<SUBMISSION>
<ACCESSION-NUMBER>0001004980-03-000295
<TYPE>8-K
<PUBLIC-DOCUMENT-COUNT>2
<PERIOD>20031222
<ITEMS>5
<ITEMS>7
<FILING-DATE>20031222
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>PG&E CORP
<CIK>0001004980
<ASSIGNED-SIC>4931
<IRS-NUMBER>943234914
<STATE-OF-INCORPORATION>CA
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>8-K
<ACT>34
<FILE-NUMBER>001-12609
<FILM-NUMBER>031067799
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>ONE MARKET SPEAR TOWER
<STREET2>SUITE 2400
<CITY>SAN FRANCISCO
<STATE>CA
<ZIP>94105
<PHONE>4152677000
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>ONE MARKET SPEAR TOWER
<STREET2>SUITE 2400
<CITY>SAN FRANCISCO
<STATE>CA
<ZIP>94105
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>PG&E PARENT CO INC
<DATE-CHANGED>19951214
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>8-K
<SEQUENCE>1
<FILENAME>final122203.htm
<DESCRIPTION>FORM 8-K
<TEXT>
<html>
<head>
<title>12-22-03 Form 8K</title>
</head>
<body>
<div>
<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td colspan="4" valign="top">
<p align="center">SECURITIES AND EXCHANGE COMMISSION</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center"><br />
 </p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center">Washington, D.C.&nbsp; 20549</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center"><br />
<br />
 </p>
</td>
</tr>

<tr>
<td colspan="4" valign="top"></td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center">FORM 8-K</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center"><br />
 </p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center">CURRENT REPORT</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center"><br />
 </p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center">Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center"><br />
 </p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center">Date of Report: December 22, 2003</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p><br />
 </p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
</tr>

<tr>
<td valign="top">
<p align="center"><br />
 Commission<br />
 File<br />
 Number</p>
</td>
<td valign="top">
<p align="center">Exact Name of<br />
 Registrant<br />
 as specified in<br />
 its charter</p>
</td>
<td valign="top">
<p align="center"><br />
 State or other<br />
 Jurisdiction of<br />
 Incorporation</p>
</td>
<td valign="top">
<p align="center"><br />
 IRS Employer<br />
 &nbsp; Identification<br />
 Number</p>
</td>
</tr>

<tr>
<td valign="top">
<p align="center">_____________</p>
</td>
<td valign="top">
<p align="center">_____________</p>
</td>
<td valign="top">
<p align="center">_____________</p>
</td>
<td valign="top">
<p align="center">_____________</p>
</td>
</tr>

<tr>
<td valign="top">
<p align="center">1-12609</p>

<p align="center">1-2348</p>
</td>
<td valign="top">
<p align="center">PG&amp;E Corporation</p>

<p align="center">Pacific Gas and<br />
 Electric Company</p>
</td>
<td valign="top">
<p align="center">California</p>

<p align="center">California</p>
</td>
<td valign="top">
<p align="center">94-3234914</p>

<p align="center">94-0742640</p>

<p align="center"><br />
 </p>
</td>
</tr>

<tr>
<td valign="top">
<p align="center">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p align="center">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p align="center">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p align="center">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
</tr>

<tr>
<td colspan="2" valign="top">
<p align="center">Pacific Gas and Electric Company<br />
 77 Beale Street, P. O. Box 770000<br />
 San Francisco, California&nbsp;&nbsp;94177</p>
</td>
<td colspan="2" valign="top">
<p align="center">PG&amp;E Corporation<br />
 One Market, Spear Tower, Suite 2400<br />
 San Francisco, California&nbsp;&nbsp;94105</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center">(Address of principal executive offices) (Zip
Code)</p>
</td>
</tr>

<tr>
<td valign="top">
<p align="center"><br />
 </p>
</td>
<td valign="top">
<p align="center">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top"></td>
<td valign="top"></td>
</tr>

<tr>
<td colspan="2" valign="top">
<p align="center">Pacific Gas and Electric Company<br />
 (415) 973-7000</p>
</td>
<td colspan="2" valign="top">
<p align="center">PG&amp;E Corporation<br />
 (415) 267-7000</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
</tr>

<tr>
<td colspan="4" valign="top">
<p align="center">(Registrant's telephone number, including area
code)</p>
</td>
</tr>

<tr>
<td valign="top">
<p>&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
</tr>
</table>

<p><br />
<br />
<br />
</p>

<br clear="all" />


<div align="center">

<hr size="2" width="100%" align="center" />
</div>

<p>Item 5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other Events</p>

<p>A.&nbsp; California Public Utilities Commission Approves
Proposed Settlement Agreement as Recommended to be Modified by
Pacific Gas and Electric Company and The Utility Reform Network</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December 19, 2003, the California Public Utilities Commission
(CPUC) issued&nbsp; a decision approving modifications to the
proposed settlement agreement announced in June 2003 by PG&amp;E
Corporation, its subsidiary, Pacific Gas and Electric Company
(Utility), and the CPUC staff to jointly support a new plan of
reorganization of the Utility (Settlement Plan) in the
Utility&rsquo;s Chapter 11 proceeding pending before the U.S.
Bankruptcy Court for the Northern District of California
(Bankruptcy Court).&nbsp; The CPUC approved the proposed settlement
agreement as recommended to be modified by the Utility and The
Utility Reform Network (TURN) in their joint reply comments filed
with the CPUC on December 16, 2003.&nbsp; The CPUC found that the
modified settlement agreement (Settlement Agreement) is fair, just
and reasonable and in the public interest and authorized the
Executive Director of the CPUC to execute the Settlement Agreement
subject to certain conditions as described below.&nbsp;</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
previously disclosed, six proposed decisions had been issued for
the CPUC&rsquo;s consideration.&nbsp; The CPUC approved a modified
version of one of Commissioner Peevey&rsquo;s proposed decisions,
previously identified as Peevey Alternate 2.&nbsp; The Peevey
Alternate 2 stated that the CPUC has the authority to enter into a
settlement agreement and bind future Commissions and that the
Bankruptcy Court has jurisdiction to enforce it.&nbsp;</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Among
other modifications, the Utility and TURN had recommended that the
Peevey Alternate 2 be modified to include a proposal to allow use
of a securitized financing backed by a dedicated rate component
(DRC) to refinance the regulatory asset to be established by the
Settlement Agreement (Regulatory Asset).&nbsp; The Utility and TURN
estimate that refinancing using the DRC could reduce ratepayer
costs by about $1 billion (nominal) over the term of the debt
securitized by the DRC compared to the estimated costs of the
Regulatory Asset, while still allowing the immediate rate reduction
provided for under the Settlement Agreement.</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
a condition precedent to the CPUC&rsquo;s execution of the
Settlement Agreement, the Utility would agree that after the
Settlement Plan is implemented and the Utility exits Chapter 11,
the Utility would seek as expeditiously as practicable to refinance
the Regulatory Asset and associated federal and state income taxes
and franchise taxes up to an aggregate amount of $3 billion using a
securitized financing supported by a DRC, provided certain
conditions are met, including the enactment of authorizing
California legislation satisfactory to the CPUC, TURN and the
Utility.&nbsp; The Utility would use the securitization proceeds to
rebalance its capital structure in order to maintain the capital
structure provided for under the Settlement Agreement.&nbsp; The
CPUC decision states that at its meeting on January 8, 2004, it
will formally request the introduction of enabling legislation in
order to facilitate early introduction and expedited consideration
of the DRC proposal by the Legislature and the Governor.</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
a further condition precedent to the CPUC&rsquo;s execution of the
Settlement Agreement, the Peevey Alternate 2 was further modified
to provide that PG&amp;E Corporation would agree that it will not
seek reimbursement from the Utility for any of its professional
fees and expenses incurred in connection with the Utility&rsquo;s
Chapter 11 proceeding.&nbsp; (As of September 30, 2003, PG&amp;E
Corporation had incurred approximately $128 million in professional
fees and expenses in connection with the Utility&rsquo;s Chapter 11
proceeding.)&nbsp; Cash which the Utility would have used to
reimburse PG&amp;E Corporation for its bankruptcy costs will
instead be used to pay creditors, thereby lowering the amount
required to be financed.&nbsp;</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
modifications to the Peevey Alternate 2 proposed by the Utility and
TURN and accepted by the CPUC are in addition to the modifications
recommended in the original Peevey Alternate 2 to:</p>

<ul>
  <li>delete the provisions restricting the CPUC&rsquo;s authority to
restrict the ability of the boards of directors of either the
Utility or PG&amp;E Corporation to declare and pay dividends or
repurchase common stock, other than the capital structure and
stand-alone dividend conditions contained in prior CPUC decisions
authorizing the formation of PG&amp;E Corporation,<br>
  </li>
  <li>delete the phrase &ldquo;notwithstanding any contrary state
law&rdquo; from the provisions which state that the Settlement
Agreement, the Settlement Plan, and the confirmation order would be
enforceable in accordance with federal law, notwithstanding any
contrary state law, and<br>
  </li>
  <li>require the Utility to increase its funding to support
environmental enhancement activities to $100 million over 10 years,
as compared to $70 million originally proposed in the Settlement
Agreement which amount is recoverable from ratepayers, and<br>
  </li>
  <li>require the Utility to increase its funding to support research
and investment in clean energy technology to $30 million over five
years, as compared to $15 million originally proposed in the
Settlement Agreement, which amount is not recoverable from
ratepayers.</li>
</ul>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December 19, 2003, the Settlement Agreement was executed by the
CPUC, the Utility and PG&amp;E Corporation and filed with the
Bankruptcy Court along with the Settlement Plan, as modified to
reflect the modified Settlement Agreement.</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A
copy of the Settlement Agreement, together with a copy of the
CPUC&rsquo;s final decision, is attached to this report as an
exhibit.</p>

<p>B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; CPUC Approves
Gas Accord II</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December 18, 2003, the CPUC issued a decision regarding the
Utility&rsquo;s Gas Accord II application, adopting an alternate
decision sponsored by CPUC Commissioner Peevey.&nbsp; The CPUC
approved the Utility&rsquo;s Gas Accord market structure for 2004
and 2005 and resolved the rates, and terms and conditions of
service for the Utility&rsquo;s natural gas transmission and
storage system for 2004.&nbsp; The CPUC adopted a 2004 revenue
requirement of $436.4 million, representing a 2.9 percent increase
from the Utility&rsquo;s current revenues.&nbsp; Under this
decision, bundled core rates will increase by 0.52 percent, and
noncore transportation rates will increase by 6.12 percent.&nbsp;
In addition, the decision extends the Utility&rsquo;s existing
incentive mechanism for recovery of core procurement costs (the
core procurement incentive mechanism, or CPIM) through 2005, unless
a revised mechanism is adopted before that time.&nbsp;</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This
decision also adopts the Utility&rsquo;s proposals for extending
natural gas transportation contracts and for soliciting new natural
gas transportation contracts; i.e., an open season, and enables the
Utility to complete its open season and have contracts in place by
January 1, 2004.&nbsp;</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Finally,
beginning in 2005, the decision exempts certain customers connected
to the Utility&rsquo;s backbone transmission facilities from paying
local transmission rates and orders the Utility to develop rate
proposals that include a surcharge for these departing
customers.&nbsp; (The Utility&rsquo;s backbone transmission
facilities connect gas transmission pipelines delivering gas from
the California border and from California production and storage
sources to the local gas transmission system.)</p>

<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under
the Gas Accord II, the Utility continues to be at risk of not
recovering its natural gas transportation and storage costs and
does not have regulatory balancing account provisions for
over-collections or under-collections of natural gas transportation
or storage revenues.&nbsp; The Utility may experience a material
reduction in operating revenues if throughput levels or market
conditions are significantly less favorable than reflected in rates
for these services.</p>

<p>Item 7.&nbsp; Financial Statements, Pro Forma Financial
Information, and Exhibits</p>

<p>Exhibit 99 - Settlement Agreement among California Public
Utilities Commission, Pacific Gas and Electric Company and PG&amp;E
Corporation, dated as of December19, 2003, together with
appendices</p>


<p></p>

<div align="center">
  <center>

<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="top">
<p>SIGNATURE</p>
</td>
</tr>
</table>

  </center>
</div>

<p>Pursuant to the requirements of the Securities Exchange Act of
1934, the registrants have duly caused this report to be signed on
their behalf by the undersigned thereunto duly authorized.</p>

<p></p>

<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>PG&amp;E CORPORATION<br />
<br />
 </p>
</td>
</tr>

<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>By:&nbsp; /s/ CHRISTOPHER P. JOHNS</p>
</td>
</tr>

<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</u></p>
</td>
</tr>

<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;CHRISTOPHER P.
JOHNS<br />
 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Senior Vice President
and Controller<br />
<br />
 </p>
</td>
</tr>

<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top"></td>
</tr>

<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>PACIFIC GAS AND ELECTRIC COMPANY<br />
<br />
 </p>
</td>
</tr>

<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>By:&nbsp;&nbsp;/s/ LINDA Y.H. CHENG</p>
</td>
</tr>

<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</u></p>
</td>
</tr>

<tr>
<td valign="top">
<p>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;LINDA Y.H. CHENG<br />
 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Corporate Secretary</p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
</tr>
</table>

<p></p>

<p>Dated:&nbsp; December 22, 2003</p>

<hr>


<p align="center">EXHIBIT INDEX</p>

<p align="center"></p>

<table border="0" cellspacing="0" cellpadding="0" width="607">
<tr>
<td valign="top">
<p align="center">Exhibit No.</p>
</td>
<td valign="top">
<p align="center">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
</td>
<td valign="top">
<p>Description of Exhibit</p>

<p></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top"></td>
</tr>

<tr>
<td valign="top">
<p align="center">99</p>
</td>
<td valign="top"></td>
<td valign="top">
<p>Settlement Agreement among California Public Utilities
Commission, Pacific Gas and Electric Company and PG&amp;E
Corporation, dated as of December19, 2003, together with
appendices</p>
</td>
</tr>
</table>

<p align="center"></p>

<p></p>
</div>
</body>
</html>


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>3
<FILENAME>finalexhibit99.htm
<DESCRIPTION>SETTLEMENT AGREEMENT AND DECISION
<TEXT>
<html>
<head>
<title>final decision</title>
</head>
<body link="blue" vlink="purple">
<div>
<p align="right"><b><font size="3" face="Times New Roman">Exhibit
99</font></b></p>

<p><b><font size="3" face="Times New Roman">I.02-04-026&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></b></p>

<p align="center"><b><font size="3" face="Times New Roman">APPROVED
SETTLEMENT AGREEMENT</font></b></p>

<p align="center"><b><u><font size="3" face=
"Times New Roman">SETTLEMENT AGREEMENT</font></u></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This
Settlement Agreement (&ldquo;Agreement&rdquo;) is made and entered
into by Pacific Gas and Electric Company (&ldquo;PG&amp;E&rdquo;),
PG&amp;E Corporation (the &ldquo;Parent&rdquo; or &ldquo;PG&amp;E
Corporation&rdquo;) (PG&amp;E and PG&amp;E Corporation are
collectively referred to as the &ldquo;PG&amp;E Proponents&rdquo;),
and the Public Utilities Commission of the State of California, as
of December 19, 2003 (each of which is individually referred to as
a &ldquo;Party,&rdquo; and collectively as the
&ldquo;Parties&rdquo;)</font></p>

<p align="center"><b><u><font size="3" face=
"Times New Roman">Recitals</font></u></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
April&nbsp;6, 2001, PG&amp;E filed a voluntary case under Chapter
11 of the United States Bankruptcy Code, Case No. 01-30923 DM (the
&ldquo;Chapter 11 Case&rdquo;), pending in the United States
Bankruptcy Court for the Northern District of California (the
&ldquo;Court&rdquo;).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PG&amp;E Proponents filed a Plan of Reorganization under Chapter 11
of the Bankruptcy Code for Pacific Gas and Electric Company, dated
April 19, 2002, as Modified by Modifications Dated July 9, 2002,
October 18, 2002, December 13, 2002, December 26, 2002, February
21, 2003, February 24, 2003, and May 22, 2003 (the &ldquo;PG&amp;E
Plan&rdquo;).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
April&nbsp;15, 2002, the Commission filed its original plan of
reorganization for PG&amp;E.&nbsp; Subsequently, the Commission and
the Official Committee of Unsecured Creditors (the
&ldquo;OCC&rdquo;) appointed in the Chapter 11 Case filed a Second
Amended Plan of Reorganization under Chapter 11 of the Bankruptcy
Code for Pacific Gas and Electric Company, dated November&nbsp;6,
2002.&nbsp; Then, on December&nbsp;5, 2002, the Commission and the
OCC filed their Third Amended Plan of Reorganization under
Chapter&nbsp;11 of the Bankruptcy Code for Pacific Gas and Electric
Company (the &ldquo;Commission Plan&rdquo;).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Court began trial on the competing plans of reorganization on
November&nbsp;18, 2002.&nbsp; During the trial on the PG&amp;E
Plan, the Court entered an order staying further confirmation and
related proceedings for 60 days to facilitate a mandatory
settlement process before the Honorable Randall&nbsp;J. Newsome,
Bankruptcy Judge.&nbsp; On April&nbsp;23, 2003, at the request of
Judge Newsome, the Court issued an order staying further
confirmation and related proceedings for an additional 30
days.&nbsp; On June 9, 2003, the Court issued an order staying
further confirmation and related proceedings for an additional four
days, with a status conference scheduled for June&nbsp;20,
2003.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Neither
PG&amp;E nor PG&amp;E Corporation has declared or paid any
dividends to holders of their common stock since October 2000, and
are agreeing in this Agreement not to do so before July 1,
2004.&nbsp; As a result, PG&amp;E&rsquo;s and PG&amp;E
Corporation&rsquo;s shareholders have foregone and will forego
dividends of approximately $1.7 billion.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;F.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Parties desire to settle their differences with respect to the
competing plans of reorganization and the other matters specified
herein, and to jointly support a plan of reorganization for
PG&amp;E (the &ldquo;Settlement Plan&rdquo;), all as set forth more
specifically below.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;G.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the
exercise of its police and regulatory powers, the Commission is
entering into this Agreement and shall adopt such decisions and
orders as necessary to implement and carry out the provisions of
this Agreement, including but not limited to, establishing Retail
Electric Rates to provide for payment in full of the Securities and
the Regulatory Asset (each as defined below) in accordance with
their respective terms.</font></p>

<p align="center"><b><u><font size="3" face=
"Times New Roman">Statement of Intent</font></u></b></p>

