstate Pipeline Capacity to California.	Rulemaking 02-06-041 (Filed June 27, 2002)
In the Matter of the Application of Southern California Gas Company Regarding Year Six (1999-2000) Under Its Experimental Gas Cost Incentive Mechanism and Related Gas Supply Matters. (U 904 G)	Application 00-06-023 (Filed June 15, 2000)
In the Matter of the Application of San Diego Gas and Electric Company (U 902 G) to Modify and Extend Permanent Gas Procurement Performance-Based Ratemaking Mechanism.	Application 02-10-040 (Filed October 31, 2002)