Pacific Gas & Electric (PCG)

Natural Gas Supply and Transportation

In December 2004, the CPUC issued a final decision approving the Gas Accord III Settlement Agreement that sets the Utility’s gas transmission and storage rates and market structure for a three-year term, commencing January 1, 2005. The decision extends the terms of a settlement agreement originally reached in 1997 called the Gas Accord. The CPUC has approved previous extensions of the Gas Accord. Under the terms of the recent decision, the Utility’s revenue requirement has been set at $427.4 million for 2005, $435.5 million for 2006, and $443.7 million for 2007. This is compared to an authorized revenue requirement for 2004 of $416.9 million, adjusted for the CPUC’s final decision in the cost of capital proceeding as discussed above. Under the Gas Accord, the Utility’s gas transmission and storage facilities are operated on an open-access basis, thus allowing all eligible shippers to subscribe to gas transmission and storage services. In addition, the Utility assumes risk of not recovering its full natural gas transportation and storage costs since the Utility does not have a balancing account for over-collections or under-collections of natural gas transportation or storage revenues.

The original Gas Accord market structure included an incentive mechanism for recovery of core procurement costs, or the CPIM, which is used to determine the reasonableness of the Utility’s costs of purchasing natural gas for its customers. Under the CPIM, costs that fall within a market-based tolerance band, which is currently 99% to 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 the Utility’s customers’ rates, and the Utility’s customers receive three-fourths of the savings when the costs are below 99% of the benchmark.

In 2004, the CPUC ordered the Utility and other California natural gas utilities to submit proposals addressing how California’s long-term natural gas needs should be met through contracts with interstate pipelines, new liquefied natural gas facilities, storage facilities and in-state production of natural gas. Proposals were submitted in February 2004. The CPUC issued a decision in September 2004, which authorizes the utilities to expand their portfolios to access gas from multiple gas producing basins, to negotiate reduced capacity, and to terminate expiring contracts. The decision also established a pre-approval process for utility interstate and Canadian pipeline capacity contracts. The second phase of this proceeding will establish a process to consider the adoption of standardized operational balancing agreements to connect all new upstream gas pipelines that interconnect with the pipeline systems of San Diego Gas and Electric and Southern California Gas Company.

Natural Gas Supply and Transportation

        In December 2004, the CPUC issued a final decision approving the Gas Accord III Settlement Agreement that sets the Utility's gas transmission and storage rates and market structure for a three-year term, commencing January 1, 2005. The decision extends the terms of a settlement agreement originally reached in 1997 called the Gas Accord. The CPUC has approved previous extensions of the Gas Accord. Under the terms of the recent decision, the Utility's revenue requirement has been set at $427.4 million for 2005, $435.5 million for 2006, and $443.7 million for 2007. This is compared to an authorized revenue requirement for 2004 of $416.9 million, adjusted for the CPUC's final decision in the cost of capital proceeding as discussed above. Under the Gas Accord, the Utility's gas transmission and storage facilities are operated on an open-access basis, thus allowing all eligible shippers to subscribe to gas transmission and storage services. In addition, the Utility assumes risk of not recovering its full natural gas transportation and storage costs since the Utility does not have a balancing account for over-collections or under-collections of natural gas transportation or storage revenues.

        The original Gas Accord market structure included an incentive mechanism for recovery of core procurement costs, or the CPIM, which is used to determine the reasonableness of the Utility's costs of purchasing natural gas for its customers. Under the CPIM, costs that fall within a market-based tolerance band, which is currently 99% to 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 the Utility's customers' rates, and the Utility's customers receive three-fourths of the savings when the costs are below 99% of the benchmark.

        In 2004, the CPUC ordered the Utility and other California natural gas utilities to submit proposals addressing how California's long-term natural gas needs should be met through contracts with interstate pipelines, new liquefied natural gas facilities, storage facilities and in-state production of natural gas. Proposals were submitted in February 2004. The CPUC issued a decision in September 2004, which authorizes the utilities to expand their portfolios to access gas from multiple gas producing basins, to negotiate reduced capacity, and to terminate expiring contracts. The decision also established a pre-approval process for utility interstate and Canadian pipeline capacity contracts. The

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second phase of this proceeding will establish a process to consider the adoption of standardized operational balancing agreements to connect all new upstream gas pipelines that interconnect with the pipeline systems of San Diego Gas and Electric and Southern California Gas Company.