<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="top">
<p><font size="3" face=
"Times New Roman">(1)&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">The Parties recognize that
reliable electric and gas service is of the utmost importance to
the safety, health, and welfare of California&rsquo;s citizenry and
economy.&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(2)</font></p>
</td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face="Times New Roman">The Parties expect that
under the Settlement Plan, Retail Electric Rates (as defined below)
will be reduced on January 1, 2004, with further reductions
expected thereafter.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(3)</font></p>
</td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face="Times New Roman">As part of this Agreement,
the PG&amp;E Proponents will withdraw the PG&amp;E Plan and no
longer propose to disaggregate the historic businesses of
PG&amp;E.&nbsp; Instead, PG&amp;E will remain a
vertically-integrated utility subject to the Commission&rsquo;s
jurisdiction to regulate in the public interest.&nbsp; Subject to
the provisions of this Agreement, the Settlement Plan, and the
Confirmation Order (as defined below), PG&amp;E shall continue to
be regulated by the Commission in accordance with the
Commission&rsquo;s policies and practices and the laws and
regulations applicable to similarly situated investor-owned
utilities in the State of California.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(4)</font></p>
</td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face="Times New Roman">The Parties enter into
this settlement to enable PG&amp;E to emerge from Chapter&nbsp;11
and fully resume its traditional role of providing safe and
reliable electric and gas service at just and reasonable rates,
subject to Commission regulation.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(5)</font></p>
</td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face="Times New Roman">It is in the public
interest to restore PG&amp;E to financial health and to maintain
and improve PG&amp;E&rsquo;s financial health in the future to
ensure that PG&amp;E is able to provide safe and reliable electric
and gas service to its customers at just and reasonable
rates.&nbsp; The Parties intend that PG&amp;E emerge from
Chapter&nbsp;11 as soon as possible with a Company Credit Rating of
Investment Grade and that PG&amp;E&rsquo;s Company Credit Rating
will improve over time.&nbsp; Investment Grade Company Credit
Ratings are necessary for PG&amp;E to emerge from Chapter 11 and
will directly benefit PG&amp;E&rsquo;s ratepayers by reducing the
cost of the financings (i) required for emergence and (ii) required
to fund future operations and capital expenditures.&nbsp; In order
to help accomplish these goals, it is fair and in the public
interest to allow PG&amp;E to recover, over a reasonable time,
prior uncollected costs and to provide the opportunity for
PG&amp;E&rsquo;s shareholders to earn a reasonable rate of return
on PG&amp;E&rsquo;s utility business, all as described
herein.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(6)</font></p>
</td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face="Times New Roman">Among other things, as
part of this Agreement, PG&amp;E will release claims against the
Commission that would have been retained by PG&amp;E or its Parent
under the PG&amp;E Plan.&nbsp; In lieu of those claims and the
value that PG&amp;E&rsquo;s shareholders would have received from
the transactions provided for under the PG&amp;E Plan,
PG&amp;E&rsquo;s shareholders will receive value over nine years
through this Agreement, the Settlement Plan and the Confirmation
Order (as defined below), including amortization of the Regulatory
Asset as provided for herein.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top"></td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(7)</font></p>
</td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face="Times New Roman">The Commission
acknowledges and agrees that the benefit of this Agreement to
PG&amp;E&rsquo;s shareholders requires that the Commission provide
timely and full recovery of PG&amp;E&rsquo;s reasonable costs of
providing utility service, including return of and return on
investment in utility plant and recovery of operating expenses,
including power procurement costs, over the full nine-year
amortization period of the Regulatory Asset.&nbsp; The Commission
intends to provide PG&amp;E with the opportunity to recover all of
its prudently incurred costs as well as a return of and return on
its investment in utility plant.&nbsp; The Commission also intends
that any operational mandate it imposes that requires PG&amp;E to
expend funds or incur costs, including demand reduction or energy
conservation programs, include a timely rate recovery mechanism for
the costs of such mandate.&nbsp;</font></p>
</td>
</tr>
</table>

<p align="center"><b><u><font size="3" face=
"Times New Roman">Agreement</font></u></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
consideration of the respective covenants and agreements contained
in this Agreement <a name="_DV_C6">and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged<b>,</b></a> the Parties agree as follows:</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
1.</b>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Definitions</u>.&nbsp;</b>
When used in this Agreement, the following terms shall have the
following meanings:</font></p>

<p><a name="OLE_LINK1"><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;96C
Bonds&rdquo;</font></a> <a name="OLE_LINK2">means those certain
Pollution Control Refunding Revenue Bonds (Pacific Gas and
Electric) 1996 Series C issued by the California Pollution Control
Financing Authority in the aggregate principal amount of
$200,000,000.</a></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;96E
Bonds&rdquo; means those certain Pollution Control Refunding
Revenue Bonds (Pacific Gas and Electric) 1996 Series E issued by
the California Pollution Control Financing Authority in the
aggregate principal amount of $165,000,000.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;96F
Bonds&rdquo; means those certain Pollution Control Refunding
Revenue Bonds (Pacific Gas and Electric) 1996 Series F issued by
the California Pollution Control Financing Authority in the
aggregate principal amount of $100,000,000.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;97B
Bonds&rdquo; means those certain Pollution Control Refunding
Revenue Bonds (Pacific Gas and Electric) 1997 Series B issued by
the California Pollution Control Financing Authority in the
aggregate principal amount of $148,550,000.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;e.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Administrative
Expense Claim&rdquo; means a Claim against PG&amp;E constituting a
cost or expense of administration of the Chapter 11 Case under
sections 503(b) and 507(a)(1) of the Bankruptcy Code, and any fees
or charges assessed against the estate of PG&amp;E under section
1930 of chapter 123 of title 28 of the United States
Code.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;f.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&ldquo;Agreement&rdquo; has the meaning set forth in the
introduction.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;g.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;ATCP
Application&rdquo; means PG&amp;E&rsquo;s Annual Transition Cost
Proceeding, Application No. 01-09-003, presently pending before the
Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;h.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Business
Day&rdquo; means any day other than a Saturday, a Sunday or any
other day on which commercial banks in San Francisco, California,
or New York, New York, are required or authorized to close by law
or executive order.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;i.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Carizzo
Plains&rdquo; has the meaning set forth in Paragraph 17.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;j.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Cash&rdquo;
means legal tender of the United States.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;k.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Cause
of Action&rdquo; means, without limitation, any and all actions,
causes of action, liabilities, obligations, rights, suits, damages,
judgments, claims and demands whatsoever, whether known or unknown,
existing or hereafter arising, in law, equity or otherwise, based
in whole or in part upon any act or omission or other event
occurring prior to April 6, 2001 or during the course of the
Chapter 11 Case, including through the Effective Date.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;l.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Chapter 11 Case&rdquo; has
the meaning set forth in Recital A.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;m.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Commission&rdquo; means the
California Public Utilities Commission, or any successor agency,
and the commissioners thereof in their official capacities and
their respective successors.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;n.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Commission-DWR Rate
Agreement&rdquo; means the agreement dated March 8, 2002, between
the Commission and DWR relating to the establishment of DWR&rsquo;s
revenue requirements and charges in connection with power sold by
DWR under Division 27, commencing with section 80000, of the
California Water Code.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;o.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Commission Plan&rdquo; has
the meaning set forth in Recital C.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;p.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Company Credit Rating&rdquo;
means a long-term issuer credit rating from S&amp;P and an issuer
rating from Moody&rsquo;s.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;q.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Confirmation Order&rdquo;
means the order of the Court confirming the Settlement Plan
pursuant to section 1129 of the Bankruptcy Code.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;r.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Court&rdquo; has the meaning
set forth in Recital A.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;s.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;DWR&rdquo; means the
California Department of Water Resources.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;t.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;DWR Contracts&rdquo; means
the contracts entered into by DWR for the purchase of electric
power and associated goods and services pursuant to California
Assembly Bill No. 1X, signed into law by the Governor on February
1, 2001.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;u.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Effective Date&rdquo; means
the date designated in the Settlement Plan as the Effective
Date.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;v.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;ESP&rdquo; means energy
service provider.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;w.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;FERC&rdquo;
means the United States Federal Energy Regulatory
Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;x.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Fixed Transition
Amount&rdquo; has the meaning set forth in section 840(d) of the
Public Utilities Code.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;y.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Forecast Average Equity
Ratio&rdquo; means the proportion of equity in the forecast of
PG&amp;E&rsquo;s average capital structure for calendar year 2004
and 2005 to be filed by PG&amp;E in its 2003 cost of capital
proceeding, Application No. 02-05-022, and its 2005 cost of capital
proceeding, respectively, or such other CPUC proceedings as may be
appropriate.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;z.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Headroom&rdquo; means
PG&amp;E&rsquo;s total net after-tax income reported under
Generally Accepted Accounting Principles, less earnings from
operations, plus after-tax amounts accrued for bankruptcy-related
administration and bankruptcy-related interest costs, all
multiplied by 1.67, provided that the calculation will reflect the
outcome of PG&amp;E&rsquo;s 2003 general rate case (A.02-09-005 and
A.02-11-067).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;aa.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Investment Grade&rdquo; means
both a credit rating from S&amp;P of BBB- or better and a credit
rating from Moody&rsquo;s of Baa3 or better.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;bb.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Land Conservation
Commitment&rdquo; has the meaning set forth in Paragraph
17a.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;cc.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Letter of Credit Backed PC
Bonds&rdquo; means, collectively, any series of 96C Bonds, 96E
Bonds, 96F Bonds and/or 97B Bonds that are outstanding as of the
Effective Date.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;dd.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Long-Term Notes&rdquo; means
the long-term notes proposed to be issued to creditors pursuant to
the PG&amp;E Plan.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ee.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;MBIA Insured PC Bonds&rdquo;
means those certain Pollution Control Refunding Revenue Bonds
(Pacific Gas and Electric Company) 1996 Series A issued by the
California Pollution Control Financing Authority in the aggregate
principal amount of $200,000,000.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ff.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &ldquo;Moody&rsquo;s&rdquo; means
Moody&rsquo;s Investor&rsquo;s Service Inc.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;gg.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;NRC&rdquo; means the United
States Nuclear Regulatory Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;hh.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;OCC&rdquo; has the meaning set
forth in Recital C.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ii.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Parent&rdquo; has the meaning
set forth in the introduction.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;jj.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Person&rdquo; has the meaning
set forth in section 101(41) of the Bankruptcy Code.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;kk.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;PG&amp;E Plan&rdquo; has the
meaning set forth in Recital B.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ll.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Preferred Stock&rdquo; means
the issued and outstanding shares of PG&amp;E&rsquo;s First
Preferred Stock, par value $25.00 per share.&nbsp; PG&amp;E&rsquo;s
First Preferred Stock comprises:&nbsp; (a) 6% Non-Redeemable First
Preferred; (b) 5.5% Non-Redeemable First Preferred; (c) 5%
Non-Redeemable First Preferred; (d) 5% Redeemable First Preferred
Series D; (e) 5% Redeemable First Preferred Series E; (f) 4.80%
Redeemable First Preferred; (g) 4.50% Redeemable First Preferred;
(h) 4.36% Redeemable First Preferred; (i) 6.57% Redeemable First
Preferred; (j) 7.04% Redeemable First Preferred; and (k) 6.30%
Redeemable First Preferred.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;mm.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;QFs&rdquo; means qualifying
facilities operating pursuant to the Public Utility Regulatory
Policies Act of 1978 and related regulations enacted
thereunder.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;nn.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Rate Recovery
Litigation&rdquo; means <i>Pacific Gas &amp; Electric Company,
Plaintiff, v. Loretta M. Lynch, et al., Defendants</i>, Case No.
C-01-3023-VRW, filed in the United States District Court for the
Northern District of California, and all appellate proceedings
arising therefrom.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;oo.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Rate Reduction Bonds&rdquo;
has the meaning set forth in section 840(e) of the Public Utilities
Code.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;pp.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Regulatory Asset&rdquo; has
the meaning set forth in Paragraph 2.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;qq.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Retail Electric Rates&rdquo;
means any and all charges authorized by the Commission to be
collected from PG&amp;E&rsquo;s retail electric
customers.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;rr.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;ROE&rdquo; has the meaning set
forth in Paragraph 2b.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ss.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;S&amp;P&rdquo; means Standard
&amp; Poor&rsquo;s, a division of The McGraw-Hill Companies,
Inc.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;tt.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;SEC&rdquo; means the United
States Securities and Exchange Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;uu.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Securities&rdquo; means the
debt and Preferred Stock to be issued or reinstated by PG&amp;E, as
the case may be, in accordance with the Settlement Plan, from time
to time, including any and all interest thereon or associated costs
as provided under such debt or Preferred Stock instruments,
agreements or certificates.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;vv.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Settlement Plan&rdquo; has the
meaning set forth in Recital F.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ww.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;State&rdquo; means the State
of California.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;xx.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Tax Tracking Account&rdquo;
has the meaning set forth in Paragraph 2c.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;yy.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;TCBA&rdquo; means Transition
Cost Balancing Account.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;zz.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;URG&rdquo; means utility
retained generation.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;aaa.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;URG Rate Base&rdquo; means the
rate base amounts set forth in PG&amp;E Advice Letter 2233-E
implementing Commission Decision (D.) No. 02-04-016.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;bbb.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&ldquo;Watershed Lands&rdquo; has the
meaning set forth in Paragraph 17.</font></p>

