The California Public Utilities Commission, citing restrictions that force electric utilities to buy and sell power through the state's power exchange, has rejected a request by Pacific Gas and Electric Co., to use energy-related financial derivatives (em futures, swaps and options, etc. (em to manage risk associated with volatility in gas and electric commodity markets.

According to the commission, the proposal by PG&E for blanket authority to employ derivatives would violate several aspects of its electric restructuring policy. It explained that during the restructuring transition period all utility purchases and sales of electricity are to be accomplished through the PX, and physical bilateral contracts between a utility and a customer are prohibited. The restructuring policy encourages the use of "contracts for differences" to hedge the cost of electricity over time, which has been described as "virtual" bilateral trading. However, such agreements among consenting traders on the PX do not include futures or forwards contracts and contain no commitment to buy the commodity, the commission said.

The PUC added that use of the derivative instruments might give PG&E an incentive and opportunity to manipulate prices on new power exchange, which is set up to guarantee efficient pricing during the transition to a restructured electric industry. It said that such incentives might include increasing the amount of transition costs to be recovered under the restructuring plan and ensuring its derivatives are profitable. It also said that the utility might have to take or deliver electricity outside of the PX if it is unable to find a buyer before the maturity of the contract.

Pacific Gas & Electric had argued that controlling costs and managing electric portfolio price risk was especially important, given the rate freeze mandated under the state's new electric restructuring law. Re Pacific Gas & Electric Co., Decision 97-08-058, a.96-11-037, Aug. 1, 1997 (Cal.P.U.C.).

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The California Public Utilities Commission, citing restrictions that force electric utilities to buy and sell power through the state's power exchange, has rejected a request by Pacific Gas and Electric Co., to use energy-related financial derivatives (em futures, swaps and options, etc. (em to manage risk associated with volatility in gas and electric commodity markets.

According to the commission, the proposal by PG&E for blanket authority to employ derivatives would violate several aspects of its electric restructuring policy. It explained that during the restructuring transition period all utility purchases and sales of electricity are to be accomplished through the PX, and physical bilateral contracts between a utility and a customer are prohibited. The restructuring policy encourages the use of "contracts for differences" to hedge the cost of electricity over time, which has been described as "virtual" bilateral trading. However, such agreements among consenting traders on the PX do not include futures or forwards contracts and contain no commitment to buy the commodity, the commission said.