California regulators last Thursday unanimously approved a seven-year natural gas hedging program for Pacific Gas and Electric Co., the first of its kind to be endorsed by the California Public Utilities Commission (CPUC). The CPUC has been reviewing and approving the major utility's hedging strategies on a year-to-year basis since 2005. As with the year-to-year plans, terms of the long-term plan are confidential.

Last August, the CPUC approved gas hedging plans for each of the major investor-owned utilities, encouraging them to come up with longer-term, multi-year plans (see Daily GPI, Aug. 25, 2006). PG&E's utility became the first to try the multi-year approach.

"PG&E took the lead and filed its application for a long-term plan to begin this winter and continue for the next seven years," said CPUC President Michael Peevey, noting that the utility; the CPUC's independent consumer unit, the Division of Ratepayer Advocate (DRA); and the state agricultural association (Aglet Consumers Alliance) reached a settlement, which was what state regulators approved unanimously last Thursday.

As approved by the CPUC, the settlement does a number of things besides approving the overall hedging operations: (1) it creates an advisory group, including representatives from PG&E, the CPUC/DRA and Aglet to meet annually on the utility's hedging plan; (2) it begins the first new plan with the coming winter 2007-08 season; (3) all gains and losses for the program will be accounted for outside the current "gas cost incentive mechanism" (GCIM) with all costs and benefits going to PG&E's core customers; (4) beginning in 2009 the advisory group can force PG&E to file an application if the group wants the utility to change or modify the program; and (5) modifies the GCIM to assign more of the savings (80%) to ratepayers when PG&E gas purchases are less costly than the pre-established gas price benchmark.

Regulators also lowered the budget for options below what was in the settlement agreement as well as the physical amount of gas that can be used in hedges and swaps, and the annual cost of the program to customers is equal to, or below, the previous authorized amount of $14/Mcf.

Peevey said the settlement and the commission's action put in place "sufficient oversight" of the hedging by private-sector utilities, although he acknowledged there were some concerns. Thus, the CPUC order also requires the commission to open a new proceeding (for a future rulemaking) to review the hedging under the utilities' GCIM incentives. That proceeding is to start by the end of this year.

The CPUC's newest member, Timothy Simon, said he supported the hedging program as "a good insurance policy" for consumers to protect against undue price spikes. "I also believe that at some point we need to incorporate incentive-based policies into our entire regulatory programs," Simon said. "Going forward, I urge this commission to incorporate performance incentives in all regulatory programs."

In approving the individual utility one-year plans last year, the regulators removed the utilities' costs of the financial hedging from each utility's respective natural gas purchase incentive mechanisms. "This is important because it will allow the utilities to take on expanded hedging programs while aligning ratepayer and shareholder interests," Peevey said. Initially, he authored a decision that rejected an administrative law judge's recommendation to deny the utilities' hedging plans in 2006.

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