<p><b><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.</font></b>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Regulatory
Asset</u>.</b>&nbsp; The Commission shall establish a regulatory
asset of Two Billion Two Hundred and Ten Million Dollars
($2,210,000,000) as a new, separate and additional part of
PG&amp;E&rsquo;s rate base (the &ldquo;Regulatory
Asset&rdquo;).&nbsp;&nbsp;</p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Regulatory Asset shall be
amortized in PG&amp;E&rsquo;s Retail Electric Rates on a
&ldquo;mortgage-style&rdquo; basis over nine years starting on
January 1, 2004.&nbsp; The details and mechanics of the
amortization and earnings of the Regulatory Asset shall be as set
forth in Appendix A, Technical Appendix, jointly prepared by the
Commission and PG&amp;E.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Regulatory Asset shall earn
PG&amp;E&rsquo;s authorized return on equity (&ldquo;ROE&rdquo;) on
the equity component of PG&amp;E&rsquo;s capital structure as set
in PG&amp;E&rsquo;s annual cost of capital proceedings, <u>provided
that</u> the ROE on the Regulatory Asset shall be no less than
11.22 percent per year for the life of the Regulatory Asset and
that, once the equity component of PG&amp;E&rsquo;s capital
structure reaches 52 percent, the authorized equity component for
the Regulatory Asset shall be no less than 52 percent for the life
of the Regulatory Asset.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission will use its usual
methodology for tax-effecting the ROE component for purposes of
setting PG&amp;E&rsquo;s revenue requirements associated with the
unamortized portion of the Regulatory Asset.&nbsp; The Commission
will apply the same method of tax-effecting to the scheduled
amortization of the Regulatory Asset.&nbsp; The Commission shall
authorize PG&amp;E to establish a Tax Tracking Account to be used
as follows:&nbsp; In the event that it is finally determined that
PG&amp;E is required to pay income taxes on the Regulatory Asset
any earlier than the Regulatory Asset is amortized pursuant to
Paragraph 2a, PG&amp;E shall record in the Tax Tracking Account the
difference between (1) the taxes incurred on account of the
Regulatory Asset plus any interest imposed by the federal or state
taxing authorities with respect to such earlier recognition of
taxable income and (2) the taxes that would have been incurred on
account of the Regulatory Asset had it been subject to tax as it
was amortized pursuant to Paragraph 2a.&nbsp; The Tax Tracking
Account shall earn PG&amp;E&rsquo;s authorized rate of return in
accordance with the provisions of Paragraph 2b.&nbsp; PG&amp;E
shall amortize the Tax Tracking Account in Retail Electric rates
over the greater of the remaining life of the Regulatory Asset or
five years.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E shall continue to cooperate
with the Commission and the State in seeking refunds from
generators and other energy suppliers.&nbsp; The net after-tax
amount of any refunds, claim offsets or other credits from
generators or other energy suppliers relating to PG&amp;E&rsquo;s
PX, ISO, QF or ESP costs that PG&amp;E actually realizes in Cash or
by offset of creditor claims in the Chapter 11 Case shall be
applied by PG&amp;E to reduce the outstanding balance of the
Regulatory Asset dollar for dollar.&nbsp; To the extent that any
consideration actually received by PG&amp;E in Cash under the
Master Settlement Agreement that resolves the litigation in
<i>Public Utilities Commission of California v. El Paso Natural Gas
Co., et al.,</i> FERC Docket No. RP00-241-000, <i>et al.</i>, and
related litigation in state and federal courts, is in settlement of
damages claimed by PG&amp;E that caused PG&amp;E to incur high
costs of electricity from March 1, 2000 to date, PG&amp;E shall
apply the net after-tax amount of such consideration to reduce the
outstanding balance of the Regulatory Asset dollar for dollar,
provided that such a reduction is consistent with the rules or
orders adopted by the Commission concerning the consideration paid
by El Paso under the Master Settlement Agreement.&nbsp; These
reductions shall reduce the remaining amortization of the
Regulatory Asset, as set forth in Appendix A, Technical
Appendix.&nbsp; At the time that there no longer is any outstanding
balance for the Regulatory Asset (e.g., after the nine-year
amortization or earlier if it is replaced with a dedicated rate
component), the Commission shall determine how PG&amp;E shall
refund or credit to the benefit of its ratepayers any further
refunds, claim offsets or other credits from generators and other
energy suppliers (e.g., El Paso Natural Gas Company) to the extent
that PG&amp;E subsequently receives or realizes these refunds,
claim offsets or other credits or has not otherwise credited them
against the Regulatory Asset.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;e.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Balances in PG&amp;E&rsquo;s TCBA,
determined in accordance with Commission Decision No. 01-03-082, as
of January 1, 2004 shall have no further impact on PG&amp;E&rsquo;s
Retail Electric Rates and shall be subject to no further review by
the Commission except for verification of recorded balances, and
PG&amp;E&rsquo;s current Retail Electric Rates will be replaced by
the Retail Electric Rates resulting from this Agreement, the
Settlement Plan and the Confirmation Order as of January 1,
2004.&nbsp; This is not intended to affect PG&amp;E&rsquo;s pending
application (Application No. 00-07-013) to recover electric
restructuring costs booked into the Electric Restructuring Cost
Account pursuant to Public Utilities Code section 376 or to
otherwise affect recovery of QF and other nonbypassable costs going
forward.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;f.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission agrees that PG&amp;E
should receive the benefit of this Agreement over the entire life
of the Regulatory Asset.&nbsp; To ensure this, the Commission
agrees that the URG Rate Base for PG&amp;E already established by
the Commission in D.02-04-016 shall be deemed just and reasonable
and not subject to modification, adjustment or reduction, except as
necessary to reflect capital expenditures and any change in
authorized depreciation.&nbsp; (This shall not preclude the
Commission from determining the reasonableness of any capital
expenditures made on URG after the Effective Date.)&nbsp; The
Commission further agrees that it shall not in any way reduce or
impair the value of the Regulatory Asset or the URG Rate Base by
taking the Regulatory Asset or the URG Rate Base, their
amortization or earnings into account when setting other revenue
requirements and resulting rates for PG&amp;E.&nbsp; Nor shall the
Commission take this Agreement or the Regulatory Asset into account
in establishing PG&amp;E&rsquo;s authorized ROE or capital
structure.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;g.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission recognizes that the
establishment, maintenance and improvement of Investment Grade
Company Credit Ratings is vital for PG&amp;E to be able to continue
to provide safe and reliable service to its customers.&nbsp; The
Commission further recognizes that the establishment, maintenance
and improvement of PG&amp;E&rsquo;s Investment Grade Company Credit
Ratings directly benefits PG&amp;E&rsquo;s ratepayers by reducing
PG&amp;E&rsquo;s immediate and future borrowing costs, which, in
turn, will allow PG&amp;E to finance its operations and make
capital expenditures on its distribution, transmission, and
generation assets at lower cost to its ratepayers.&nbsp; In
furtherance of these objectives, the Commission agrees to act to
facilitate and maintain Investment Grade Company Credit Ratings for
PG&amp;E.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;h.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As part of ensuring that PG&amp;E has
the opportunity to recover all its prudently incurred costs of
providing service, including return of and return on utility
investment, the Commission agrees that it shall timely act upon
PG&amp;E&rsquo;s applications to collect in rates its prudently
incurred costs (including return of and return on) of any new,
reasonable investment in utility plant and assets.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;i.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission shall promptly adjust
PG&amp;E&rsquo;s rates consistent with AB 57/SB 1976 and the
Commission-DWR Rate Agreement to ensure that PG&amp;E&rsquo;s
collection of the following is not impaired:&nbsp; (1) Fixed
Transition Amount to service existing Rate Reduction Bonds; (2)
Regulatory Asset amortization and return; and (3) base revenue
requirements (<i>e.g.,</i> electric and gas distribution, URG, gas
commodity procurement, existing QF contract costs and associated
return).&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;j.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission agrees that, in the
absence of compelling evidence to the contrary, PG&amp;E&rsquo;s
expected regulatory outcomes and financial performance should be
similar to those of the other investor-owned energy utilities in
California under similar circumstances.&nbsp; In furtherance of the
foregoing, the Commission shall not discriminate against PG&amp;E
by reason of the Chapter 11 Case, the Rate Recovery Litigation,
this Agreement, the Regulatory Asset or any other matters addressed
or resolved herein.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Ratemaking
Matters.&nbsp;</u></b></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission agrees to maintain
PG&amp;E&rsquo;s Retail Electric Rates at current levels through
December 31, 2003.&nbsp; As of January 1, 2004, the Commission may
adjust PG&amp;E&rsquo;s Retail Electric Rates prospectively
consistent with this Agreement, the Settlement Plan, the
Confirmation Order and California law.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission shall set
PG&amp;E&rsquo;s capital structure and authorized ROE in
PG&amp;E&rsquo;s annual cost of capital proceedings in its usual
manner; <u>&shy;provided that</u>, from January 1, 2004 until
either S&amp;P confers on PG&amp;E a Company Credit Rating of at
least &ldquo;A-&rdquo; or Moody&rsquo;s confers on PG&amp;E a
Company Credit Rating of at least &ldquo;A3,&rdquo; the authorized
ROE shall be no less than 11.22 percent per year and the authorized
equity ratio for ratemaking purposes shall be no less than 52
percent, except for a transition period as provided below.&nbsp;
The Commission recognizes that, at the Effective Date,
PG&amp;E&rsquo;s capital structure will likely not contain 52
percent equity.&nbsp; Accordingly, for 2004 and 2005, the
authorized equity ratio shall equal the Forecast Average Equity
Ratio, but in no event shall it be less than 48.6 percent.&nbsp;
PG&amp;E agrees not to pay any dividend on common stock before July
1, 2004.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nothing in this Agreement shall be
construed to create a rate freeze or rate cap for PG&amp;E&rsquo;s
electric or gas business.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
4.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Implementation of
Ratemaking</u>.</b>&nbsp; To ensure that all conditions to the
Effective Date are met as soon as possible following issuance of
the Confirmation Order, as soon as practicable after the Commission
decision approving this Agreement, PG&amp;E shall file an advice
letter to implement all the rate and tariff changes necessary to
implement the Settlement Plan.&nbsp; The Commission shall act
promptly on the advice filing and revised rates and tariffs.&nbsp;
The Commission shall also review and issue a decision promptly on
the merits of any application for rehearing of the approval of the
advice filing.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
5.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Timely Decisions on
Ratemaking Matters</u>.</b>&nbsp; The Commission and PG&amp;E agree
that timely applications by PG&amp;E and timely action by the
Commission on such applications are essential to the achievement of
the objectives of this settlement.&nbsp; The Commission agrees that
it will promptly act on the pending PG&amp;E ratemaking proceedings
listed in Appendix B hereto.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
6.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>[Intentionally
Omitted]</b></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
7.</b> &nbsp;&nbsp;&nbsp;&nbsp;<u>&nbsp;<b>DWR
Contracts</b></u><b>.&nbsp;</b> If the Commission desires it,
PG&amp;E agrees to accept an assignment of or to assume legal and
financial responsibility for the DWR Contracts, <u>provided
that</u> (a) PG&amp;E&rsquo;s Company Credit Rating, after giving
effect to such assignment or assumption, shall be no less than
&ldquo;A&rdquo; from S&amp;P and &ldquo;A2&rdquo; from
Moody&rsquo;s; (b) the Commission shall first have made a finding
that, for purposes of assignment or assumption, the DWR Contracts
to be assigned or assumed are just and reasonable; and (c) the
Commission shall have acted to ensure that PG&amp;E will receive
full and timely recovery in its Retail Electric Rates of all costs
of such DWR Contracts over their life without further review.&nbsp;
The Commission agrees not to require PG&amp;E to assume or accept
an assignment of legal or financial responsibility for the DWR
Contracts unless conditions (a), (b) and (c) are all met.&nbsp;
Nothing in this paragraph shall be construed to limit the
discretion of the Commission to review the prudence of
PG&amp;E&rsquo;s administration and dispatch of the DWR Contracts,
consistent with applicable law.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
8.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Headroom
Revenues</u>.&nbsp;</b></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission acknowledges and
agrees that the Headroom, surcharge, and base revenues accrued or
collected by PG&amp;E through and including December 31, 2003 are
property of PG&amp;E&rsquo;s Chapter 11 estate, have been or will
be used for utility purposes, including to pay creditors in the
Chapter 11 Case, have been included in PG&amp;E&rsquo;s Retail
Electric Rates consistent with state and federal law, and are not
subject to refund.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Headroom revenues accrued by
PG&amp;E during calendar year 2003 shall not exceed $875 million
and shall not be less than $775 million, both on a pre-tax
basis.&nbsp; If the amount of Headroom PG&amp;E accrues in 2003 is
greater or less than these amounts, the Commission shall take such
action in 2004 as is necessary to require PG&amp;E to refund any
Headroom accrued in excess of $875 million or, if the accrued
Headroom is less than $775 million, to allow PG&amp;E to collect in
rates the difference between the Headroom accrued and $775
million.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
9.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Dismissal of the Rate
Recovery and Other Litigation</u>.</b>&nbsp; On or as soon as
practicable after the later of the Effective Date or the date on
which the Commission approval of this Agreement is no longer
subject to appeal, PG&amp;E shall dismiss with prejudice the Rate
Recovery Litigation, foregoing any recovery from ratepayers of
costs sought in such litigation not otherwise provided for in this
Agreement and the Settlement Plan; withdraw the PG&amp;E Plan;
dismiss other pending proceedings, as specified herein; and provide
the other consideration described herein.&nbsp; In exchange, on or
before January 1, 2004, the Commission shall establish and
authorize the collection of the Regulatory Asset and the URG Rate
Base, and on or as soon as practicable after the Effective Date,
the Commission shall resolve Phase 2 of the presently pending ATCP
Application with no adverse impact on PG&amp;E&rsquo;s cost
recovery as filed, and provide the other consideration described
herein.&nbsp; PG&amp;E&rsquo;s motion to dismiss the Rate Recovery
Litigation shall be in form and substance satisfactory to the
Commission.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
10.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Dismissal of Other
Proceedings</u>.</b>&nbsp; On or as soon as practicable after the
later of the Effective Date or the date on which the Commission
approval of this Agreement is no longer subject to appeal, PG&amp;E
and PG&amp;E Corporation, on the one hand, and the Commission, on
the other, will execute full mutual releases and dismissals with
prejudice of all claims, actions or regulatory proceedings arising
out of or related in any way to the energy crisis or the
implementation of A.B. 1890 listed on Appendix C hereto.&nbsp; All
such releases and dismissals with prejudice shall be in form and
substance satisfactory to PG&amp;E, PG&amp;E Corporation and the
Commission.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
11.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Withdrawal of Certain
Applications</u>.</b>&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Promptly upon the Effective Date,
PG&amp;E shall withdraw all of its applications previously filed
with the FERC, the NRC, the SEC and elsewhere in connection with
the PG&amp;E Plan.&nbsp; A full and complete list of such
applications is set forth in Appendix&nbsp;D hereto.&nbsp; Upon
execution of this Agreement, PG&amp;E and PG&amp;E Corporation
shall move to obtain or otherwise request a stay of all actions
before the FERC, NRC, SEC or a similar agency initiated by PG&amp;E
and/or PG&amp;E Corporation to implement the PG&amp;E Plan.&nbsp;
In addition, upon execution of this Agreement by all Parties,
PG&amp;E and PG&amp;E Corporation shall suspend all actions to
obtain or transfer licenses, permits and franchises to implement
the PG&amp;E Plan.&nbsp; On the Effective Date or as soon
thereafter as practicable, PG&amp;E and PG&amp;E Corporation shall
withdraw or abandon all such applications for licenses, permits and
franchises.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to withdrawing its
pending applications at FERC, PG&amp;E and PG&amp;E Corporation
agree that, for the life of the Regulatory Asset, neither they nor
any of their affiliates or subsidiaries will make any filing under
Sections 4, 5 or 7 of the Natural Gas Act to transfer ownership of
or ratemaking jurisdiction over PG&amp;E&rsquo;s intrastate natural
gas pipeline and storage facilities, and to keep such natural gas
pipeline and storage facilities subject to the regulation of the
Commission.&nbsp; In addition, PG&amp;E and PG&amp;E Corporation
agree that the Commission has jurisdiction under existing Public
Utilities Code section 851 to review and approve any proposal by
PG&amp;E to dispose of property necessary or useful in the
performance of PG&amp;E&rsquo;s duties to the public.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
12.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Interest Rate
Hedging</u>.&nbsp;</b> In order to take advantage of the current
favorable interest-rate climate, the Commission agrees that the
actual reasonable cost of PG&amp;E&rsquo;s interest rate hedging
activities with respect to the financing necessary for the
Settlement Plan shall be reflected and recoverable in
PG&amp;E&rsquo;s retail gas and electric rates without further
review.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
13.</b>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Financing</u>.</b>&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;It is anticipated that all of
PG&amp;E&rsquo;s existing trade and financial debt, except for the
MBIA Insured PC Bonds and the Letter of Credit Backed PC Bonds,
shall be paid in Cash under the Settlement Plan.&nbsp; It is
further anticipated that the MBIA Insured PC Bonds, the Letter of
Credit Backed PC Bonds and the Preferred Stock shall be reinstated
under the Settlement Plan.&nbsp; The Settlement Plan will detail
the proposed financing and creditor treatment.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The financing of the Settlement Plan
shall not include any new preferred or common
stock.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All financing shall be arranged and
placed by a financing team led by PG&amp;E that includes
representatives of the Commission and PG&amp;E and shall be duly
authorized by the Commission and subject to the authority and duty
of the boards of directors of PG&amp;E and PG&amp;E Corporation to
approve such financing.&nbsp; The financing shall be designed and
accomplished so as to minimize the cost to ratepayers consistent
with achieving an appropriate and financially flexible capital
structure.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In consideration for the agreement by
UBS Warburg LLC and Lehman Brothers each to (i) limit its
consummation and/or advisory fee to $20 million (in the case of
Lehman Brothers inclusive of advisory fees already paid by PG&amp;E
Corporation and further subject to the crediting provisions
contained in Lehman Brothers&rsquo; engagement letter, and, in the
case of UBS Warburg LLC, in lieu of the full consummation fee
calculated pursuant to section 2(d) of UBS Warburg LLC&rsquo;s
engagement letter with the Commission and the OCC), which shall be
payable on the Effective Date, and (ii) jointly provide the bank
facilities determined by PG&amp;E to be necessary under the
Settlement Plan (subject to negotiation of satisfactory terms and
conditions), PG&amp;E agrees to name UBS Warburg LLC and Lehman
Brothers as exclusive book runners, lead managers and hedging
providers of all financings pursuant to the Settlement Plan with
equal economics for 80 percent of the aggregate of total fees and
commissions payable on such financings, and otherwise on customary
terms as agreed among them.&nbsp; To the extent that PG&amp;E adds
co-managers, the Commission shall have the right to appoint one
additional co-manager at the highest level of economics available
to co-managers.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;e.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All documents used or prepared by
PG&amp;E in connection with the financing, including prospectuses,
indentures and notes, shall be in form and substance reasonably
satisfactory to the Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;f.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The cost of the financing, including
principal, interest, any fees or discounts payable to investment
bankers, capital markets arrangers or book runners, including the
fees to be paid to UBS Warburg LLC and Lehman Brothers pursuant to
Paragraph 13d, as well as any past or future call premiums on
reacquired debt, shall be fully recoverable as part of the cost of
debt to be collected in PG&amp;E&rsquo;s retail gas and electric
rates without further review.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
14.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Treatment of
Creditors</u>.&nbsp;</b> The treatment of creditors under the
Settlement Plan will be consistent with that provided in the
PG&amp;E Plan, except that those creditors that were to receive
Long-Term Notes or a combination of Cash and Long-Term Notes will
be paid entirely in Cash.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
15.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Fees and
Expenses</u>.&nbsp;</b> As of the Confirmation Date, and pursuant
to the Settlement Plan and the Confirmation Order, PG&amp;E shall
reimburse the Commission for all of their respective professional
fees and expenses incurred in connection with the Chapter&nbsp;11
Case (such fees and expenses of the Commission to include those of
Paul, Weiss, Rifkind, Wharton &amp; Garrison LLP, UBS Warburg LLC
and Chanin Capital Partners), without the need for any application
under Section&nbsp;330 or 503(b) of the Bankruptcy Code.&nbsp; If
it is determined by court order that such an application is
required for all or any part of such fees and expenses, then the
Parties shall support such application in a written pleading to be
filed with the Court and such fees and expenses shall be allowed
and treated as an Administrative Expense Claim under the Settlement
Plan in the amount approved by the Court.&nbsp; The Commission
shall authorize PG&amp;E to recover the amounts so paid or
reimbursed to the Commission in retail rates over a reasonable
period of time, not to exceed four years.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
16.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Conditions Precedent to
Effective Date</u>.&nbsp;</b> Among other conditions to be
contained in the Settlement Plan, the following shall be conditions
precedent to the Effective Date:</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;S&amp;P and Moody&rsquo;s shall have
issued Investment Grade Company Credit Ratings for
PG&amp;E.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Commission shall have given
final, nonappealable approval for all rates, tariffs and agreements
necessary to implement the Settlement Plan.&nbsp; The PG&amp;E
Proponents shall have the right to waive this provision with
respect to any appeal from the Commission&rsquo;s
approvals.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
17.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Preservation and
Environmental Enhancement of PG&amp;E Land</u>.&nbsp;</b> PG&amp;E
owns approximately 140,000 acres of watershed lands
(&ldquo;Watershed Lands&rdquo;) associated with its hydroelectric
generating system and the approximately 655 acre Carizzo Plains
property in San Luis Obispo County (&ldquo;Carizzo
Plains&rdquo;).&nbsp; Of the Watershed Lands, approximately 95,000
acres are lands that are either included in the project boundaries,
contain essential project elements related to the operations of the
hydro facilities, or are part of legal parcels that contain major
FERC project facilities. The remaining 44,000 acres are lands
completely outside the FERC project boundaries and do not contain
FERC project features.&nbsp; The Watershed Lands and Carizzo Plains
are worth an estimated $300 million.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E agrees to the land
conservation commitment set forth in Appendix E hereto, by which
the Watershed Lands and Carizzo Plains will be subject to
conservation easements and/or donated in fee simple to public
agencies or non-profit conservation organizations (&ldquo;Land
Conservation Commitment&rdquo;).&nbsp; Nothing herein relieves
PG&amp;E or the Commission of their responsibilities pursuant to,
inter alia, Public Utilities Code &sect;851 (obtaining approval of
the Commission before the disposition of utility
property).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On the Effective Date or as soon
thereafter as practicable, PG&amp;E shall establish PG&amp;E
Environmental Enhancement Corporation, a California non-profit
corporation, to oversee the Land Conservation Commitment and to
carry out environmental enhancement activities.&nbsp; The governing
board of PG&amp;E Environmental Enhancement Corporation will
consist of one representative each from PG&amp;E, the Commission,
the California Department of Fish and Game, the State Water
Resources Control Board, the California Farm Bureau Federation, and
three public members to be named by the Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E shall fund PG&amp;E
Environmental Enhancement Corporation with $100 million in Cash:
$70 million of which will cover administrative expenses and the
costs of environmental enhancements to the Watershed Lands and
Carizzo Plains, <u>provided</u> that no such enhancement may at any
time interfere with PG&amp;E&rsquo;s hydroelectric operations,
maintenance or capital improvements; and $30 million of which will
be dedicated to the Environmental Opportunity for Urban Youth
Program.&nbsp; The funds will be paid in equal installments over
ten years on the Effective Date and on January 2 of each year
thereafter.&nbsp; The Commission shall authorize PG&amp;E to
recover these payments in retail rates without further
review.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
18.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Clean Energy Technology
Commitment</u>.&nbsp;</b></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On the Effective Date or as soon
thereafter as practicable, PG&amp;E shall establish a new,
California non-profit corporation dedicated to supporting research
and investment in clean energy technologies primarily in
PG&amp;E&rsquo;s service territory.&nbsp; The non-profit
corporation will be governed by a board consisting of nine members,
three each appointed by the Commission and PG&amp;E, and the
remaining three to be selected jointly by the Commission appointees
and the PG&amp;E appointees.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E shall fund the non-profit
corporation with $30 million in Cash paid over five years, as
follows:&nbsp; $2 million in the first year, $4 million in the
second year, $6 million in the third year, $8 million in the fourth
year, and $10 million in the fifth year, each amount payable on
January 2 of each year after the Effective Date.&nbsp; The
Commission shall not include any portion of this funding in
PG&amp;E&rsquo;s retail rates.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E and the Commission shall
work together to attract additional funding for the non-profit
corporation.&nbsp;&nbsp;&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
19.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Cooperation</u>.</b>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Parties will cooperate fully and
in good faith to obtain timely confirmation of the Settlement Plan
and to effectuate the transactions contemplated by this Agreement
and the Settlement Plan.&nbsp; The Parties will support this
Agreement, the Settlement Plan, and the Confirmation Order in all
judicial, administrative and legislative forums.&nbsp; PG&amp;E,
PG&amp;E Corporation and the Commission will cooperate in all
presentations to credit rating agencies in connection with the
consummation of the Settlement Plan.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
20.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Waiver of Sovereign
Immunity</u>.</b>&nbsp; In connection with any action or proceeding
concerning the enforcement of this Agreement, the Settlement Plan
or the Confirmation Order or other determination of the
Parties&rsquo; rights under this Agreement, the Settlement Plan or
the Confirmation Order, the Commission hereby knowingly and
expressly waives all existing and future rights of sovereign
immunity, and all other similar immunities, as a defense.&nbsp;
Accordingly, the Commission hereby consents to the jurisdiction of
any court or other tribunal or forum for such actions or
proceedings including, but not limited to, the Court.&nbsp; This
waiver is irrevocable and applies to the jurisdiction of any court,
legal process, suit, judgment, attachment in aid of execution of a
judgment, attachment prior to judgment, set-off or any other legal
process with respect to the enforcement of this Agreement, the
Settlement Plan or the Confirmation Order or other determination of
the Parties&rsquo; rights under this Agreement, the Settlement Plan
or Confirmation Order.&nbsp; It is the intention of this Agreement
that neither the Commission nor any other California entity acting
on the Commission&rsquo;s behalf may assert immunity in an action
or proceeding, as discussed herein, concerning the Parties&rsquo;
rights under this Agreement, the Settlement Plan or the
Confirmation Order.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
21.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Validity and Binding
Effect</u>. &nbsp;</b> The Parties agree not to contest the
validity and enforceability of this Agreement, the Settlement Plan
or any order entered by the Court contemplated by or required to
implement this Agreement and the Settlement Plan.&nbsp; This
Agreement, the Settlement Plan and any such orders are intended to
be enforceable under federal law. This Agreement and the Settlement
Plan, upon becoming effective, and the orders to be entered by the
Court as contemplated hereby and under the Settlement Plan, shall
be irrevocable and binding upon the Parties and their successors
and assigns, notwithstanding any future decisions and orders of the
Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
22.</b>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Enforcement</u>.&nbsp;</b> The
Parties agree that the Court shall retain jurisdiction over the
Parties for all purposes relating to enforcement of this Agreement,
the Settlement Plan and the Confirmation Order.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
23.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Specific
Performance</u>.</b>&nbsp; It is understood and agreed by each of
the Parties hereto that money damages would not be a sufficient
remedy for any material breach of any provision of this Agreement
by any Party, and each non-breaching Party shall be entitled to
specific performance and injunctive or other equitable relief as a
remedy for any such breach, without the necessity of securing or
posting a bond or other security in connection with such
remedy.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
24.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Releases</u>.&nbsp;</b>
The &ldquo;Releases by Debtor&rdquo; provided for in the Settlement
Plan shall include PG&amp;E Corporation, its present and former
officers, directors, management (in each case, who were such on or
after April 6, 2001), and professionals; the present or former
members of the OCC, the present or former officers and directors
and management of any present or former member of the OCC; and the
Commission, its present and former commissioners and employees, as
well as the advisors, consultants and professionals of or to the
OCC, the members of the OCC, and the Commission, in each case in
their respective capacities as such.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
25.</b>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Counterparts</u>.</b>&nbsp;
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
26.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Captions and Paragraph
Headings</u>.</b>&nbsp; Captions and paragraph headings used herein
are for convenience only and are not a part of this Agreement and
shall not be used in construing it.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
27.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Entire
Agreement</u>.&nbsp;</b> This Agreement and its appendices,
including the Commission&rsquo;s D. 03-12-035 attached as Appendix
F, together with the Settlement Plan and the Confirmation Order,
contain the entire understanding of the Parties concerning the
subject matter of this Agreement and, except as expressly provided
for herein, supersedes all prior understandings and agreements,
whether oral or written, among them with respect to the subject
matter hereof and thereof.&nbsp; There are no representations,
warranties, agreements, arrangements or understandings, oral or
written, between the Parties hereto relating to the subject matter
of this Agreement and such other documents and instruments which
are not fully expressed herein or therein.&nbsp; This Agreement may
be amended or modified only by an agreement in writing signed by
each of the Parties hereto which is filed with and, if necessary,
approved by, the Court.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
28.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Time of
Essence</u>.</b>&nbsp; Time is hereby expressly made of the essence
with respect to each and every term and provision of this Agreement
upon its effectiveness.&nbsp; The Parties acknowledge that each
will be relying upon the timely performance by the others of their
obligations hereunder as a material inducement to each
Party&rsquo;s execution and approval of this Agreement.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
29.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>No Third Party
Beneficiaries</u>.</b>&nbsp; Except as may be specifically set
forth in this Agreement or the Settlement Plan, nothing in this
Agreement, whether express or implied, is intended to confer any
rights or remedies under or by reason of this Agreement on any
Persons other than the Parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended
to relieve or discharge the obligation or liability of any third
Persons to any Party, nor give any third Persons any right of
subrogation or action against any Party.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
30.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Authority;
Enforceability</u>.</b>&nbsp; Each Party represents and warrants to
the others that this Agreement has been duly authorized by all
action required of such Party to be bound thereby, and that this
Agreement, when effective, constitutes valid, binding and
enforceable obligations of such Party.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
31.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Waiver of
Compliance</u>.</b>&nbsp; To the extent permitted by applicable
law, any failure of any of the Parties to comply with any
obligation, covenant, agreement or condition set forth herein may
be waived by the Party entitled to the benefit thereof only by a
written instrument signed by such Party, but any such waiver shall
not operate as a waiver of, or estoppel with respect to, any prior
or subsequent failure to comply therewith.&nbsp; The failure of a
Party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of such
rights.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
32.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>California
Law</u>.&nbsp;</b> This Agreement shall be governed by, and shall
be construed and enforced in accordance with, the laws of the State
of California, without giving effect to the conflict of law
principles thereof, except that this Agreement, the Settlement Plan
and any orders of the Court (including the Confirmation Order) are
intended to be enforceable under federal law.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
33.</b>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Admissions</u>.</b>&nbsp; This
Agreement is a compromise believed by the Parties to be in the best
interests of all concerned parties.&nbsp; Nothing in this Agreement
shall be construed or deemed to be an admission by any of the
Parties of any liability or any material fact in connection with
any other litigation or proceeding.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
34.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Confirmation
Order</u>.</b>&nbsp; The Confirmation Order shall, among other
things, order the Parties to perform under and in accordance with
this Agreement and the Settlement Plan.&nbsp; The Confirmation
Order shall be in form and substance satisfactory to each of the
Parties.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
35.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Plan
Documents</u>.</b>&nbsp; This Agreement is expressly conditioned on
the preparation and approval by the Court of the Settlement Plan,
the disclosure statement for the Settlement Plan, and the
Confirmation Order, each of which shall be in form and substance
reasonably satisfactory to each of the Parties.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
36.</b>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Termination</u>.</b>&nbsp; This
Agreement shall terminate at the end of nine (9) years from the
Effective Date, <u>provided that</u> all rights of the Parties
under this Agreement that vest on or prior to such termination,
including any rights arising from any default under this Agreement,
shall survive such termination for the purpose of enforcing such
vested rights.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
37.</b> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b><u>Conditions Precedent to
Effectiveness</u>.</b>&nbsp; This Agreement shall only be binding
upon the Parties and their respective successors and assigns and
enforceable in accordance with its terms upon:&nbsp;
(1)&nbsp;approval by the boards of directors of PG&amp;E and
PG&amp;E Corporation, (2)&nbsp;approval by the Commission, and (3)
execution of this Agreement by all Parties on or before December
31, 2003.&nbsp;</font></p>

