Reliability Must Run Agreements

The ISO has entered into reliability must run, or RMR, agreements with various power plant owners, including the Utility, that require designated units, known as RMR units, to remain available to generate electricity upon the ISO’s demand when needed for local transmission system reliability.  At March 31, 2005, as a party to a Transmission Control Agreement, or TCA, the Utility estimated that it could be obligated to pay the ISO approximately $211 million for costs incurred under these RMR agreements during the period April 1, 2005 to June 30, 2006.  Of this amount, the Utility estimates it would receive approximately $21 million under these RMR agreements during the same period.  These payments and receipts are subject to applicable ratemaking mechanisms.

In June 2000, a FERC administrative law judge, or ALJ, issued an initial decision addressing subsidiaries of Mirant Corporation.  The decision approved rates and a ratemaking methodology that, if affirmed by the FERC, will require the Mirant subsidiaries that are parties to three RMR agreements with the ISO to refund to the ISO, and the ISO to refund to the Utility, excess payments of approximately $360 million, including interest, for the availability of RMR plants under these agreements.  On July 14, 2003, Mirant Corporation and certain of its subsidiaries filed a petition for reorganization under Chapter 11 and on December 15, 2003, the Utility filed claims in Mirant’s Chapter 11 proceeding including a claim for an RMR refund.  On January 14, 2005, the Utility entered into a settlement with Mirant Corporation and its subsidiaries that own RMR units that, among other matters, will resolve the Utility’s claim through September 30, 2004.  The settlement agreement is described below.  In its order approving the settlement agreement issued April 13, 2005, the FERC terminated the Mirant RMR rate case without deciding the merits of the June 2000 initial decision.  The Utility will seek rehearing of only that part of the order terminating the RMR case.

In November 2001, after the ALJ issued the initial decision in the Mirant subsidiaries’ rate case, two complaints were filed at the FERC against other RMR plant owners, including the Utility, alleging that the ratemaking methodology approved in the ALJ’s initial decision should be applied to the other RMR agreements.  The complainants asked the FERC to

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Reliability Must Run Agreements

The ISO has entered into reliability must run, or RMR, agreements with various power plant owners, including the Utility, that require designated units in certain power plants, known as RMR plants, to remain available to generate electricity upon the ISO’s demand when needed for local transmission system reliability. At December 31, 2004, as a party to the Transmission Control Agreement, or the TCA, the Utility estimated that it could be obligated to pay the ISO approximately $570 million in costs incurred under these RMR agreements during the period January 1, 2005 to December 31, 2006. Of this amount, the Utility estimates that it would receive approximately $42 million under its RMR agreements during the same period. These costs and revenues are subject to applicable ratemaking mechanisms.

In June 2000, a FERC administrative law judge, or ALJ, issued an initial decision addressing subsidiaries of Mirant Corporation. The decision approved rates and a ratemaking methodology that, if affirmed by the FERC, will require the Mirant subsidiaries that are parties to three RMR agreements with the ISO to refund to the ISO, and the ISO to refund to the Utility, excess payments of approximately $360 million, including interest, for the availability of Mirant’s RMR plants under these agreements. On July 14, 2003, Mirant filed a petition for reorganization under Chapter 11 and on December 15, 2003, the Utility filed claims in Mirant’s Chapter 11 proceeding including a claim for an RMR refund. On January 14, 2005, the Utility entered into a settlement with Mirant and its subsidiaries that own RMR units that will resolve the Utility’s claim. The settlement agreement is subject to approval by the FERC, the bankruptcy court overseeing the Chapter 11 cases filed by Mirant and these subsidiaries, and to the extent deemed necessary by the Utility, by the bankruptcy court that retains jurisdiction over the Utility’s Chapter 11 case. Under the settlement, Mirant will transfer to the Utility Mirant’s interest in and equipment for the partially built Contra Costa Unit 8 power plant. If Contra Costa Unit 8 is not transferred to the Utility as a result of various contingencies described in the settlement, Mirant will pay the Utility at least $70 million in lieu of the plant assets. In addition, under the settlement, the Utility will enter into a contract that gives the Utility the right to dispatch power from certain RMR units owned by Mirant subsidiaries from 2006-2012, and the Utility will receive approximately $60 million of allowed claims, credits, offsets, or cash from Mirant or its subsidiaries. The Utility is unable to predict whether and when the FERC or the bankruptcy courts will approve the settlement. Although the settlement resolves issues concerning any refund that might be owed by Mirant, it does not address the underlying merits of the RMR case, which will still be decided by the FERC.

In November 2001, after the ALJ issued the initial decision in Mirant’s rate case, two complaints were filed at the FERC against other RMR plant owners, including the Utility, alleging that the ratemaking methodology approved in the ALJ’s initial decision should be applied to the other RMR agreements. The complainants asked the FERC to take no action until after the FERC issues its final decision in Mirant’s rate case. If the FERC adopts the ALJ’s decision in the Mirant rate case and applies the ratemaking methodology to the Utility’s RMR plants, the Utility could be required to refund payments it received from the ISO for the availability of the Utility’s RMR plants. The Utility has responded to the complaint asserting that the methodology approved in the ALJ’s decision should not apply to the Utility. The FERC has not yet acted on these complaints. On December 23, 2004, the Utility filed a settlement with all the complainants that, if approved by FERC, will result in the withdrawal of the complaint with no decision by the FERC on its merits. If the case is not dismissed, the Utility believes the ultimate outcome of this matter will not have an adverse material effect on the Utility’s results of operations or financial condition.

