This excerpt taken from the PCG 10-K filed Feb 18, 2005.
Natural Gas Procurement
The Utility sets the natural gas procurement rate for core customers monthly based on the forecasted costs of natural gas, core pipeline capacity and storage costs. The Utility reflects the difference between actual natural gas purchase costs and forecasted natural gas purchase costs in several natural gas balancing accounts, with under-collections and over-collections taken into account in subsequent monthly rates.
Under the core procurement incentive mechanism, or the CPIM, the Utility's natural gas purchase costs (including Canadian and interstate capacity and volumetric transportation charges) are compared to an aggregate market-based benchmark based on a weighted average of published monthly and daily natural gas price indices at the points where the Utility typically purchases natural gas. Costs that fall within a tolerance band, which is currently between 99% and 102% of the benchmark, are considered reasonable and fully recoverable, in customers' rates. One-half of the costs above 102% of the benchmark are recoverable in customers' rates, and the Utility's customers receive three-fourths of the savings when the costs are below 99% of the benchmark. Any awards associated with the CPIM are reflected annually in the purchased natural gas balancing account after the close of the annual period ending October 31 that is used to measure the CPIM. These awards are not included in earnings until approved by the CPUC.
On September 2, 2004, the CPUC issued an order establishing a process, whereby utilities receive CPUC pre-approval of contracts for interstate and Canadian pipeline capacity to support their natural gas procurement activities.