<div align="center">
<table border="0" cellspacing="0" cellpadding="0" width="524">
<tr>
<td valign="top">
<p><font size="3" face="Times New Roman"></font></p>

<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<p><font size="3" face="Times New Roman">December 19,&nbsp;
2003</font></p>

<p><font size="3" face="Times New Roman"></font></p>

<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<p><font size="3" face="Times New Roman">December 19,
2003</font></p>

<p><font size="3" face="Times New Roman"></font></p>

<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<p><font size="3" face="Times New Roman">December 19,
2003</font></p>
</td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">CALIFORNIA PUBLIC
UTILITIES COMMISSION</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
/s/ William Ahern</font></p>

<p><font size="3" face=
"Times New Roman">By________________________________________</font></p>

<p><font size="3" face="Times New Roman">Its&nbsp;&nbsp; Executive
Director</font></p>

<p><font size="3" face="Times New Roman">PACIFIC GAS AND ELECTRIC
COMPANY|</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;/s/&nbsp;
Kent M. Harvey</font></p>

<p><font size="3" face=
"Times New Roman">By_________________________________________</font></p>

<p><font size="3" face="Times New Roman">Its&nbsp;&nbsp; Senior
vice President and Chief Financial Officer</font></p>

<p><font size="3" face="Times New Roman">PG&amp;E CORPORATION<br />
<br />
 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;/s/
Robert D. Glynn, Jr.</font></p>

<p><font size="3" face=
"Times New Roman">By_________________________________________</font></p>

<p><font size="3" face=
"Times New Roman">Its&nbsp;&nbsp;&nbsp;&nbsp;Chairman, Chief
Executive Officer and President</font></p>
</td>
</tr>
</table>
</div>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p><font size="3" face="Times New Roman"><br clear="all" />
</font></p>

<p align="center"><b><font size="3" face="Times New Roman">APPENDIX
A<br />
<u>TECHNICAL APPENDIX</u></font></b></p>

<p><font size="3" face="Times New Roman">&nbsp;A. Methodology for
Calculating Regulatory Asset Amortization</font></p>

<p><font size="3" face="Times New Roman">&nbsp;The amount of the
amortization of the Regulatory Asset principal to be included
annually in PG&amp;E's revenue requirement shall be calculated each
year according to the following formula:</font></p>

<p><font size="3" face="Times New Roman">&nbsp;&nbsp;</font></p>

<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">P * r</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Annual Principal
Amortization =</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">[</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<p><font size="3" face="Times New Roman">[1 &ndash;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<p><u><font size="3" face="Times New Roman">&nbsp;&nbsp;&nbsp;
1&nbsp;&nbsp;&nbsp;</font></u>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;]</p>

<p><font size="3" face="Times New Roman">(1 +
r)<sup>n</sup><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">]</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<p><font size="3" face="Times New Roman">&ndash; (P<sub>a</sub> *
r)</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>
</table>

<p><font size="3" face="Times New Roman">&nbsp;&nbsp;</font></p>

<p><font size="3" face="Times New Roman">where:</font></p>

<p><font size="3" face="Times New Roman">"P" is defined as the
total Regulatory Asset principal, as specified in the Settlement
Agreement; "r" is defined as the estimated tax-effected return on
rate base, as more fully described below; "n" is defined as the
period of amortization in years, as specified in the Settlement
Agreement; and "P a " is defined as the principal remaining at the
beginning of the year under consideration.</font></p>

<p><font size="3" face="Times New Roman">&nbsp;B. Estimated
Tax-Effected Return on Rate Base</font></p>

<p><font size="3" face="Times New Roman">&nbsp;The tax-effected
return on rate base used in the above formula shall reflect an
estimate of the cost of PG&amp;E's capital structure. The following
example uses its approximate assumed capital ratios over the life
of the regulatory asset, as detailed below:</font></p>

<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="bottom">
<p><font size="3" face="Times New Roman">&nbsp;&nbsp;</font></p>
</td>
<td valign="bottom">
<p><font size="3" face="Times New Roman">Capital Ratio<br />
 (%)</font></p>
</td>
<td valign="bottom">
<p><font size="3" face="Times New Roman">Nominal Cost<br />
 (%)</font></p>
</td>
<td valign="bottom">
<p><font size="3" face="Times New Roman">Tax-Effected Cost<br />
 (%)<sup>1</sup></font></p>
</td>
<td valign="bottom">
<p><font size="3" face="Times New Roman">Weighted Cost<br />
 (%)</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Common Equity</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">52.0</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">11.220</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">18.937</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">9.847</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Preferred
Securities</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">2.0</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">6.500</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">10.970</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">0.219</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Debt</font></p>
</td>
<td valign="top">
<p><u><font size="3" face="Times New Roman">46.0</font></u></p>
</td>
<td valign="top">
<p><u><font size="3" face="Times New Roman">6.616</font></u></p>
</td>
<td valign="top">
<p><u><font size="3" face="Times New Roman">6.616</font></u></p>
</td>
<td valign="top">
<p><u><font size="3" face="Times New Roman">3.043</font></u></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Tax-Effected Return on
Rate Base</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><u><font size="3" face="Times New Roman">13.110</font></u></p>
</td>
</tr>
</table>

<p><font size="3" face="Times New Roman">&nbsp;NOTE</font></p>

<p><font size="3" face="Times New Roman">1&nbsp;&nbsp; Assumes
total state and federal income tax rate of 40.75%.</font></p>

<p><font size="3" face="Times New Roman">&nbsp;The actual
authorized pre-tax cost of capital shall be used to determine the
annual return and amortization components of the regulatory asset,
subject to the requirements set forth in paragraph 2(b) of the
Settlement Agreement.</font></p>

<p><font size="3" face="Times New Roman">C. Example Amortization
Schedule for Regulatory Asset</font></p>

<p><font size="3" face="Times New Roman">&nbsp;Applying the
foregoing formula to the Regulatory Asset of $2, 210 million, to be
amortized over</font></p>

<p><font size="3" face="Times New Roman">nine years, as initially
specified in the Settlement Agreement, the schedule for principal
amortization is as follows:</font></p>

<p><font size="3" face="Times New Roman">&nbsp;P =
&nbsp;&nbsp;&nbsp;&nbsp; 2, 210. 0 million</font></p>

<p><font size="3" face="Times New Roman">r =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 13. 110%</font></p>

<p><font size="3" face="Times New Roman">n =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 9 years</font></p>

<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<div align="center">
<table border="0" cellspacing="0" cellpadding="0" width="678">
<tr>
<td valign="bottom">
<p><i><font size="3" face="Times New Roman">(Figures in millions of
dollars)</font></i></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2004</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2005</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2006</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2007</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2008</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2009</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2010</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2011</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2012</font></b></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Principal Balance,
Beginning of Period</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">2,210.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">2,067.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,905.9</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,723.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,516.9</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,283.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1019.1</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">720.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">382.3</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(Principal
Amortization)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;&nbsp;
(<u>142.7</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;&nbsp;
(<u>161.4</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(<u>182.6</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">(<u>206.5</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(2<u>33.6</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(<u>264. 2</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;(<u>298. 8</u>)</font></p>
</td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;(<u>338.0</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">(<u>382.3</u>)</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Principal Balance, End of
Period</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">2,067.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,905.9</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,723.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,516.9</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,283.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,019.1</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">720.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">382.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">(0.
0)</font></p>
</td>
</tr>
</table>
</div>

<p><font size="3" face="Times New Roman">&nbsp;&nbsp;D. Effect of a
Reduction in the Regulatory Asset</font></p>

<p><font size="3" face="Times New Roman">&nbsp;If, pursuant to the
Settlement Agreement, the outstanding balance of the Regulatory
Asset is reduced, then the amortization schedule for the remainder
of the Regulatory Asset shall be recalculated for the current year
and each of the successive years using the method described in
Sections A through C above. For purposes of the formula in Section
A above, the term "n" shall refer to the number of remaining years
of amortization and the term "P" shall refer to the outstanding
balance of the Regulatory Asset at the beginning of the current
year after giving effect to the reduction.</font></p>

<p><font size="3" face="Times New Roman">&nbsp;For example, if in
2006 the outstanding balance of the Regulatory Asset were to be
reduced by $500 million (after tax), then the principal
amortization for 2006 and all successive years would be
recalculated on the basis of the reduced remaining outstanding
balance of $1,407.4 million, the same estimated tax- effected
return on rate base of 13.110% as specified in Section B above, and
a seven year remaining amortization period, as shown
below:</font></p>

<p><font size="3" face="Times New Roman">&nbsp;&nbsp;</font></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p><i><font size="3" face="Times New Roman"><br clear="all" />
</font></i></p>

<div align="center">
<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="bottom">
<p><i><font size="3" face="Times New Roman">(Figures in millions of
dollars)</font></i></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2004</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2005</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2006</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2007</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2008</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2009</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2010</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2011</font></b></p>
</td>
<td valign="bottom">
<p><b><font size="3" face="Times New Roman">2012</font></b></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Principal Balance,
Beginning of Period</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">2,210.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">2,067.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,905.9</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,271.2</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,118.9</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">946.6</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">751.8</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">531.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">282.0</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(Reduction in
Principal)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">0.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">0.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;&nbsp;(500.0)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">0.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">0.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">0.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">0.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">0.0</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">0.0</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">(Principal
Amortization)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(<u>142.7</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;&nbsp;
(<u>161.4</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;&nbsp;
(<u>134.7</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(<u>152.3</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(<u>172.3</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(<u>194.9</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(<u>220.4</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp; (<u>249.3</u>)</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">&nbsp;
(<u>282.0</u>)</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Principal Balance, End of
Period</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">2,067.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,905.9</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,271.2</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">1,118.9</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">946.6</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">751.8</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">531.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face=
"Times New Roman">382.3</font></p>
</td>
<td valign="top">
<p align="right"><font size="3" face="Times New Roman">(0.
0)</font></p>
</td>
</tr>
</table>
</div>

<p><i><font size="3" face="Times New Roman">&nbsp;</font></i>
E.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Example of Calculation
of Total Revenue Requirement</p>

<p><font size="3" face="Times New Roman">&nbsp;The total
requirement for the Regulatory Asset will include return, taxes on
return, amortization, and taxes on amortization.&nbsp; The Company
shall include its authorized factor for franchise fees and
uncollectibles.&nbsp; Any property taxes attributable to the
Regulatory asset shall also be included in the revenue
requirement.&nbsp; Changes in the annual revenue requirement shall
be implemented by advice filling, subject to review by the CPUC
Energy Division.</font></p>

<div align="center">
<table border="0" cellspacing="0" cellpadding="0" width="688"
height="144">
<tr height="21">
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">&nbsp;<i>(Figures in
millions of dollars)</i></font></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2004</font></b></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2005</font></b></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2006</font></b></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2007</font></b></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2008</font></b></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2009</font></b></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2010</font></b></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2011</font></b></p>
</td>
<td height="21" valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">2012</font></b></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">Return and Taxes on
Average Balance</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">280.4</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">260.4</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">237.9</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">212.4</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">183.5</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">150.9</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">114.0</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">72.3</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">25.1</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">Amortization</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">142.7</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">161.4</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">182.6</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">206.5</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">233.6</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">264.2</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">298.8</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">338.0</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">382.3</font></p>
</td>
</tr>

<tr height="18">
<td height="18" valign="top">
<p><font size="3" face="Times New Roman">Taxes on
Amortization</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">98.1</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">111.0</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">125.6</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">142.0</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">160.6</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">181.7</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">205.5</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">232.5</font></p>
</td>
<td height="18" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">262.9</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">Property Taxes (not
estimated in example)</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">F&amp;U (not estimated in
example)</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">Total Revenue
Requirement</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">521.2</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">532.8</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">546.0</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">560.9</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">577.7</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">596.8</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">618.3</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">642.7</font></p>
</td>
<td height="21" valign="top">
<p align="right"><font size="3" face=
"Times New Roman">670.3</font></p>
</td>
</tr>
</table>
</div>

<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p align="center"><b><font size="3" face="Times New Roman">APPENDIX
B</font></b></p>

<p align="center"><b><u><font size="3" face="Times New Roman">LIST
OF PROCEEDINGS</font></u></b></p>

<p><font size="3" face="Times New Roman">A.00-05-002, -003, -004;
-005; A.01-05-003, -009, -017, -018; A.02-05-002, -003, -005, -007,
Annual Earnings Assessment Proceeding (AEAP)
applications.</font></p>

<p><font size="3" face="Times New Roman">A.01-09-003, PG&amp;E 2001
Annual Transition Cost Proceeding, Phase 1 cost recovery
issues.</font></p>

<p><font size="3" face="Times New Roman">A.02-06-019,
PG&amp;E&rsquo;s 2002 Attrition Proceeding.</font></p>

<p><font size="3" face="Times New Roman">A.99-03-039, Public
Utilities Code Section 368(e) proceeding.</font></p>

<p><font size="3" face="Times New Roman">A.00-07-013, PG&amp;E
Electric Restructuring Cost Account application.</font></p>

<p><font size="3" face="Times New Roman">A.02-11-017 and
A.02-09-005, PG&amp;E 2003 General Rate Case
applications.</font></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p align="center"><b><font size="3" face="Times New Roman">APPENDIX
C<br />
<u>OTHER PROCEEDINGS TO BE DISMISSED</u></font></b></p>

<p><font size="3" face="Times New Roman">Various market valuation
applications under AB 1890, Public Utilities Code Section 367(b),
including Docket Nos. A.99-09-053, A.00-05-034.</font></p>

<p><font size="3" face="Times New Roman">A.00-06-046, PG&amp;E
application to implement benefit sharing ratemaking for Diablo
Canyon pursuant to CPUC Diablo Canyon restructuring decisions.
(Probably superseded by D.02-04-016, URG decision.)</font></p>

<p><font size="3" face="Times New Roman">I.01-04-002, CPUC
investigation into past holding company actions during energy
crisis (but only as to past actions, not prospective
matters).</font></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p align="center"><b><font size="3" face="Times New Roman">APPENDIX
D<br />
<u>CERTAIN APPLICATIONS</u></font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(a) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Applications to Transfer
Regulatory Assets filed with the FERC in Docket Nos. EC02-3 1,
EL02-36, ES02-17, ER02-456, and ER02-455</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(b) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Applications to Transfer Hydro
Assets filed with FERC in Project Nos. 77-116, 96-031, 137-031,
175-018, 178-015, 233-082, 606-020, 619-095, 803-055, 1061-056,
1121-058, 1333-037, 1354-029, 1403-042, 1962-039, 1988-030,
2105-087, 2106-039, 2107-012, 2130-030, 2155-022, 2310-120,
2467-016, 2661-016, 2687-022, 2735-071, 2118-006, 2281-005,
2479-003, 2678-001, 2781-004, 2784-001, 4851-004, 5536-001,
5828-003, 7009-004, and 10821-002.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(c) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Applications for Certificates of
Public Convenience and Necessity filed with FERC in Docket Nos.
CP02-38, CP02-39, CP02-40, CP02-41, and CP02-42.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(d) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;License Transfer Application
filed with the NRC in Docket Nos.&nbsp;50-275-LT, and
50-323-LT.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(e)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Filing with the SEC for Approval
under the Public Utilities Holding Company Act of 1935 to create
Electric Generation LLC, ETrans LLC, and GTrans LLC.</font></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p align="center"><b><font size="3" face="Times New Roman">APPENDIX
E<br />
<u>LAND CONSERVATION COMMITMENT</u></font></b></p>

