Gas Procurement Incentive Mechanisms
Gas procurement incentive mechanisms were first implemented in the mid-1990s. These mechanisms replaced the highly litigious and time-consuming “reasonableness reviews” that prevailed prior to the mid-1990s. The goals of the incentive mechanisms were three-fold: (1) to align customer and shareholder interests; (2) to measure utility performance relative to a market-based benchmark; and (3) to reduce the regulatory burden. In developing the incentive mechanisms, DRA collaborated with each utility so that mechanisms were designed to strike a balance between risk and reward while providing utilities an incentive to acquire gas at the lowest possible cost. The mechanisms have been modified over time to accommodate market and regulatory changes.
- The Performance Based Ratemaking (PBR) mechanism was adopted for SDG&E in 1993.
- The Gas Cost Incentive Mechanism (GCIM) was adopted for SoCalGas in 1994.
- The Core Procurement Incentive Mechanism (CPIM) was adopted for PG&E in 1997.
- In 2005, a gas cost incentive mechanism was also adopted for Southwest Gas.
While the basic structure is the same for the gas procurement incentive mechanisms, each utility’s mechanism incorporates its own unique facets. All mechanisms have deadbands, where ratepayers receive 100% of any gains or incur 100% of the losses within the deadband around the benchmark. If a utility procures gas at prices lower than the benchmark, then “savings” are realized. Ratepayers and shareholders share these savings. On the other hand, if the utility procures gas at prices higher than the benchmark, then losses are realized. In this instance, ratepayers and shareholders share these losses. Benchmarks are based on gas price indices published by industry journals such as Inside FERC and Gas Daily.