Volume I. Part I - California Public Utilities Commission

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PG&E has several “lessons learned” with respect to electric and gas hedging.
These lessons came from PG&E’s early hedging activities under its 2003 and 2004
STPP, as enhanced by its Electric Portfolio Gas Hedging Plan (“GHP”)and its
succeeding updates, and market activity over the past three and a half years.
First, hedging activity, especially hedging the gas component, has a significant
impact on To-expiration Value-at-Risk (“TeVaR”), and thus, overall portfolio risk.
PG&E has successfully reduced TeVaR with its gas hedging program. However, gas
and electric hedging cannot guarantee that PG&E’s electric portfolio TeVaR will
remain below the Commission-approved Consumer Risk Tolerance (“CRT”) of
$0.01/kilowatt-hour (“kWh”). At times, PG&E has found that even if electric and gas
positions were 100% forward hedged, TeVaR could still exceed the CRT due to other
portfolio risks such as load and hydro risk uncertainty.
Second, during implementation of the gas hedging program, market timing risk
can be reduced by spreading trading over a longer period of time. For example, in
2005, PG&E benefited from beginning implementation of its gas hedging program in
the spring, long before Hurricane Katrina impacted the gas market. This desirable
characteristic is built into the hedging operating targets.
Finally, it is most effective to manage hedging of the electric portfolio
electricity and gas components in an integrated manner, using a consistent set of
operating targets over a common forward period. This is discussed in detail in
Volume I, Sections III.B.1 and III.B.3.
E. Changes Since Previous Procurement Plans
In addition to incorporating PG&E’s existing STPP authority and 2004 LTPP
authority, PG&E’s 2006 LTPP incorporates the following major changes relative to
prior long-term procurement plans:
• The 2006 LTPP uses an analytical framework based on the past resource
plans of PacifiCorp and Puget Sound. PG&E’s planning approach uses a
number of scenarios to test the performance of three candidate procurement
plans based on selected metrics. Volume 1, Section IV.A describes PG&E’s
analytical approach.
• The 2006 LTPP includes larger amounts of preferred resources, and
associated transmission, than any previous PG&E procurement plan.
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