<p align="center"><b><u><font size="3" face=
"Times New Roman">STATEMENT OF PURPOSE</font></u></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
shall ensure that the Watershed Lands it owns and Carizzo Plains
are conserved for a broad range of beneficial public values,
including the protection of the natural habitat of fish, wildlife
and plants, the preservation of open space, outdoor recreation by
the general public, sustainable forestry, agricultural uses, and
historic values.&nbsp; PG&amp;E will protect these beneficial
public values associated with the Watershed Lands and Carizzo
Plains from uses that would conflict with their conservation.&nbsp;
PG&amp;E recognizes that such lands are important to maintaining
the quality of life of local communities and all the people of
California in many ways, and it is PG&amp;E&rsquo;s intention to
protect and preserve the beneficial public values of these lands
under the terms of any agreements concerning their future ownership
or management.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
Environmental Enhancement Corporation will develop a plan for
protection of these lands for the benefit of the citizens of
California.&nbsp; Protecting such lands will&nbsp; be accomplished
through either (1) PG&amp;E&rsquo;s donation of conservation
easements to one or more public agencies or qualified conservation
organizations consistent with these objectives, or (2)
PG&amp;E&rsquo;s donation of lands in fee to one or more public
entities or qualified conservation organizations, whose ownership
would be consistent with these conservation
objectives.&nbsp;</font></p>

<p align="center"><b><u><font size="3" face=
"Times New Roman">COMMITMENTS</font></u></b></p>

<table border="0" cellspacing="0" cellpadding="0" width="651">
<tr>
<td valign="top">
<p><font size="3" face=
"Times New Roman">1.&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td valign="top">
<p><u><font size="3" face="Times New Roman">PG&amp;E Shall Place
Permanent Conservation Easements on or Donate Watershed
Lands</font></u>:&nbsp; The Watershed Lands and Carizzo Plains
shall (1) be subject to permanent conservation easements
restricting development of the lands so as to protect and preserve
their beneficial public values, and/or (2) be donated in fee simple
to one or more public entities or qualified non-profit conservation
organizations, whose ownership will ensure the protection of these
beneficial public values.&nbsp; PG&amp;E will not be expected to
make fee simple donations of Watershed Lands that contain
PG&amp;E&rsquo;s or a joint licensee&rsquo;s hydroelectric project
features.&nbsp; In instances where PG&amp;E has donated land in
fee, some may be sold to private entities subject to conservation
easements and others, without significant public interest value,
may be sold to private entities with few or no restrictions.</p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face="Times New Roman">The conservation easements
shall provide for the preservation of land areas for the protection
of the natural habitat of fish, wildlife and plants, the
preservation of open space, outdoor recreation by the general
public, sustainable forestry, agricultural uses, and historic
values and, shall prevent any other uses that will significantly
impair or interfere with those values.&nbsp; Conservation easements
on the Watershed Lands will include an express reservation of a
right for continued operation and maintenance of hydroelectric
facilities and associated water delivery facilities, including
project replacements and improvements required to meet existing and
future water delivery requirements for power generation and
consumptive water use by existing users, compliance with any FERC
license, FERC license renewal or other regulatory requirements. In
addition, easements will honor existing agreements for economic
uses, including consumptive water deliveries.&nbsp; The
conservation easements shall be donated to and managed by one or
more non-profit conservation trustees, qualified conservation
organizations or public agencies with the experience and expertise
to fully and strictly implement the conservation
easements.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top"></td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face=
"Times New Roman">2.&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td valign="top"></td>
<td valign="top">
<p><u><font size="3" face="Times New Roman">Process For Development
of the Conservation Easements and Land Donation Plan</font></u>:
PG&amp;E will work with PG&amp;E Environmental Enhancement
Corporation and the Commission in the development and
implementation of the conservation easements and land donation
plan.&nbsp; PG&amp;E Environmental Enhancement Corporation will
recommend to PG&amp;E (1)&nbsp;conservation objectives for the
properties, including identification of conservation values,
(2)&nbsp;criteria for ultimate disposition of the properties,
(3)&nbsp;conservation easements guidelines, and (4) land
disposition plans.</p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top"></td>
<td valign="top"></td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">3.</font></p>
</td>
<td valign="top"></td>
<td valign="top">
<p><u><font size="3" face="Times New Roman">Reporting
Responsibilities</font></u>:&nbsp; PG&amp;E Environmental
Enhancement Corporation will prepare a report to the Commission
within 18 months of the Effective Date describing the status of the
conservation easement and land disposition plan.&nbsp; PG&amp;E
Environmental Enhancement Corporation will make the report
available to the public upon request.&nbsp; Every two years
following the first report, PG&amp;E Environmental Enhancement
Corporation will prepare a report to the Commission on the
implementation of the conservation easement and land disposition
plan.</p>
</td>
</tr>
</table>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p align="center"><b><font size="3" face="Times New Roman">APPENDIX
F</font></b></p>

<p><font size="3" face=
"Times New Roman">COM/acb&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
MAIL DATE</b></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
12/19/03</b></font></p>

<p><font size="3" face="Times New Roman">Decision
03-12-035&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; December
18, 2003</font></p>

<p align="center"><b><font size="3" face="Times New Roman">BEFORE
THE PUBLIC UTILITIES COMMISSION OF THE STATE OF
CALIFORNIA</font></b></p>

<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Order Instituting
Investigation into the ratemaking implications for Pacific Gas and
Electric Company (PG&amp;E) pursuant to the Commission&rsquo;s
Alternative Plan of Reorganization under Chapter 11 of the
Bankruptcy Code for PG&amp;E, in the United States Bankruptcy
Court, Northern District of California, San Francisco Division, In
re Pacific Gas and Electric Company, Case No. 01-30923
DM.</font></p>

<p><font size="3" face="Times New Roman">(U 39 M)</font></p>
</td>
<td valign="top">
<p align="center"><font size="3" face=
"Times New Roman">Investigation 02-04-026</font></p>

<p align="center"><font size="3" face="Times New Roman">(Filed
April 22, 2002)</font></p>
</td>
</tr>
</table>

<p align="center"><b><font size="3" face="Times New Roman">OPINION
MODIFYING THE PROPOSED SETTLEMENT<br />
AGREEMENT OF PACIFIC GAS &amp; ELECTRIC COMPANY, PG&amp;E
CORPORATION AND THE COMMISSION STAFF, AND APPROVING<br />
THE MODIFIED SETTLEMENT AGREEMENT</font></b></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p><font size="3" face="Times New Roman"><br clear="all" />
</font></p>

<div align="center">
<table border="0" cellspacing="0" cellpadding="0" height="1275">
<tr height="21">
<td colspan="9" height="21" valign="top">
<p><font size="3" face="Times New Roman">TABLE OF
CONTENTS</font></p>
</td>
</tr>

<tr height="21">
<td colspan="4" height="21" valign="top">
<p><font size="3" face="Times New Roman">Title</font></p>
</td>
<td colspan="4" height="21" valign="top"></td>
<td height="21" valign="bottom">
<p><font size="3" face="Times New Roman">Page</font></p>
</td>
</tr>

<tr height="59">
<td colspan="8" height="59" valign="top">
<p><font size="3" face="Times New Roman">OPINION MODIFYING THE
PROPOSED SETTLEMENT AGREEMENT OF PACIFIC GAS &amp; ELECTRIC
COMPANY, PG&amp;E CORPORATION AND THE COMMISSION STAFF, AND
APPROVING THE MODIFIED SETTLEMENT AGREEMENT</font></p>
</td>
<td height="59" valign="bottom">
<p><font size="3" face="Times New Roman">2</font></p>
</td>
</tr>

<tr height="21">
<td colspan="4" height="21" valign="top">
<p><font size="3" face="Times New Roman">Summary</font></p>
</td>
<td colspan="4" height="21" valign="top"></td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">3</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">I.</font></p>
</td>
<td colspan="6" height="21" valign="top">
<p><font size="3" face="Times New Roman">Introduction and
Background</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">3</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">II.</font></p>
</td>
<td colspan="6" height="21" valign="top">
<p><font size="3" face="Times New Roman">Procedural
History</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">10</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">III.</font></p>
</td>
<td colspan="6" height="21" valign="top">
<p><font size="3" face="Times New Roman">Description of the PSA
Terms and Conditions</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">11</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">A.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Structure of the
Settlement Plan of Reorganization</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">11</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">B.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Financial Elements of the
PSA</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">11</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">1.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Regulatory
Asset</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">11</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">2.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Headroom</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">13</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">3.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Ratemaking
Matters</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">13</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">4.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Dividends and Stock
Repurchases</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">14</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">C.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Dismissal of Energy
Crisis-Related Disputes</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">14</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">D.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Environmental
Provisions</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">15</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">E.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Conditions Precedent to
Effectiveness of Settlement Plan</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">16</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">F.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Other
Provisions</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">17</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">1.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Assignability of DWR
Contracts</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">17</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">2.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Interest Rate
Hedging</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">17</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">3.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Financing</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">17</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">4.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Fees and
Expenses</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">18</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">5.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Releases</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">18</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">6.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Bankruptcy Court
Supervision</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">18</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">IV.</font></p>
</td>
<td colspan="6" height="21" valign="top">
<p><font size="3" face="Times New Roman">Standard of
Review</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">19</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">V.</font></b></p>
</td>
<td colspan="6" height="21" valign="top">
<p><font size="3" face="Times New Roman">Lawfulness of the
PSA</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">22</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">A.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">The Purpose of the
Commission v. The Purpose of the Bankruptcy Court</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">22</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">B.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">The Commission's Ability
to Bind Future Commissions</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">25</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">C.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Jurisdiction of the
Bankruptcy Court</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">35</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">D.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Consistency with Assembly
Bill 1890 and &sect; 368(a)</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">37</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">VI.</font></b></p>
</td>
<td colspan="6" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">Whether the Proposed
Settlement Agreement Is in the Public Interest</font></b></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">39</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">A.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Adequacy of a Settlement
Proposal in Achieving a Feasible Plan of Reorganization</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">39</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">1.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">The MSA Will Allow
PG&amp;E to Emerge Promptly From Bankruptcy</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">40</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">2.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">The Rating Agencies
(S&amp;P and Moody's)</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">41</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">B.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Fairness and
Reasonableness</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">44</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">1.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Relationship of Settlement
to Parties' Risks of Achieving Desired Results</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">44</font></p>
</td>
</tr>

<tr height="40">
<td colspan="3" height="40" valign="top"></td>
<td colspan="2" height="40" valign="top">
<p><font size="3" face="Times New Roman">2.</font></p>
</td>
<td colspan="3" height="40" valign="top">
<p><font size="3" face="Times New Roman">The Risk, Expense,
Complexity, and Likely Duration of Further Bankruptcy
Litigation</font></p>
</td>
<td height="40" valign="top">
<p><font size="3" face="Times New Roman">45</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">3.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Reasonableness of
Settlement of Other Claims and Litigation</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">47</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">4.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Reasonableness of
Rates</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">51</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">5.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Adequacy of Representation
in the Settlement Process</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">52</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">6.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Release of PG&amp;E
Corporation</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">53</font></p>
</td>
</tr>

<tr height="21">
<td height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">C.</font></p>
</td>
<td colspan="5" height="21" valign="top">
<p><font size="3" face="Times New Roman">Public Interest</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">55</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">1.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">The Regulatory
Asset</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">55</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">2.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Headroom</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">55</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">3.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Dividends</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">57</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">4.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Credit Rating</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">60</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">5.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Assignability of DWR
Contracts</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">62</font></p>
</td>
</tr>

<tr height="21">
<td colspan="3" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">6.</font></p>
</td>
<td colspan="3" height="21" valign="top">
<p><font size="3" face="Times New Roman">Environmental
Matters</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">62</font></p>
</td>
</tr>

<tr height="21">
<td colspan="4" height="21" valign="top"></td>
<td colspan="4" height="21" valign="top">
<p><font size="3" face="Times New Roman">The Land Conservation
Commitment (LCC)</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">62</font></p>
</td>
</tr>

<tr height="21">
<td colspan="4" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">(a)</font></p>
</td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">The Stewardship
Council</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">63</font></p>
</td>
</tr>

<tr height="21">
<td colspan="4" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">(b)</font></p>
</td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">Environmental Opportunity
For Urban Youth</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">67</font></p>
</td>
</tr>

<tr height="21">
<td colspan="4" height="21" valign="top"></td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">(c)</font></p>
</td>
<td colspan="2" height="21" valign="top">
<p><font size="3" face="Times New Roman">Clean Energy Technology
Commitment</font></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">68</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">VII.</font></b></p>
</td>
<td colspan="6" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">The TURN Dedicated Rate
Component Proposal</font></b></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">68</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">VIII.</font></b></p>
</td>
<td colspan="6" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">Rulings of the
Administrative Law Judge (ALJ)</font></b></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">75</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">IX.</font></b></p>
</td>
<td colspan="6" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">Comments on the
Decision</font></b></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">76</font></p>
</td>
</tr>

<tr height="21">
<td colspan="2" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">X.</font></b></p>
</td>
<td colspan="6" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">Assignment of
Proceeding</font></b></p>
</td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">76</font></p>
</td>
</tr>

<tr height="21">
<td colspan="7" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">Findings of
Fact</font></b></p>
</td>
<td height="21" valign="top"></td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">76</font></p>
</td>
</tr>

<tr height="21">
<td colspan="7" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">Conclusions of
Law</font></b></p>
</td>
<td height="21" valign="top"></td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">83</font></p>
</td>
</tr>

<tr height="21">
<td colspan="7" height="21" valign="top">
<p><b><font size="3" face="Times New Roman">ORDER</font></b></p>
</td>
<td height="21" valign="top"></td>
<td height="21" valign="top">
<p><font size="3" face="Times New Roman">87</font></p>
</td>
</tr>
</table>
</div>

<p><font size="3" face="Times New Roman">Appendix A</font></p>

<p><font size="3" face="Times New Roman">Appendix B</font></p>

<p><font size="3" face="Times New Roman">Appendix C</font></p>

<p><font size="3" face="Times New Roman">Appendix D</font></p>

<p><font size="3" face="Times New Roman">Appendix E</font></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p><b><font size="3" face="Times New Roman"><br clear="all" />
</font></b></p>

<p><a name="_Toc59591872"></a><a name="header_opinion"></a><font
size="3" face="Times New Roman">I.02-04-026&nbsp;
COM/MP1/acb&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>
ALTERNATE&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; DRAFT</b></font></p>

<p align="center"><b><font size="3" face="Times New Roman">APPENDIX
E</font></b></p>

<div align="center">
<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="top">
<p align="center"><b><font size="3" face=
"Times New Roman">************ SERVICE LIST ***********<br />
 Last Update on 16-OCT-2003 by: DYK</font></b><br />
 <b>I0204026 LIST</b><br />
 <b>&nbsp;</b></p>
</td>
</tr>

<tr>
<td valign="top"></td>
</tr>
</table>
</div>

<p align="center"><b><font size="3" face="Times New Roman">OPINION
MODIFYING THE PROPOSED SETTLEMENT AGREEMENT OF PACIFIC GAS &amp;
ELECTRIC COMPANY, PG&amp;E CORPORATION AND THE COMMISSION STAFF,
AND APPROVING THE MODIFIED SETTLEMENT AGREEMENT</font></b></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p align="center"><a name="_Toc59591873"></a><a name=
"summary"></a><font size="3" face=
"Times New Roman">Summary</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This
decision modifies and clarifies the Proposed Settlement Agreement
(PSA) offered by Pacific Gas &amp; Electric Company (PG&amp;E),
PG&amp;E Corporation (Corp.), and the Commission staff.&nbsp; We
find that the settlement agreement, with these modifications and
clarifications, is fair, just and reasonable and in the public
interest.&nbsp; Therefore, we can enter into the Modified
Settlement Agreement (MSA).</font></p>

<p><a name="_Toc59591874"></a><a name=
"intro_background"></a><b><font size="3" face=
"Times New Roman">I.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Introduction and
Background</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Proposed Settlement Agreement (PSA) between PG&amp;E, PG&amp;E
Corp. (hereafter generally referred to as PG&amp;E) and our staff
offers the promise of allowing PG&amp;E to emerge quickly from
bankruptcy protection in a proceeding now pending in the United
States Bankruptcy Court for the Northern District of California as
a financially strong utility subject to the directives in
California laws and the continuing jurisdiction of this
Commission.&nbsp; The timely resolution of PG&amp;E&rsquo;s
financial difficulties and the PSA come before this Commission
pursuant to a background of unprecedented developments, and our
careful consideration of their related consequences is of utmost
importance to the ratepayers of PG&amp;E and the citizens of
California.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The PSA contains a number of provisions that provide additional
benefits to PG&amp;E compared to the Commission&rsquo;s plan of
reorganization (Commission POR) submitted by the Commission to the
Bankruptcy Court.&nbsp;&nbsp; The most significant modifications
compared to the Commission&rsquo;s POR are:</font></p>

<ul>
  <li>Allowing PG&amp;E to keep between $775 million and $875 million
in headroom from 2003;<br>
  </li>
  <li>Increasing the size of the regulatory asset from $1.75 billion
to $2.21 billion.<br>
  </li>
  <li>Eliminating a proposed $400 million disallowance against
PG&amp;E for imprudent procurement practices;<br>
  </li>
  <li>Fixing PG&amp;E&rsquo;s rate of return on equity at 11.22% for
up to nine years;<br>
  </li>
  <li>Allowing Department of Water Resources (DWR) contracts to be
assigned to PG&amp;E only after a very high credit rating is
achieved by PG&amp;E.</li>
</ul>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Overall, the PSA&rsquo;s changes from the Commission&rsquo;s POR
give PG&amp;E significant additional benefits.&nbsp; In evaluating
the reasonableness of the provisions in the PSA, we conclude that
there are certain modifications that are necessary to the proposal
to ensure that it is reasonable for ratepayers.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In particular, we will not allow PG&amp;E to recover from
ratepayers Corp&rsquo;s litigation costs.&nbsp; Further, we
substantially adopt findings, conclusions and ordering paragraphs
jointly proposed by TURN and PG&amp;E that lead to the expectation
that there will be a statute enacting a dedicated rate component
that would replace the regulatory asset, saving the ratepayers an
estimated $1 billion over nine years.&nbsp; We also make a number
of changes to clarify matters of legal concern to the Attorney
General, the Department of Water Resources, and this Commission. To
delve yet again into the facts and forces that led to the
dysfunctional electricity market in California during the period
from mid-2000 to early 2001 serves no purpose here.&nbsp; A
succinct and readable summary of the market behaviors, and
responsive actions taken by the California Legislature, as well as
State and federal regulators, is contained in the recent opinion of
the California Supreme Court in <i>Southern California Edison Co.
v.</i> <i>Peevey</i> &nbsp; (2003) 31 Cal. 4<sup>th</sup>
781.&nbsp; We provide a condensed version of this summary in the
background section herein.&nbsp; As noted in that opinion, this
Commission deemed the energy crisis one that involved not only
utility solvency but the very reliability of the State&rsquo;s
electrical system.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
PG&amp;E responded to the financial difficulty it was facing by
filing for Chapter 11 bankruptcy protection on April 6, 2001.&nbsp;
Numerous creditors and other parties, including the Commission,
appeared (in the Commission&rsquo;s case, subject to its sovereign
immunity rights and defenses under the 11<sup>th</sup> Amendment of
the U.S. Constitution and related principles).&nbsp; PG&amp;E
asserted that as a result of the energy crisis beginning in May
2000 and because its retail electric rates were frozen, it was
unable to recover approximately $9 billion of electricity
procurement costs from its customers, resulting in billions of
dollars of defaulted debt and the downgrading of its credit ratings
by all of the major credit rating agencies.&nbsp; PG&amp;E&rsquo;s
decision to seek Bankruptcy Court protection came in the wake of
its earlier decision to sue this Commission in federal district
court to recover these costs under a &ldquo;filed rate
doctrine&rdquo; theory <i>See</i> PG&amp;E v. Lynch, No.
C-01-3023-VRW, N.D. Cal. (the &ldquo;Rate Recovery
Litigation&rdquo;).&nbsp; The Commission vigorously defended this
action, and a similar lawsuit filed by Southern California Edison
Co. (SCE), on behalf of the customers of the two utilities.&nbsp;
The costs and complexities of this litigation were
tremendous.&nbsp; The outcome was far from certain.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On September 20, 2001, PG&amp;E and PG&amp;E Corporation, as
co-proponents, filed a plan of reorganization (PG&amp;E Plan) in
PG&amp;E&rsquo;s bankruptcy case.&nbsp; The PG&amp;E Plan provided
for the disaggregation of PG&amp;E&rsquo;s businesses into four
companies, three of which would have been regulated by the Federal
Energy Regulatory Commission (FERC).&nbsp; The Commission and
others opposed the PG&amp;E Plan.&nbsp; The PG&amp;E Plan was
amended and modified a number of times.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
It was an exceedingly bold proposal that went far beyond the
traditional and usual purpose of resolving creditor claims and
returning the utility to financial viability.&nbsp; As noted in the
Commission staff&rsquo;s opening brief, PG&amp;E&rsquo;s proposed
plan of reorganization was expansive in the extreme, and threatened
its ratepayers in three ways. First, it would have disaggregated
the utility and would have divested this Commission of authority
over significant aspects of PG&amp;E&rsquo;s operations.&nbsp;
Secondly, it had potentially disastrous environmental consequences.
Finally, it locked in, for twelve years, power purchase costs that
would have resulted in high retail rates, and then would have left
PG&amp;E&rsquo;s power purchase costs to the markets that were
largely responsible for PG&amp;E&rsquo;s financial predicament in
the first place.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Commission&rsquo;s formal response to PG&amp;E&rsquo;s proposal
in the Bankruptcy Court was strong and swift. As Commissioner Lynch
noted in her declaration supporting our opposition:</font></p>

