On a split vote and with a relatively large amount of discussion, the five-member California Public Utilities Commission, minus one of its commissioners, voted 3-1 Thursday to approve an expanded natural gas hedging program for Pacific Gas and Electric Co. The continuing concern over the impact of rising wholesale prices for natural gas in the wake of the two Gulf Coast hurricanes was a strong focus of both the action and discussion.

The adopted action rejected both the utility’s proposal and one by a CPUC administrative law judge in favor of a compromise proposal by the consumer group The Utility Reform Network (TURN). The dissenting commissioner, Geoffrey Brown, supported the judge’s proposed decision, which would not allow multi-year hedges.

CPUC President Michael Peevey and his colleague Susan Kennedy supported the TURN alternative, noting that with natural gas bills expected to rise by at least 40% this winter, California’s utilities need “the necessary tools to mitigate any additional price increases.” Kennedy called natural gas prices this winter “the single biggest threat” to the state’s energy security.

Kennedy said the action allows PG&E to get around the state’s current gas procurement rules that can penalize utilities for taking more risk in additional hedges. “I strongly support removing the hedging costs from the core procurement mechanism for this winter, and the following winter we will be aligning the company’s interests with the consumer’s interest,” said Kennedy, adding that the state’s major gas utilities should come up with plans for how to treat hedging in the longer term future.

Thursday’s action is designed to allow the PG&E utility to further hedge its gas portfolio to protect the core (residential and small commercial) customers from future price spikes. As a result, residential customers will pay an extra $2/month, which Peevey characterized as necessary insurance.

“It’s a small price to pay to guard against higher bills,” he said. “It is insurance, which always costs something.” The decision leaves in place a core gas-buying incentive mechanism, but orders the utility’s shareholders to forego any benefits from it that may accrue for 2004 and 2005.

However, Commissioner Brown argued the utility has had the authority to hedge all along, and the action Thursday only removes risks for the PG&E shareholders associated with that hedging. “The action effectively places all the risks and costs onto the ratepayers,” Brown said. “There is nothing about higher natural gas prices that justifies increasing ratepayer risk, and decreasing shareholder risk. PG&E should not be allowed to in effect hold ratepayers at risk by implicitly threatening not to hedge unless shareholders are held harmless.”

Peevey said the decision does not give PG&E’s utility carte blanche, but rather serves as a “balanced” compromise, given the situation in today’s wholesale natural gas marketplace.

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