CPUC Proposes Administrative Changes to Utility Gas Procurement Incentive Mechanisms

As part of the CPUC's investigation into the causes and consequences of the Winter 2022-2023 natural gas price spike (I.23-03-008), Commission staff recently issued "White Paper Part II." The paper focuses on how the utilities' gas procurement incentive mechanisms (PG&E's Core Procurement Incentive Mechanism, or CPIM, and SoCalGas's Gas Cost Incentive Mechanism, or GCIM) performed during the crisis.

• The paper expands the CPUC's investigation, examining whether storage practices, Independent Storage Provider (ISP) contracts, and gas-electric market interactions contributed to extraordinary price volatility. Staff concludes that storage withdrawals generally aligned with cold-weather demand rather than with price-driven market withholding, and that inventories across PG&E, SoCalGas, and ISPs declined significantly over the winter. However, according to the paper, questions remain about whether ISPs operate within a competitive market environment (particularly as PG&E’s core procurement department is mandated to procure large volumes of storage from them).
• The paper also finds that high gas prices, particularly in December 2022, directly translated into higher electricity prices in the CAISO's markets, given the reliance on gas-fired generation as the marginal price-setting resource. Wholesale market costs soared from $12.6 billion in 2021 to $21.6 billion in 2022, leading to noticeable increases in retail bills for PG&E and SCE customers. The paper says that statistical modeling confirms a strong correlation (over 0.9) between gas and electricity prices in both northern and southern California service territories, while also showing that volatility during Winter 2022–23 was the highest in recent years.

Major stakeholders recently filed comments offering varying degrees of support, criticism, and alternative policy proposals. Their positions are summarized below.

PG&E

PG&E agrees with Staff’s conclusions that its hedging activities and the CPIM did not contribute to gas price spikes. PG&E's supports the paper's three administrative recommendations:

1. Filing a Tier 1 advice letter to clarify CPIM details in its tariffs (a Tier 1 filing takes effect immediately upon submission and used for routine matters);
2. Aligning approval processes for shareholder awards across utilities via Tier 2 advice letter (a Tier 2 filing does not take effect until CPUC staff reviews it); and
3. Establishing a fixed annual filing deadline for CPIM reports.

PG&E also clarifies that any savings from sales at the citygate or border were due to optimization of contracted physical capacity (not speculative trading) and emphasizes that financial hedges reduced costs for core customers.

The Utility Reform Network (TURN)

TURN supports Staff’s recommendations and underscores that procurement incentive mechanisms significantly affect ratepayer costs because PG&E and SoCalGas are among the largest gas purchasers in the West. TURN argues for greater alignment and transparency between the CPIM and GCIM, calling both mechanisms overly complex and lacking synchronization in reporting timelines.

TURN also notes that hedging lowered customer costs (especially PG&E’s financial hedges, which offset high gas prices) and supports Staff’s proposals to clarify tariff descriptions and standardize oversight, but believes deeper reforms may require a new CPUC proceeding.

SoCalGas

SoCalGas supports the three administrative recommendations but defends the effectiveness of the GCIM, stating that it is transparent, timely, and already includes an established shareholder award process through application rather than advice letter. SoCalGas agrees to improve tariff descriptions but argues that broader changes to procurement incentives should be taken up in a future proceeding.

Sierra Club

Sierra Club takes the strongest position, arguing that the incentive mechanisms are fundamentally “broken.” It notes that SoCalGas has received shareholder rewards every year for decades without ever paying a penalty, even during periods of high customer bills.

Sierra Club urges the CPUC to suspend shareholder rewards immediately and replace the current incentive structures with a fuel-cost-sharing mechanism that better aligns with state climate policy and ratepayer interests. If replacement is not immediate, Sierra Club recommends at least a moratorium on shareholder rewards until a future proceeding reexamines the mechanisms

INSTANT ANALYSIS

The white paper's recommended moves wouldn't change how utilities profit from gas purchasing yet but they might enhance transparency and set the stage for a new battle. TURN and Sierra Club are already pushing for deeper reform (or even a suspension of utility rewards). CPUC staff indicates that anything beyond the paper's recommended procedural fixes will require a new phase, or an altogether new proceeding.