Reliability Must Run Agreements

        The ISO also has entered into reliability must run, or RMR, agreements with various power plant owners, including the Utility, that require designated units in certain power plants, known as RMR units, to remain available to generate electricity upon the ISO's demand when needed for local transmission system reliability. As a participating transmission owner under the TCA, the Utility is responsible for the ISO's costs paid under RMR agreements to power plant owners within or adjacent to the Utility's service territory.

        At December 31, 2004, the Utility estimated that it could be obligated to pay the ISO approximately $570 million in costs incurred under these RMR agreements during the period January 1, 2005 to December 31, 2006. Of this amount, the Utility estimates that it would receive approximately $42 million under its RMR agreements during the same period. These costs and revenues are subject to applicable ratemaking mechanisms. For a discussion of a proposed settlement agreement entered into in January 2005 with Mirant Corporation and various of its subsidiaries to resolve the Utility's claims that it was overcharged under Mirant's RMR agreements and other RMR-related issues that could affect the Utility, see the section titled "Reliability Must Run Agreements" in MD&A.

Reliability Must Run Agreements

        The ISO has entered into reliability must run, or RMR, agreements with various power plant owners, including the Utility, that require designated units in certain power plants, known as RMR plants, to remain available to generate electricity upon the ISO's demand when needed for local transmission system reliability. At December 31, 2004, as a party to the Transmission Control Agreement, or the TCA, the Utility estimated that it could be obligated to pay the ISO approximately $570 million in costs incurred under these RMR agreements during the period January 1, 2005 to December 31, 2006. Of this amount, the Utility estimates that it would receive approximately $42 million under its RMR agreements during the same period. These costs and revenues are subject to applicable ratemaking mechanisms.

        In June 2000, a FERC administrative law judge, or ALJ, issued an initial decision addressing subsidiaries of Mirant Corporation. The decision approved rates and a ratemaking methodology that, if affirmed by the FERC, will require the Mirant subsidiaries that are parties to three RMR agreements with the ISO to refund to the ISO, and the ISO to refund to the Utility, excess payments of approximately $360 million, including interest, for the availability of Mirant's RMR plants under these agreements. On July 14, 2003, Mirant filed a petition for reorganization under Chapter 11 and on December 15, 2003, the Utility filed claims in Mirant's Chapter 11 proceeding including a claim for an RMR refund. On January 14, 2005, the Utility entered into a settlement with Mirant and its subsidiaries that own RMR units that will resolve the Utility's claim. The settlement agreement is subject to approval by the FERC, the bankruptcy court overseeing the Chapter 11 cases filed by Mirant and these subsidiaries, and to the extent deemed necessary by the Utility, by the bankruptcy court that retains jurisdiction over the Utility's Chapter 11 case. Under the settlement, Mirant will transfer to the Utility Mirant's interest in and equipment for the partially built Contra Costa Unit 8 power plant. If Contra Costa Unit 8 is not transferred to the Utility as a result of various contingencies described in the settlement, Mirant will pay the Utility at least $70 million in lieu of the plant assets. In addition, under the settlement, the Utility will enter into a contract that gives the Utility the right to dispatch

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power from certain RMR units owned by Mirant subsidiaries from 2006-2012, and the Utility will receive approximately $60 million of allowed claims, credits, offsets, or cash from Mirant or its subsidiaries. The Utility is unable to predict whether and when the FERC or the bankruptcy courts will approve the settlement. Although the settlement resolves issues concerning any refund that might be owed by Mirant, it does not address the underlying merits of the RMR case, which will still be decided by the FERC.

        In November 2001, after the ALJ issued the initial decision in Mirant's rate case, two complaints were filed at the FERC against other RMR plant owners, including the Utility, alleging that the ratemaking methodology approved in the ALJ's initial decision should be applied to the other RMR agreements. The complainants asked the FERC to take no action until after the FERC issues its final decision in Mirant's rate case. If the FERC adopts the ALJ's decision in the Mirant rate case and applies the ratemaking methodology to the Utility's RMR plants, the Utility could be required to refund payments it received from the ISO for the availability of the Utility's RMR plants. The Utility has responded to the complaint asserting that the methodology approved in the ALJ's decision should not apply to the Utility. The FERC has not yet acted on these complaints. On December 23, 2004, the Utility filed a settlement with all the complainants that, if approved by FERC, will result in the withdrawal of the complaint with no decision by the FERC on its merits. If the case is not dismissed, the Utility believes the ultimate outcome of this matter will not have an adverse material effect on the Utility's results of operations or financial condition.