In its usual split fashion, the five-member California Public Utilities Commission Thursday voted 3-2 to allow Southern California Edison Co. on an interim basis to hedge a portion of its natural gas price risk in power supply contracts with small qualifying facility (QF) electricity generators. Specifics of the authority are kept confidential for proprietary reasons. The hedges cannot extend beyond June 30, 2004.

In getting the interim authority, some of the commissioners criticized Edison for waiting until less than a month ago to ask for the authority to hedge for this winter and spring. The two commissioners voting against the measure — former CPUC president Loretta Lynch and Carl Wood — objected to the “lack of information on which to make a decision” and the fact that the utility used a stopgap “advice letter” filing, rather than a formal application that would have taken more time and required formal “evidence” to support its hedging need.

Edison’s authority is limited to the first two quarters of next year with the expectation that a permanent authority will be given to the utility in the interim period (in December most likely) as part of a pending rate case. The interim authority was considered “most critical” because that is the period in which wholesale natural gas prices are expected to be the most volatile, said CPUC President Michael Peevey, who advocated the position ultimately adopted by a majority of the state regulators.

Peevey and the majority favored putting fewer limits on how Edison structured the hedges. Specifically, he opposed a proposed decision by the CPUC consumer unit, the Office of Ratepayer Advocates (ORA), that wanted to use hedging models and Nymex data as limits on what Edison was able to put in place.

“In the case of the use of a cost-effectiveness model, it may make sense in some cases, but not in others,” Peevey said. “Up front cost-effectiveness measures may work when it comes to valuing options, but not for fixed-price deals as (another consumer group) TURN points out in its comments. Equally important is the value of a hedge as an insurance policy, and like car insurance, the only real way to know the value of it ahead of time is to compare prices among providers, or it may not become apparent until you have an accident. If you never have an accident, it appears you paid too much for insurance.”

The state’s other two major private-sector utilities with QF contracts — Pacific Gas and Electric Co. and San Diego Gas and Electric Co. — already have been given the authority to hedge; the only reason Edison doesn’t have it, Peevey said, is that the issue was left out of its October 2001 federal court settlement with the CPUC that has been driving its utility operations ever since.

Both Peevey and Commissioner Susan Kennedy urged the regulators not to “micro-manage” the utility in this situation.

Kennedy said that recent headlines in the news media over the past 10 days have “screamed that gas prices are going to go up by as much as 30% this winter,” so she feels that “there is no question that we should allow our utilities to engage in financial transactions to protect the customers. The faster we (the CPUC) get out of the way the better.”

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