The California Public Utilities Commission (CPUC) last Thursday adopted a new framework for major investor-owned utilities' (IOU) gas hedging programs, including the adoption of a settlement involving Pacific Gas and Electric Co. (PG&E).
The new approach also applies to Sempra Energy's Southern California Gas Co. (SoCalGas) and San Diego Gas and Electric Co. (SDG&E). Las Vegas, NV-based Southwest Gas Corp.'s operations in California remain unchanged.
The changes involve incentive treatment for hedging by the three California-based gas IOUs. PG&E's settlement, resulting in a risk/reward sharing of hedging deals between ratepayers and investors, is subject to a 1.5% commodity cost cap. Winter hedging design and implementation is left with PG&E.
SoCalGas and SDG&E will have revised risk/reward sharing on hedging programs, said the CPUC action. Hedging risk/reward sharing for the two Sempra gas utility operations, which effectively have been merged, will now include a 25% ratio assigned to the gas cost incentive mechanism (GCIM). Separately at the CPUC meeting Thursday regulators approved a $12 million reward for SoCalGas under the GCIM program.
As with PG&E, SoCalGas will not change its winter hedging design and implementation.
The CPUC said it views hedging as a form of "price insurance" used to protect customers from excessive swings in wholesale gas prices, noting that the use of hedging by utilities has grown substantially in recent years as natural gas prices have shown greater volatility in the past decade.
"Today's decision shifts a portion of the financial risk for hedging onto the utilities," the CPUC said. "Gains or losses attributed to hedging of natural gas prices will now be shared by utilities and their customers, encouraging utilities to hedge more cost-effectively."
Commissioner John Bohn said Thursday's decision gives utilities "more incentive to hedge wisely, while creating a level of protection for consumers from the risks associated with hedging."
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