<p><font size="3" face="Times New Roman">&ldquo;In its proposed
plan, PG&amp;E demands sweeping declaratory and injunctive relief
against the Commission.&nbsp; The Commission believes
PG&amp;E&rsquo;s purpose is to carry out a frontal assault upon the
State of California as a government and regulator, as PG&amp;E
seeks to preempt no fewer than 15 core statutes and laws essential
to the health and safety of California&rsquo;s
citizens.&rdquo;&nbsp; This strategy was referred to as &ldquo;the
regulatory jailbreak&rdquo;.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Specifically, the utility proposal would have removed
PG&amp;E&rsquo;s hydroelectric generation facilities, natural gas
transmission assets and nuclear facilities from state regulatory
control.&nbsp; That proposal raised the potential that the
Commission would be unable to ensure the provision of basic service
in case of an energy supply or capacity crisis; the potential that
the pricing of service for captive customers would undermine the
availability of affordable service for California citizens and
necessitate the widespread use of alternative fuels, thereby
creating adverse impacts on the environment; and adverse effects to
the safety and welfare of California residents through the loss of
local regulation.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In response, on April 15, 2002, the Commission authorized the
filing of its original plan of reorganization for PG&amp;E
(Original CPUC Plan).&nbsp; It was crafted to permit PG&amp;E to
emerge from bankruptcy by repaying creditor claims in full while
avoiding the negative consequences of the PG&amp;E plan.&nbsp;
Among other things, the Original CPUC Plan would have raised funds
to pay PG&amp;E&rsquo;s creditors through &ldquo;headroom&rdquo;
revenues <sup>1</sup>and the issuance of new debt and equity
securities, while at the same time maintaining PG&amp;E as a
vertically integrated utility subject to regulation by the
Commission.&nbsp; Subsequently, the Commission and the Official
Creditors Committee (OCC) filed an amended plan of reorganization
for PG&amp;E, dated August 30, 2002 (as amended, Joint Amended
Plan) (supplemented by a &ldquo;Reorganization Agreement&rdquo; to
be entered into by the Commission and PG&amp;E).&nbsp; The Joint
Amended Plan was not well received by PG&amp;E, and thus the battle
to restore PG&amp;E to financial viability was launched on a second
major front, with legions of lawyers and financial experts poised
to do battle before the Bankruptcy Court to prove the relative
merits and flaws of the two competing plans.&nbsp; Lengthy and
contentious trials proceeded on the plans.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Bankruptcy Court confirmation hearings on the competing plans of
reorganization started on November 18, 2002.&nbsp; On November 21,
2002, during the trial on the Joint Amended Plan, PG&amp;E made a
motion for judgment against the Joint Amended Plan, on the grounds,
<i>inter alia</i>, that the Reorganization Agreement proposed by
the Commission would violate California law because it would bind
future Commissions in a manner allegedly contrary to the Public
Utilities Code and decisions and regulations of the
Commission.&nbsp; On November&nbsp;25, 2002, the Bankruptcy Court
denied PG&amp;E&rsquo;s motion, finding that the Commission did
have the authority to enter into the Reorganization Agreement and
to be bound by it under California and federal law.&nbsp; (Ex. 122,
CPUC Staff/Clanon, Exhibit C.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;It
was against this backdrop that the Bankruptcy Court ordered the
initiation of a judicially supervised settlement conference between
PG&amp;E and the Commission staff in March of this year.&nbsp; On
March&nbsp;11, 2003, the Bankruptcy Court entered an order staying
further confirmation and related proceedings to facilitate a
mandatory settlement process.&nbsp; Pursuant to orders by the
bankruptcy judge, parties to the settlement discussions are
prohibited from disclosing information regarding or relating to the
settlement discussions.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;That
effort produced the Proposed Settlement Agreement that is now
before us for evaluation.&nbsp; On June 19, 2003, as a result of
the settlement process, PG&amp;E and the Commission staff announced
agreement on a Proposed Settlement Agreement which would form the
basis of a new plan of reorganization to be filed by PG&amp;E in
the Bankruptcy Court that embodies the terms and conditions
contained in the PSA (the Settlement Plan).<sup>2</sup>&nbsp;
PG&amp;E, PG&amp;E Corporation, and the OCC as co-proponents filed
the Settlement Plan and disclosure statement for the plan with the
Bankruptcy Court.&nbsp; The PSA constitutes an integral part of the
Settlement Plan and is incorporated in the plan by reference.&nbsp;
The Bankruptcy Court has stayed all proceedings related to the
Commission&rsquo;s Joint Amended Plan and the PG&amp;E Plan, until
a confirmation hearing on the Settlement Plan.&nbsp; After
conducting a trial on the PSA and Settlement Plan, on December 12,
2003 the Bankruptcy Court issued its &ldquo;Memorandum Decision
Approving Settlement Agreement and Overruling Objections to
Confirmation of Reorganization Plan.&rdquo;&nbsp; The Court,
however, did not issue a Confirmation Order and has set a status
conference for December 22, 2003 to consider any action taken by
the Commission.&nbsp; The procedural history details the
interaction between the Bankruptcy Court and this Commission in
considering the completeness and balancing of competing interests
embraced by the PSA.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
reaching our decision, we are informed by a complete record
developed by the efforts of a number of parties during eight days
of hearing in this proceeding. These parties directed their
showings to the overall issue to whether the PSA is fair, just and
reasonable, and in the public interest. In assessing our
presentations, we pay particular attention to the following goals
that have been at the heart of our opposition to PG&amp;E&rsquo;s
plan of reorganization:</font></p>

<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">1.</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">Does the PSA result in
PG&amp;E abandoning its effort to evade adherence to state laws and
our jurisdiction?</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">2.</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">Does the PSA resolve
energy crisis-related litigation between PG&amp;E and the
CPUC?</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">3.</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">Does the PSA result in
lower rates for PG&amp;E&rsquo;s ratepayers?</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">4.</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">Does the PSA result in
PG&amp;E&rsquo;s creditors being paid in full?</font></p>
</td>
</tr>
</table>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
do not undertake our consideration of the PSA against a blank
slate.&nbsp; In conducting their settlement negotiations, our staff
and PG&amp;E were clearly aware of the settlement we entered into
with SCE to restore that utility&rsquo;s financial viability and
end its litigation against the Commission, as well as our proposed
plan of reorganization for PG&amp;E.&nbsp;</font></p>

<p><a name="_Toc370798910"></a><a name="_Toc53565555"></a><a name=
"_Toc59591875"></a><a name="procedural_history"></a><b><font size=
"3" face=
"Times New Roman">II.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Procedural
History<sup>3</sup></font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
July 1, 2003, PG&amp;E filed and served the PSA, the Settlement
Plan, and a disclosure statement in this proceeding.&nbsp; On July
9, 2003, a prehearing conference (PHC) was held to determine the
scope of proceedings for the Commission to consider the PSA.&nbsp;
After the PHC, the Assigned Commissioner issued his &ldquo;Scoping
Memo and Ruling of Assigned Commissioner&rdquo; (Scoping Memo)
establishing the scope and schedule for this proceeding.&nbsp; The
Scoping Memo, as amended, provided that the proceeding was limited
to determining whether the PSA should be approved by the
Commission, including whether the settlement is fair, reasonable,
and in the public interest, using the criteria encompassed in
various Commission, state, and federal court
decisions.<sup>4</sup>&nbsp; Excluded from the proceeding were
alternative plans, rate allocation and rate design, and direct
access issues.&nbsp; Proposed modifications to the PSA were
permitted to be offered, but were required to be limited.&nbsp;
Hearings were held on September 10, 11, 12, 22, 23, 24, 25, and
26.&nbsp; On September&nbsp;25, 2003, PG&amp;E, the Office of
Ratepayer Advocates (ORA), and certain other parties and
non-parties submitted a stipulation resolving issues regarding the
land conservation commitment in the PSA.&nbsp; Concurrent opening
briefs were filed on October 10, 2003, and reply briefs on October
20, 2003, when the matter was submitted.</font></p>

<p><a name="_Toc59591876"></a><a name=
"psa_terms_conditions"></a><b><font size="3" face=
"Times New Roman">III.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Description of
the PSA Terms and Conditions</font></b></p>

<p><a name="_Toc59591877"></a><a name=
"structure_of_settlementplan"></a><b><font size="3" face=
"Times New Roman">A.&nbsp;&nbsp;Structure of the Settlement Plan of
Reorganization</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E&rsquo;s
original plan of reorganization in the Bankruptcy Court provided
for the disaggregation of PG&amp;E&rsquo;s historic businesses into
four separate companies, three of which would be under the
regulatory jurisdiction of FERC rather than this Commission.&nbsp;
Under the Settlement Plan, PG&amp;E will <b>remain</b> a vertically
integrated utility subject to the plenary regulatory jurisdiction
of this Commission.<sup>5</sup></font></p>

<p><a name="_Toc53565558"></a><a name="_Toc59591878"></a><a name=
"financial_elements_psa"></a><b><font size="3" face=
"Times New Roman">B.&nbsp;&nbsp;Financial Elements of the
PSA</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
asserts that restoration, maintenance, and strengthening of
PG&amp;E as an investment grade company is vital for the
company&rsquo;s future ability to serve its customers.&nbsp; The
PSA expressly recognizes this:</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Commission recognizes that the establishment, maintenance and
improvement of investment grade company credit ratings is vital for
PG&amp;E to be able to continue to provide safe and reliable
service to its customers.&nbsp; The Commission further recognizes
that the establishment, maintenance and improvement of
PG&amp;E&rsquo;s investment grade company credit ratings directly
benefits PG&amp;E&rsquo;s ratepayers by reducing PG&amp;E&rsquo;s
immediate and future borrowing costs, which, in turn, will allow
PG&amp;E to finance its operations and make capital expenditures on
its distribution, transmission, and generation assets at lower cost
to its ratepayers.&nbsp; In furtherance of these objectives, the
Commission agrees to act to facilitate and maintain investment
grade company credit ratings for PG&amp;E.&nbsp; (PSA,&nbsp;&para;
2g.)</font></p>

<p><a name="_Toc53565559"></a><a name="_Toc59591879"></a><a name=
"reg_asset_first"></a><b><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;
Regulatory Asset</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA establishes a regulatory asset with a starting value of $2.21
billion as a new, separate, and additional part of PG&amp;E&rsquo;s
rate base (PSA, &para; 2).&nbsp; The regulatory asset will be
reduced dollar for dollar by the net after-tax amounts of any
reductions in bankruptcy claims or refunds PG&amp;E actually
receives from generators or other energy suppliers (PSA &para;
2d).&nbsp; The regulatory asset will be amortized on a
mortgage-style basis over nine years starting on January 1, 2004
(PSA, &para; 2a).&nbsp; The mortgage-style amortization keeps the
revenue requirements associated with the regulatory asset
relatively constant over its life rather than being front-end
loaded as they would under traditional rate base treatment.&nbsp;
Because the regulatory asset will not have any tax basis, both the
amortization of the regulatory asset and the return on it will be
grossed up for taxes (PSA, &para;&nbsp;2c).<sup>6</sup>&nbsp; The
PSA provides a floor on the authorized return on equity (ROE) and
the equity component of the capital structure associated with the
regulatory asset (PSA, &para; 2b).&nbsp; While the regulatory asset
will earn the ROE on the equity component of PG&amp;E&rsquo;s
capital structure as set in PG&amp;E&rsquo;s annual cost of capital
proceedings, the ROE will be no less than 11.22 percent and, once
the equity component of PG&amp;E&rsquo;s capital structure reaches
52 percent (expected in 2005), the equity component will be set for
ratemaking purposes at not less than 52&nbsp;percent.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA provides that the Utility Retained Generation (URG) rate base
established by D.02-04-016 shall be deemed just and reasonable and
not subject to modification, adjustment or reduction (other than
through normal depreciation) (PSA, &para; 2f).&nbsp; Similarly, the
value of the regulatory asset and URG rate base are not to be
impaired by the Commission taking them into account when setting
PG&amp;E&rsquo;s other revenue requirements and resulting rates or
PG&amp;E&rsquo;s authorized ROE or capital structure.</font></p>

<p><a name="_Toc53565560"></a><a name="_Toc59591880"></a><a name=
"headroom_first"></a><b><font size="3" face=
"Times New Roman">2.&nbsp; Headroom<sup>7</sup></font></b></p>

<p><font size="3" face="Times New Roman">The proposed settlement
acknowledges that the headroom, surcharge, and base revenues
accrued or collected by PG&amp;E through the end of 2003 have been
or will be used for utility purposes, including paying creditors in
PG&amp;E&rsquo;s Chapter 11 case (PSA, &para; 8a).&nbsp; Those past
revenues will no longer be subject to refund.&nbsp; The PSA
establishes both a floor and a ceiling on 2003 headroom
revenues.&nbsp; PG&amp;E will be authorized to collect at least
$775 million, but not more than $875&nbsp;million (both pretax), of
headroom (PSA, &para; 8b).&nbsp; The Commission will adjust 2004
rates to refund any overcollection or make up any
undercollection.</font></p>

<p><a name="_Toc53565561"></a><a name="_Toc59591881"></a><a name=
"ratemaking_matters_first"></a><b><font size="3" face=
"Times New Roman">3.&nbsp; Ratemaking Matters</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
proposed settlement provides for PG&amp;E&rsquo;s retail electric
rates to remain at current levels through 2003, and then come down
effective as of January 1, 2004 (PSA, &para; 3a).&nbsp; As of
January&nbsp;1, 2004, the TCBA and other Assembly Bill 1890
ratemaking accounts will be replaced by the regulatory asset and
the ratemaking resulting from the proposed settlement (PSA, &para;
2e).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E&rsquo;s
capital structure and authorized ROE will continue to be set in
annual cost of capital proceedings, but until PG&amp;E achieves a
company credit rating of either A- from Standard &amp; Poor
(S&amp;P) or A3 from Moody&rsquo;s, the authorized ROE will be no
less than 11.22 percent and the equity ratio will be no less than
52 percent (PSA, &para; 3b).&nbsp; (PG&amp;E claims that this
capital structure, with its 52 percent equity ratio, is necessary
to support the investment grade credit metrics contemplated by the
proposed settlement.&nbsp; (Ex. 112, pp. 7-6, 7-16,
PG&amp;E/Murphy.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
is given a two-year transition period to achieve the
52&nbsp;percent equity ratio.&nbsp; Until that time,
PG&amp;E&rsquo;s equity ratio for ratemaking purposes will be its
Forecast Average Equity Ratio (as defined in the PSA, but no less
than 48.6&nbsp;percent (PSA, &para; 3b).</font></p>

<p><a name="_Toc53565562"></a><a name="_Toc59591882"></a><a name=
"dividends_stockrepurchase_first"></a><b><font size="3" face=
"Times New Roman">4.&nbsp; Dividends and Stock
Repurchases</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under
the PSA, PG&amp;E agrees not to pay any dividend on common stock
before July 1, 2004 (PSA, &para; 3b).&nbsp; PG&amp;E has told the
financial community that it does not expect to pay a common stock
dividend before the second half of 2005.&nbsp; Under the PSA, other
than the capital structure and stand-alone dividend conditions
contained in the PG&amp;E holding company decisions (D.96-11-017
and D.99-04-068), the Commission agrees not to restrict the ability
of the boards of directors of either PG&amp;E or PG&amp;E
Corporation to declare and pay dividends or repurchase common stock
(PSA, &para; 6).&nbsp;</font></p>

<p><a name="_Toc53565564"></a><a name="_Toc59591883"></a><a name=
"dismissal_energy_disputes"></a><b><font size="3" face=
"Times New Roman">C.&nbsp; Dismissal of Energy Crisis-Related
Disputes</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
part of the PSA, PG&amp;E will dismiss its pending Rate Recovery
Litigation<sup>8</sup> against the Commission (PSA,&nbsp;&para;
9).&nbsp; In that litigation, PG&amp;E had sought recovery from
ratepayers of approximately $9 billion in unrecovered costs of
purchasing power during the energy crisis.&nbsp; (Exs. 120 and
120c, PG&amp;E/McManus.)&nbsp; The Commission will resolve Phase 2
of PG&amp;E&rsquo;s pending Annual Transition Cost Proceeding
(ATCP) application without any disallowance (PSA, &para; 9).&nbsp;
In the ATCP, ORA contends that PG&amp;E incurred approximately $434
million of unreasonable power procurement costs and recommends
disallowance of that amount.&nbsp;</font></p>

<p><a name="_Toc53565565"></a><a name="_Toc59591884"></a><a name=
"env_provisions"></a><b><font size="3" face=
"Times New Roman">D.&nbsp; Environmental Provisions</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA contains environmental benefits.&nbsp; First, PG&amp;E commits
to protect its approximately 140,000 acres of watershed lands
associated with its hydroelectric system, plus the 655 acre Carizzo
Plains in San&nbsp;Luis Obispo County, through conservation
easements or fee simple donations (PSA, &para; 17a).&nbsp; PG&amp;E
estimates that lands subject to this commitment are worth
approximately $300 million.<sup>9</sup>&nbsp; Subject, of course,
to the Commission&rsquo;s authority under, <i>inter alia</i>,
Public Utilities Code &sect;851 to approve the disposition of
utility property, the he determination of how best to protect these
lands will be made by the board of a new California non-profit
corporation (PSA, &para; 17b) which will present its
recommendations and advice to the Commission.&nbsp; Under the Land
Conservation Commitment Stipulation (Ex. 181), this non-profit
corporation will be named the Pacific Forest and Watershed Lands
Stewardship Council (the Stewardship Council).&nbsp; The
Stewardship Council&rsquo;s governing board will consist of
representatives from the Commission, the California Resources
Agency, ORA, the State Water Resources Control Board, the
California Farm Bureau Federation, the California Department of
Fish and Game, the California Forestry Association, the California
Hydropower Reform Coalition, the Regional Council of Rural
Counties, the Central Valley Regional Water Quality Board,
Association of California Water Agencies, The Trust for Public
Land, and PG&amp;E, and three public members named by the
Commission.&nbsp; The U.S. Department of Agriculture-Forest Service
and U.S. Department of Interior-Bureau of Land Management will
together designate a federal liaison who will participate in an
advisory and non-voting capacity.<b>&nbsp;</b> (Ex. 181, paragraph
10a.)&nbsp; The Stewardship Council will be funded with $70 million
through rates over 10 years (PSA, &para; 17c).&nbsp; This funding
will cover both administrative expenses and environmental
enhancements to the protected lands.&nbsp; The governing board of
the Stewardship Council will develop a system-wide plan for
donation of fee title or conservation easements.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
second environmental commitment is that PG&amp;E will establish and
fund a clean energy technology incubator.&nbsp; This new,
California non-profit corporation will be dedicated to supporting
research and investment in clean energy technologies primarily in
PG&amp;E&rsquo;s service territory (PSA, &para; 18a).&nbsp;
PG&amp;E will provide shareholder funding of $15 million over five
years (PSA, &para; 18b) and will work with the Commission to
attract additional funding (PSA, &para; 18c).</font></p>

<p><a name="_Toc53565566"></a><a name="_Toc59591885"></a><a name=
"conditions_precedent"></a><b><font size="3" face=
"Times New Roman">E.&nbsp;&nbsp;Conditions Precedent to
Effectiveness of Settlement Plan</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Commission
approval of the PSA as well as final, nonappealable approval of all
rates, tariffs, and agreements necessary to implement the
Settlement Plan and PSA are conditions to the effectiveness of the
PSA (PSA, &para; 37) and the Settlement Plan (PSA, &para; 16b),
respectively.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA expressly provides that receipt of investment grade company
credit ratings from both S&amp;P and Moody&rsquo;s is a condition
to the Settlement Plan becoming effective (PSA, &para; 16a).&nbsp;
The plan provides that this condition cannot be waived.&nbsp; (Ex.
101, pp.1-15, PG&amp;E/Smith.)&nbsp;</font></p>

<p><a name="_Toc53565567"></a><a name="_Toc59591886"></a><a name=
"other_provisions"></a><b><font size="3" face=
"Times New Roman">F.&nbsp;&nbsp;Other Provisions</font></b></p>

<p><a name="_Toc53565568"></a><a name="_Toc59591887"></a><a name=
"assignability_dwr_first"></a><b><font size="3" face=
"Times New Roman">1.&nbsp;&nbsp;Assignability of DWR
contracts</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
settlement agreement provides that &ldquo;[I]f the Commission
desires it, PG&amp;E agrees to accept assignment of or to assume
legal and financial responsibility for the DWR Contracts&rdquo;
subject to certain conditions, including that &ldquo;(a)
PG&amp;E&rsquo;s Company Credit Rating, after giving effect to such
assignment or assumption, shall be no less than &ldquo;A&rdquo;
from S&amp;P and &ldquo;A2&rdquo; from Moody&rsquo;s; (b) the
Commission shall first have made a finding that, for purposes of
assignment or assumption, the DWR Contracts to be assigned or
assumed are just and reasonable; and (c) the Commission shall have
acted to ensure that PG&amp;E will receive full and timely recovery
in its Retail Electric Rates of all costs of such DWR Contracts
over their life without further review.&nbsp; (PSA &para; 7)&nbsp;
The PSA has no limitation on the discretion of the Commission to
review the prudence of PG&amp;E&rsquo;s administration and dispatch
of the DWR Contracts, consistent with applicable law.</font></p>

<p><a name="_Toc59591888"></a><a name=
"interest_rate_hedging_first"></a><b><font size="3" face=
"Times New Roman">2.&nbsp;&nbsp;Interest Rate
Hedging</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To
allow PG&amp;E to take advantage of the current low interest rate
environment, the proposed settlement authorizes the actual
reasonable cost of PG&amp;E&rsquo;s interest rate hedging
activities to be recovered in rates without further review (PSA,
&para;&nbsp;12).&nbsp; The Commission recently issued D.03-09-020
in its Bankruptcy Financing Order Instituting Investigation
(Investigation 02&#8209;07&#8209;015) authorizing PG&amp;E to
initiate interest rate hedging for any approved and confirmed plan
of reorganization.</font></p>

<p><a name="_Toc53565569"></a><a name="_Toc59591889"></a><a name=
"financing_first"></a><b><font size="3" face=
"Times New Roman">3.&nbsp;&nbsp;Financing</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With
the exception of certain pollution control bond-related obligations
and outstanding preferred stock, the Settlement Plan contemplates
that all of PG&amp;E&rsquo;s existing trade and financial debt will
be paid in cash (PSA, &para;&para; 13a and 14).&nbsp; The financing
will not include any new preferred or common stock (PSA,
&para;&nbsp;13b).&nbsp; The cash to pay creditors will come from a
combination of cash on hand and new long- and short&#8209;term debt
issuances.&nbsp;</font></p>

<p><a name="_Toc53565570"></a><a name="_Toc59591890"></a><a name=
"fees_expenses_first"></a><b><font size="3" face=
"Times New Roman">4.&nbsp;&nbsp;Fees and Expenses</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
will reimburse the Commission for its professional fees and
expenses in the Chapter 11 case.&nbsp; (PSA, &para; 15).&nbsp; The
Commission will authorize PG&amp;E to recover these amounts in
rates over a reasonable time, not to exceed four&nbsp;years
(<i>id</i>.).&nbsp; Similarly, PG&amp;E will reimburse PG&amp;E
Corporation for its professional fees and expenses in the Chapter
11 case, but that cost will be borne solely by shareholders through
a reduction in retained earnings (<i>id</i>.).</font></p>

<p><a name="_Toc53565571"></a><a name="_Toc59591891"></a><a name=
"releases"></a><b><font size="3" face=
"Times New Roman">5.&nbsp;&nbsp;Releases</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
part of the Settlement Plan, PG&amp;E will release claims against
the Commission, the OCC, and PG&amp;E Corporation (PSA, &para;
24).</font></p>

<p><a name="_Toc59591892"></a><a name="bc_supervision"></a><b><font
size="3" face="Times New Roman">6.&nbsp;&nbsp;Bankruptcy Court
Supervision</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA ensures that the settlement will be enforceable by the
Bankruptcy Court for its full nine-year term (PSA, &para;&para;
20-23, 30, and 32).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
paragraph 20 of the PSA, the Commission waives &ldquo;all existing
and future rights of sovereign immunity, and all other similar
immunities, as a defense&rdquo; and consents to the jurisdiction of
any court, including a federal court, for any action or proceeding
to enforce the Settlement Agreement, the Settlement Plan, or the
Bankruptcy Court&rsquo;s confirmation order.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
paragraph 22 of the PSA, the Commission and PG&amp;E agree that the
Bankruptcy Court shall retain jurisdiction over them &ldquo;for all
purposes relating to the enforcement of this Agreement, the
Settlement Plan and the Confirmation Order.&rdquo;&nbsp;</font></p>

<p><a name="_Toc59591893"></a><a name=
"standard_review"></a><b><font size="3" face=
"Times New Roman">IV.&nbsp;&nbsp;Standard of Review</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
evaluating whether the PSA is reasonable and in the public
interest, we are guided not only by our precedents on settlements,
but also by the overall &ldquo;just and reasonable&rdquo; standard
of the Public Utilities Code.&nbsp; Under Rule 51 of the
Commission&rsquo;s Rules of Practice and Procedure, we will not
approve a settlement unless the settlement is &ldquo;reasonable in
light of the whole record, consistent with law, and in the public
interest.&rdquo;&nbsp; (Commission Rule 51.1(e).)&nbsp; In our
decision approving a settlement of SDG&amp;E&rsquo;s 1992 test year
general rate case, we held that in considering a proposed
settlement, we do not &ldquo;delve deeply into the details of
settlements and attempt to second-guess and re-evaluate each aspect
of the settlement, so long as the settlements as a whole are
reasonable and in the public interest.&rdquo;&nbsp;
(<i>SDG&amp;E</i>, (1992) 46 CPUC 2d 538, 551.)&nbsp; We agreed
that the hearing on the settlement need not be a &ldquo;rehearsal
for trial on the merits.&rdquo;&nbsp; (<i>Id</i>. at 551.)&nbsp;
Similarly, in <i>Officers for Justice</i> v<i>. Civil Service
Commission</i>, the Court, affirming a lower court decision
approving a class action settlement, stated that &ldquo;the
settlement or fairness hearing is not to be turned into a trial or
rehearsal for trial on the merits.&rdquo; (<i>Officers for
Justice</i> v<i>. Civil Service Commission</i>, (9<sup>th</sup>
Cir. 1982) 688&nbsp;F.2d 615, 625.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
the PSA must be approved by this Commission, we look to our own
precedents.&nbsp; In <i>Re Pacific Gas and Electric Company</i>
(1988) D.88-12-083, 30 CPUC 2d 189 (&ldquo;<i>Diablo
Canyon</i>&rdquo;), we approved a settlement proposed by PG&amp;E
and Commission staff (ORA&rsquo;s predecessor, the Division of
Ratepayer Advocates (DRA)) that was vigorously opposed by other
parties.&nbsp; The settlement resolved claims by DRA that $4.4
billion in previous costs incurred by PG&amp;E to design and
construct Diablo Canyon should be disallowed from recovery in
PG&amp;E&rsquo;s future electric rates.&nbsp; In settling the case,
PG&amp;E, DRA, and the California Attorney General proposed that
PG&amp;E&rsquo;s investment costs and return on rate base for
Diablo Canyon be recovered in future rates exclusively under a
non-traditional performance-based ratemaking mechanism that would
be in place for 28 years.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
evaluating the Diablo Canyon settlement, the Commission cited the
<i>Officers for Justice</i> decision approvingly, as well as the
Commission rules on settlements:</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
[T]he settlement affects the interest of all PG&amp;E
customers.&nbsp; In such a case, the factors which the courts use
in approving class action settlements provide the appropriate
criteria for evaluating the fairness of this
settlement&hellip;&nbsp; When a class action settlement is
submitted for approval, the role of the court is to hold a hearing
on the fairness of the proposed settlement&hellip;&nbsp; However,
the fairness hearing is not to be turned into a trial or rehearsal
for trial on the merits.&nbsp; [Citations omitted.]&nbsp; The court
must stop short of the detailed and thorough investigation that it
would undertake if it were actually trying the case.&nbsp;
[Citations omitted.]</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
standard used by the courts in their review of proposed settlements
is whether the class action settlement is fundamentally fair,
adequate, and reasonable.&nbsp; [Citations omitted.]&nbsp; The
burden of proving that the settlement is fair is on the proponents
of the settlement.&nbsp; [Citations omitted.]&nbsp; Proposed
[Commission] Rule 51.1(e) provides that this Commission will not
approve a settlement unless the &ldquo; . . . settlement is
reasonable in light of the whole record, consistent with law, and
in the public interest.&rdquo;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
order to determine whether the settlement is fair, adequate, and
reasonable, the court will balance various factors which may
include some or all of the following:&nbsp; the strength of
applicant&rsquo;s case; the risk, expense, complexity, and likely
duration of further litigation; the amount offered in settlement;
the extent to which discovery has been completed so that the
opposing parties can gauge the strength and weakness of all
parties; the stage of the proceedings; the experience and views of counse; the presence of a governmental participant; and the
reaction of class members to the proposed settlement.&nbsp;
[Citations omitted.]&nbsp; In addition, other factors to consider
are whether the settlement negotiations were at arm&rsquo;s length
and without collusion; whether the major issues are addressed in
the settlement; whether segments of the class are treated
differently in the settlement; and the adequacy of
representation.&nbsp; [Citations omitted.]&nbsp;
(<i>Diablo&nbsp;Canyon</i>, 30 CPUC 2d, 189, 222.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
agrees that these settlement criteria should apply to the PSA, and
maintains that this is not the proceeding to consider alternative
plans that one or more parties may prefer.&nbsp; Instead, PG&amp;E
contends that we should consider the proposed settlement on its own
merits, &ldquo;up or down,&rdquo; and approve or disapprove it
without change, consistent with the expectations of the parties who
are proposing it.<sup>10</sup>&nbsp; We disagree with
PG&amp;E&rsquo;s view that our choices are so limited. We have
often exercised our plenary power to modify settlements, which
would otherwise not be reasonable or in the public interest. <i>See
e.g.</i> D.02-12-068 (2002); D.01-12-018 (2001); D.01-04-038
(2001); D.99-12-032 (1999).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under
Rule 51 and &sect;&sect; 451, 454, and 728, we review and approve a
settlement if its overall effect is &ldquo;fair, reasonable and in
the public interest.&rdquo;&nbsp; California and U.S. Supreme Court
decisions provide that we may consider the overall end-result of
the proposed settlement and its rates under the &ldquo;just and
reasonable&rdquo; standard, not whether the settlement or its
individual constituent parts conform to any particular ratemaking
formula.&nbsp; (<i>FPC</i> v<i>. Hope Natural Gas&nbsp;Co.</i>
(1944) 320 U.S. 591, 602.)&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
reviewing a settlement we must consider individual provisions but
we do not base our conclusion on whether this or that provision of
the settlement is, in and of itself, the optimal outcome.&nbsp;
Instead, we stand back from the minutiae of the parties&rsquo;
positions and determine whether the settlement, <u>as a whole</u>,
is in the public interest.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
will approve the PSA with certain modifications and clarifications
that we believe are necessary in order to make the settlement fair,
reasonable and in the public interest. We will discuss these
matters more extensively, but we should begin our analysis of the
PSA with its most important provisions, the regulatory asset and
the total dollar amount of the settlement.&nbsp; To emerge from
bankruptcy PG&amp;E must pay its creditors in full.&nbsp; We agree
that all allowed claims should be paid in full; and we agree that
the dollar amount of the settlement, $7.2 billion, will achieve
that result and is a reasonable compromise of the differences
between PG&amp;E and the Commission staff.</font></p>

<p><a name="_Toc59591894"></a><a name="lawfulness_psa"></a><b><font
size="3" face="Times New Roman">V.&nbsp;&nbsp;Lawfulness of the
PSA</font></b></p>

<p><a name="_Toc59591895"></a><a name=
"purposes_commission_bc"></a><b><font size="3" face=
"Times New Roman">A.&nbsp;&nbsp;The Purpose of the Commission v.
The Purpose of the Bankruptcy Court</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Before
reviewing the specific legal issues, it is important to recognize
the fundamental differences between the Commission and the
Bankruptcy Court. The Commission regulates the relationship between
public utilities and their ratepayers whereas the Bankruptcy Court
is mostly concerned with the relationship between the debtor and
its creditors.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
the California Supreme Court recently explained in <i>Southern
California Edison Co. v. Peevey, supra,</i> 31 Cal. 4th at 792, the
Commission&rsquo;s &ldquo;authority derives not only from statute
but from the California Constitution, which creates the agency and
expressly gives it the power to fix rates for public
utilities.&rdquo;&nbsp; The Supreme Court, in a prior decision, had
declared that:&nbsp; The Commission was created by the Constitution
in 1911 in order to &ldquo;protect the people of the state from the
consequences of destructive competition and monopoly in the public
service industries . . .&nbsp; [The Commission] is an active
instrument of government charged with the duty of supervising and
regulating public utility services and rates.&rdquo;&nbsp; (<i>Sale
v. Railroad Commission</i> (1940) 15 Cal. 2d 612, 617.)&nbsp; The
Commission has legislative and judicial powers.&nbsp; <i>(People v
Western Air Lines</i> (1954) 42 Cal. 2d 621, 630.)&nbsp; The fixing
of rates is quasi-legislative in character. (<i>Clam v. PUC</i>
(1979) 25 Cal. 3d 891, 909; <i>Southern Pacific Co. v. Railroad
Com.</i> (1924) 194 Cal. 734, 739.) In addition, the California
Legislature has provided that &ldquo;all charges by a public
utility for commodities or services rendered shall be just and
reasonable (&sect; 451) and has given the commission the power and
obligation to determine not only that any rate or increase in a
rate is just and reasonable (&sect;&sect; 454, 728), but also
authority to &lsquo;supervise and regulate every public utility in
the State . . . &rsquo;&rdquo;&nbsp; (<i>Camp Meeker Water System,
Inc. v. Public Utilities Com.</i> (1990) 51 Cal. 3d 845,
861-862.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
contrast, the Bankruptcy Court operates under the authority of the
Bankruptcy Code, and a central purpose of the Bankruptcy Code is to
"provide a procedure by which certain insolvent debtors can reorder
their affairs, make peace with their creditors, and enjoy&nbsp;
&lsquo;a new opportunity in life . . . &rsquo;&rdquo;&nbsp;
(<i>Grogan v. Garner&nbsp;</i> (1991) 498 U.S. 279, 286.)&nbsp; Put
another way, the two overarching purposes of the Bankruptcy Code
are:&nbsp; &ldquo;(1) providing protection for the creditors of the
insolvent debtor and (2) permitting the debtor to carry on and
&hellip; make a &lsquo; fresh start.&rsquo;&rdquo;&nbsp; (<i>In re
Andrews</i> (4th Cir. 1996) 80 F.3d 906, 909.)&nbsp; (We note that
PG&amp;E is a <u>solvent</u> debtor.)&nbsp; PG&amp;E&rsquo;s
disclosure statement (Ex. 101b, p. 2) seconds this:&nbsp;
&ldquo;Under chapter 11, a debtor is authorized to reorganize its
business for the benefit of itself, its creditors, and its equity
interest holders.&rdquo;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Bankruptcy Code, 11 U.S.C. &sect; 1129(a)(6), explicitly recognizes
that utility ratemaking is the province of governmental regulatory
commissions, such as the Commission, rather than the Bankruptcy
Court.&nbsp; As stated in <i>In re Cajun Elec. Power Co-op.,
Inc</i>. (5th Cir. 1999) 185 F.3d 446, 453,&nbsp; &ldquo;[s}ection
1129(a)(6) of the Bankruptcy Code further provides that any rate
change in a reorganization plan must be approved by governmental
regulatory commissions with proper jurisdiction.&rdquo;&nbsp; The
Court found no support for a narrow reading of&nbsp;&nbsp; &sect;
1129(a)(6), because &ldquo;such an argument &lsquo; ignores the
reasons which mandate [public utility commission] regulation in the
first instance.&nbsp; The [commission] is entrusted to safeguard
the compelling public interest in the availability of electric
service at reasonable rates.&nbsp; That public interest is no less
compelling during the pendency of a bankruptcy than at other
times.&rsquo;&nbsp; &ldquo;(<i>Id</i>., at 453, n. 11, quoting with
approval Flaschen &amp; Reilly, <i>Bankruptcy Analysis of a
Financially-Troubled Electric Utility</i>, (1985) 59 Am.Bankr.L.J.
135, 144.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indeed,
in an earlier phase of PG&amp;E&rsquo;s bankruptcy proceeding,
PG&amp;E sought from the Bankruptcy Court a stay of the
Commission&rsquo;s D.01-03-082 (the Accounting Decision).&nbsp; In
finding that the public interest will not be served by issuing an
injunction, the Bankruptcy Court declared that issuing a stay
"would create jurisdictional chaos.&nbsp; The public interest is
better served by deference to the regulatory scheme and leaving the
entire regulatory function to the regulator, rather than
selectively enjoining the specific aspects of one regulatory
decision that PG&amp;E disputes.&nbsp; PG&amp;E has all the usual
avenues for relief from the Accounting Decision, including
appellate review and reconsideration by CPUC.&nbsp; These
alternatives may be particularly apropos in the constantly-changing
factual and regulatory environment.&rdquo;&nbsp; (<i>In re Pacific
Gas and Electric Company</i>(2001) 263 B.R. 306, 323; 2001 Bankr.
LEXIS 629 **38<i>, appeal pending sub nom</i><u>.</u>, <i>Pacific
Gas and Electric Company v. California Public Utilities Commission,
et al.,</i> United States District Court for the Northern District
of California No.&nbsp;C&#8209;01&#8209;2490 VRW.)</font></p>

<p><a name="_Toc59591896"></a><a name=
"commission_binding"></a><b><font size="3" face=
"Times New Roman">B.&nbsp;&nbsp;The Commission&rsquo;s Ability to
Bind Future Commissions</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The clause of the PSA requiring future Commissions to be bound is
paragraph&nbsp;21.</font></p>

<p><b><font size="3" face="Times New Roman">21.</font></b>&nbsp;
<b><u>Validity and Binding Effect.</u></b>&nbsp; The Parties agree
not to contest the validity and enforceability of this Agreement,
the Settlement Plan or any order entered by the Court contemplated
by or required to implement this Agreement and the Settlement
Plan.&nbsp; This Agreement, the Settlement Plan and any such orders
are intended to be enforceable under federal law, notwithstanding
any contrary state law.&nbsp; This Agreement and the Settlement
Plan, upon becoming effective, and the orders to be entered by the
Court as contemplated hereby and under the Settlement Plan, shall
be irrevocable and binding upon the Parties and their successors
and assigns, notwithstanding any future decisions and orders of the
Commission.</p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There
cannot be any doubt that under certain circumstances, the
Commission can legally enter into settlements or contracts which
would bind future Commissions.<sup>11</sup>&nbsp; In <i>Southern
California Edison Co. v. Peevey, supra</i>, 31 Cal. 4<sup>th</sup>
at 792, the California Supreme Court relied upon the
Commission&rsquo;s broad authority under Article XII of the
California Constitution, sections 701 and 728 of the Public
Utilities Code, and prior precedent to conclude that the Commission
is a &ldquo;state agency of constitutional origin with far-reaching
duties, functions and powers whose &lsquo;power to fix rates [and]
establish rules&rsquo; has been &lsquo;liberally
construed.&rsquo;&rdquo; Because the Commission had not acted
contrary to state law and in light of the Commission&rsquo;s
inherent authority, the California Supreme Court upheld the
Commission entering into a binding settlement with SCE in its
federal district court case against the Commission.&nbsp;
<i>Id.</i> at 805.<sup>12</sup></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;It
is true that in <i>Diablo Canyon</i>, D.88-12-083, 30 CPUC 2d 189,
we held that we lack the power to approve settlements that bind
future Commissions.&nbsp; We relied upon cases which hold that a
legislative body cannot restrict its own power or that of
subsequent legislative bodies, as well as &sect;&sect; 728 and
1708, which provide that, after a hearing, the Commission may
rescind, alter or amend previous decisions, or may declare rates
are unjust and unreasonable and fix the just and reasonable rates
to be thereafter observed and in force.&nbsp; (<i>Id</i>. at
223-225.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
proponents of the PSA distinguish <i>Diablo Canyon</i>, because
that case involved a settlement pending before the Commission,
whereas the PSA would be entered into by the Commission itself to
settle litigation in federal courts.&nbsp; The proponents claim
that a decision of the Commission by itself may not bind future
Commissions, but the Commission may execute a settlement agreement
or a contract to bind future Commissions.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
agree with the proponents that a court-approved settlement would
bind the Commission.&nbsp; There is a fundamental difference
between the Commission&rsquo;s authority within the scope of its
own proceedings, and the Commission&rsquo;s efforts to resolve
litigation in courts.&nbsp; The Commission must abide by court
orders and a subsequent Commission does not have the authority to
ignore a court order approving a settlement to which the Commission
is a party.&nbsp; Particularly here, where the public interest
would be greatly served by getting PG&amp;E out of bankruptcy, the
Commission must have the ability to exercise its regulatory and
police powers to resolve through a settlement the Bankruptcy Court
litigation.&nbsp; Upon approval by the Bankruptcy Court of such a
settlement agreement, there is no question that subsequent
Commissions cannot disregard the court order approving the
settlement agreement.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;When
entering into settlement agreements or contracts, however, the
Commission may not act inconsistently with state law.&nbsp; As the
Court declared in <i>Southern California Edison Co. v. Peevey</i>,
<i>supra,</i> 31 Cal. 4<sup>th&nbsp;</sup> at 792:&nbsp; &ldquo;If
PUC lacked substantive authority to propose and enter into the rate
settlement agreement at issue here, it was not for lack of inherent
authority, but because this rate agreement was barred by some
specific statutory limit on PUC's power to set
rates.&rdquo;&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Similarly,
in <i>Southern California Edison Co. v. Lynch</i> (9th Cir. 2002)
307 F.3d 794, 809, the Ninth Circuit held that if the
Commission&rsquo;s settlement agreement violated state law, "then
the Commission lacked capacity to consent to the Stipulated
Judgment, and [the Ninth Circuit] would be required to vacate it as
void.&nbsp; State officials cannot enter into a
federally-sanctioned consent decree beyond their authority under
state law.&rdquo;&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
therefore must determine that a settlement is consistent with state
law before we can enter into the settlement.&nbsp; While Paragraphs
21 and 32 of the PSA provide that the Parties agree that the
settlement agreement, the settlement plan and any court orders are
intended to be binding and enforceable under federal law,
&ldquo;notwithstanding any contrary state law,&rdquo; this is
general language that does not specify the purportedly contrary
state laws.&nbsp; More significantly, this is irrelevant language
to the extent that the settlement agreement, as modified by this
decision, is not contrary to state law.&nbsp; To avoid any
confusion, we are striking these phrases from the settlement,
because we can enter into a settlement only if it is consistent
with state law.&nbsp; However, as discussed below, the settlement
agreement, as modified and clarified by this decision (the
&ldquo;MSA&rdquo;), is not contrary to state law and we can bind
the Commission by entering into it.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
light of the constitutional requirement that the Commission
actively supervise and regulate public utility rates (<i>Sale v.
Railroad Commission</i> (1940) 15 Cal. 2d 607 at 617) and the
statutory requirements under the &sect;&sect;451, 454, 728 that the
Commission ensure that the public utilities' rates are just and
reasonable (<i>Camp Meeker Water System, Inc. v. Public Utilities
Com</i>. (1990) 51 Cal. 3d 850 at 861-862), the Commission must
retain its authority to set just and reasonable rates during the
nine-year term of the settlement and thereafter.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&ldquo;The regulation of utilities is one of the most important of
the functions traditionally associated with the police power of the
states.&rdquo;&nbsp; (<i>Arkansas Electric Coop. v. Arkansas Pub.
Serv. Comm&rsquo;n</i> (1983) 461 U.S. 375, 377.)&nbsp; This
Commission&rsquo;s authority to regulate public utilities in the
State of California is pursuant to the State&rsquo;s police
power.&nbsp; (<i>See, Motor Transit Company v. Railroad Commission
of the State of California</i> (1922) 189 Cal. 573, 581.)&nbsp; The
California Supreme Court has held that &ldquo;it is settled that
the government may not contract away its right to exercise the
police power in the future.&rdquo;&nbsp; (<i>Avco Community
Developers, Inc. v. South Coast Regional Com.</i> (1976) 17 Cal. 3d
785, 800.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Commission cannot be powerless to protect PG&amp;E's ratepayers
from unjust and unreasonable rates or practices during the
nine-year term of the proposed settlement.&nbsp; &ldquo;The police
power being in its nature a <i>continuous</i> one, must ever be
reposed somewhere, and cannot be barred or <i>suspended</i> by
contract or irrepealable law.&nbsp; It cannot be bartered away even
by express contract.&rdquo;&nbsp; (<i>Mott v. Cline</i>&nbsp;
(1927) 200 Cal. 434, 446 (emphasis added).)&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Whether
or not the Commission could enter into a settlement agreement
without violating state law turns on whether the settlement
agreement would surrender or suspend the Commission&rsquo;s
exercise of its police powers for nine years or whether the
settlement agreement is consistent with the Commission exercising
its regulatory powers.&nbsp; In <i>Santa Margarita Area&nbsp;
Residents Together&nbsp; v.&nbsp; San Louis Obispo County Bd. of
Supervisors</i> (2000) 84 Cal. App.4th 221, 233, the Court found
that notwithstanding a zoning freeze, the County&rsquo;s agreement
had not surrendered its police powers, because under the agreement,
the project had to be developed in accordance with the County's
general plan, the agreement did not permit construction until the
County had approved detailed building plans, and the agreement
retained the County's discretionary authority in the future.&nbsp;
In light of the above, we must review the PSA to ascertain whether
the Commission would be exercising or surrendering its police
powers by entering into the settlement.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
contends that on a going-forward basis, the PSA affects only
approximately 5.4% of the electric bill, which is the impact from
the Regulatory Asset.&nbsp; As explained below, we find that the
proposed amount for and the regulatory rate treatment of the
Regulatory Asset is just and reasonable.&nbsp; Moreover, the PSA
did not address the ratemaking treatment or amounts going forward
for the other 95% of PG&amp;E's electric revenue requirements or
what PG&amp;E's overall retail electric rates should be during the
next nine years.&nbsp; Therefore, we find that entering into the
PSA, subject to the modifications discussed herein, is fully
consistent with the Commission's exercise of its ratemaking
authority, because we find that the Regulatory Asset provision is
just and reasonable and a necessary part of the settlement, and we
will still decide the overall retail electric rates for PG&amp;E's
customers in pending and future proceedings.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
discussed in more detail below, we are modifying the PSA by
deleting Paragraph 6 (&ldquo;Dividend Payments and Stock
Repurchases&rdquo;), which we find is unreasonable and not in the
public interest. Paragraph 6 of the PSA proposes that other than
ensuring compliance with the capital structure and stand-alone
dividend conditions in D. 96-11-017 and D.99&#8209;04-068, the
Commission shall not restrict the ability of the boards of
directors of either PG&amp;E or PG&amp;E Corporation to declare and
pay dividends or repurchase common stock.&nbsp; Therefore, under
this proposed paragraph and except for the two limited conditions,
for nine years the Commission would have been precluded from making
a finding that PG&amp;E Corporation or PG&amp;E's dividends or
common stock repurchasing practices were unreasonable and we would
have been precluded from ordering PG&amp;E Corporation or PG&amp;E
to change their practices in this regard.&nbsp; Under the proposed
Paragraph 6, there could also be an argument that the Commission
could not disallow unreasonably or imprudently incurred
costs.&nbsp; Paragraph 6 of the PSA, therefore, could have
prevented the Commission from restricting PG&amp;E&rsquo;s dividend
practices regardless of the circumstances, evidence or merit of any
challenges to PG&amp;E's dividend practices.&nbsp; Because it is
unreasonable and contrary to the public interest to preclude the
Commission from considering such challenges, if any, we are
exercising our regulatory authority to strike
Paragraph&nbsp;6.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
all likelihood, notwithstanding this modification to the PSA,
PG&amp;E will be regularly issuing dividends in the near future if
it agrees to this Modified Settlement Agreement (MSA).&nbsp;
Historically, under traditional cost-of-service ratemaking,
regulated utilities are provided the opportunity to earn a return
on their investment, and have traditionally issued dividends or
repurchased common stock under authorized capital structures
approved by their regulators.&nbsp; Assuming that a utility is
responsibly meeting its obligation to serve, the Commission does
not micromanage the utility in its carrying out of its obligations
and responsibilities and financial management practices.&nbsp;
Indeed, PG&amp;E witness and CFO Kent Harvey testified that prior
to the energy crisis, PG&amp;E was one of the healthiest energy
utilities in the country, and enjoyed strong investment grade
credit ratings and consistently paid dividends to its
shareholders.&nbsp; (Ex. 103: 2-1, PG&amp;E/Harvey ).&nbsp;
PG&amp;E Witness and CEO Gordon Smith testified that until
recently, (i.e., since the energy crisis) PG&amp;E did not miss a
single quarterly dividend since it began paying quarterly dividends
in 1916.&nbsp; PG&amp;E was able to do so while maintaining its
authorized capital structure.&nbsp; (RT: p. 696).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
view of past history under traditional cost-of-service ratemaking
where utilities have historically paid quarterly dividends, it is
very unlikely that the Commission would restrict PG&amp;E's
dividends during the next nine years. However, it is unreasonable
to expect the Commission to agree at this time, without knowing all
future circumstances, to preclude future Commissions from deciding
potential issues, if any, about PG&amp;E&rsquo;s dividend
practices.&nbsp; We do not have a record in this proceeding to
support whether future dividend practices or stock repurchasing
practices are reasonable or unreasonable.&nbsp; Moreover, we do not
have a crystal ball and it would not be possible to have a record
to decide these future issues.&nbsp; Consequently, we strike
Paragraph 6 in order for us to find the settlement, as modified,
reasonable and in the public interest.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Many
parties have expressed their opposition to Paragraph 2.g. of the
PSA, which would require the Commission "to act to facilitate and
maintain Investment Grade Company Credit Ratings for
PG&amp;E."&nbsp; The statutory requirements under sections 454 and
728 of the Public Utilities Code are that the rates must be just
and reasonable (<i>see Camp Meeker Water System, Inc. v. Public
Utilities Com.</i>, 51 Cal. 3d at 862), and the opponents have
argued that the investment grade requirement would supplant the
just and reasonable standard. As discussed in more detail below,
however, we believe that we can clarify this commitment in a way
that is consistent with our statutory responsibility to ensure that
PG&amp;E's rates are just and reasonable.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
commitment will remain, as provided in Paragraph 2.g., to act to
facilitate and maintain the investment grade credit
ratings.&nbsp;&nbsp; However, we do not interpret Paragraph 2.g. to
require the Commission to guarantee such a credit rating when there
are other causes, besides the Commission&rsquo;s actions (e.g.,
PG&amp;E's imprudent conduct resulting in a disallowance), which
are responsible for any threats to PG&amp;E's investment grade
credit rating.&nbsp; Therefore, under the settlement, as clarified,
PG&amp;E's ratepayers will still be protected from unjust and
unreasonable rates.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
setting just and reasonable rates, in addition to protecting the
consumers, we also must consider the financial health of the public
utility. Indeed, we view this commitment to act to facilitate and
maintain investment grade credit ratings as essentially doing what
we have always done under cost-of-service regulation: provide just
and reasonable rates and authorize a reasonable capital structure
that maintains the fiscal integrity of the utility.&nbsp; As
already discussed, our traditional regulation resulted in high
investment grade ratings of our energy utilities.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
the balancing of interests of the utility and its ratepayers that
we undertake in setting rates, a major factor is the
utility&rsquo;s financial integrity.&nbsp; There should be enough
revenue for all of the utility&rsquo;s prudently incurred costs or
operating expenses, investments and costs of debt. <i>See Duquesne
Light Co. v. Barasch</i> (1989) 488 U.S. 299, 310; <i>FPC v. Hope
Natural Gas Co.</i>, <i>supra,</i> 320 U.S. at 603.&nbsp; We are
therefore exercising our regulatory authority in agreeing with this
commitment in Paragraph 2g., as clarified above, because we find as
part of our regulatory responsibilities, that it is in the public
interest to get PG&amp;E out of bankruptcy and restore its
investment grade credit ratings.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In<i>
Southern California Edison Company v. Peevey</i>, <i>supra,</i> 31
Cal.4<sup>th</sup> at 791, the California Supreme Court explicitly
recognized that the Commission's settlement with SCE was intended
to "restore SCE's creditworthiness and avoid further instability
and uncertainty for the company and consumers."&nbsp; The Court not
only upheld the Commission&rsquo;s authority to enter into the
settlement, it also confirmed the Commission&rsquo;s "duty and
authority to guarantee that the electric utilities would have the
capacity and financial viability to provide power to California
consumers."&nbsp; <i>Id.</i> at 793.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Just
as the Court found in <i>Santa Margarita Area&nbsp; Residents
Together&nbsp; v. San Louis Obispo County Bd. of Supervisors</i>,
<i>supra,</i> 84 Cal. App.4<sup>th</sup> at 233, that the County
had not surrendered its police powers, because in entering the
agreement, the County had exercised its regulatory powers and
retained the County's discretionary authority in the future, the
Commission would not be surrendering or suspending its police
powers, because the present settlement, as modified and clarified
by this decision, is a reasonable exercise of those police powers
based upon the record in this proceeding.&nbsp; The Commission has
retained its discretionary authority over PG&amp;E's overall retail
electric rates, and, after considering all of the evidence and
positions of the parties in this proceeding, we find that the
provisions concerning the regulatory asset, which will comprise
approximately 5.4% of PG&amp;E's retail electric rates, are just
and reasonable.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
<i>Southern California Edison Co. v. Peevey, supra</i>, 31 Cal.4th
at 792 makes clear, we have the inherent authority to enter into
binding settlements where we are not limited by state law.&nbsp;
The Commission&rsquo;s settlement with SCE was approved by a
federal district court's stipulated judgment, and the California
Supreme Court upheld our right to enter into and be bound by the
settlement even without hearings, a written decision with findings,
and a vote in a public meeting. <i>Id.</i> at
805.<sup>13</sup></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
the present case, the settlement, as modified and clarified by this
decision, is consistent with state law.&nbsp; We have held a
hearing, issued a written decision with findings, voted in a public
meeting and modified and clarified provisions in the PSA to make
the settlement, as modified, fair, just and reasonable and in the
public interest.&nbsp; To ensure that these modifications and
clarifications are part of the&nbsp; Settlement Plan and the
Confirmation Order, we&nbsp; clarify that any references in the MSA
to the &ldquo;Settlement Plan&rdquo;or &ldquo;Confirmation
Order&rdquo; are references to the Settlement Plan and/or&nbsp;
Confirmation Order, which adopt, incorporate or reflect the
MSA.&nbsp; Further, we require as a condition to our enterring into
the MSA that this decision (without any concurrences, dissents, or
its appendices) be attached to the MSA as an appendix and that
Paragraph 27 of the PSA be modified to explicitly state the
attached Commission decision reflects the understanding of the
parties to the settlement.&nbsp; Accordingly, with these
modifications&nbsp; and clarifications, we find that we can enter
into the MSA and bind future Commissions.</font></p>

<p><a name="_Toc59591897"></a><a name=
"bc_jurisdiction"></a><b><font size="3" face=
"Times New Roman">C.&nbsp;&nbsp;Jurisdiction of the Bankruptcy
Court</font></b></p>

<p><font size="3" face="Times New Roman">The clause of the PSA
regarding the jurisdiction of the Bankruptcy Court is paragraph
22.</font></p>

<p><b><font size="3" face="Times New Roman">22.
<u>Enforcement</u>.</font></b>&nbsp; The Parties agree that the
Court shall retain jurisdiction over the Parties for all purposes
relating to enforcement of this Agreement, the Settlement Plan and
the Confirmation Order.</p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
present case is not the usual case where the Commission issues its
decisions involving public utilities' rates.&nbsp; We are in an
extraordinary situation involving PG&amp;E's bankruptcy.&nbsp;
Under sections of the United States Code and the Bankruptcy Code,
28 U.S.C.&nbsp; &sect;&sect; 157(b), 1334, and 11 U.S.C. &sect;
1129, the Bankruptcy Court has jurisdiction over the plan of
reorganization, which must be confirmed in order to get PG&amp;E
out of bankruptcy. By agreeing to this settlement, as modified and
clarified, it is our intent to present the Bankruptcy Court with a
plan that is lawful under state law and that the Court will be able
to confirm.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
also recognize that the Bankruptcy Court must have jurisdiction
over the parties to enforce the agreement, the settlement plan and
the Court&rsquo;s own confirmation order.&nbsp; Under sections of
the United States Code and Bankruptcy Code, 28 U.S.C. &sect;&sect;
157(b), 1334, and 11 U.S.C. &sect; 1142, the Bankruptcy Court has
jurisdiction over the implementation of the bankruptcy plan.&nbsp;
As discussed above, we have required modifications and
clarifications to the PSA in order for it to be consistent with
state law and to be just and reasonable.&nbsp; Having done so, we
may bind the Commission to an agreement that is part of the
settlement plan before the Bankruptcy Court.&nbsp; Just as the
Commission was bound by the settlement with SCE and the federal
district court can enforce the stipulated judgment (which adopted
the settlement), the Bankruptcy Court can enforce the modified
settlement agreement to the extent that it becomes part of the
settlement plan approved by the Bankruptcy Court's confirmation
order.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Contrary
to the views of opponents of the PSA, the Bankruptcy Court's
potential enforcement of the agreement (as modified), the
settlement plan incorporating the modified agreement and the
Court&rsquo;s confirmation order, in no way means that the
Bankruptcy Court will be deciding PG&amp;E's rates or services for
the next nine years or supplant the California appellate courts
from their judicial review of Commission orders involving
PG&amp;E.&nbsp; As discussed above, the modifications we have
required to the PSA will result in the Commission retaining the
authority over PG&amp;E's rates and services subject to judicial
review in the California appellate courts.&nbsp; Except for its
enforcement of the specific provisions in the settlement, as
modified, the Bankruptcy Court will not be supervising the
Commission's determinations as to PG&amp;E's rates and
services.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For
the most part, after the Bankruptcy Court confirms the plan of
reorganization, the Bankruptcy Court no longer supervises or
protects the debtor. <i>See Southwest Marine Inc. v. Danzig</i>
(9th Cir. 2000) 217 F.3d 1128, 1140.&nbsp; As the Bankruptcy Court
stated with regard to the Commission&rsquo;s plan of
reorganization, the Bankruptcy Court "is being asked to enforce the
reorganization agreement.&nbsp; Nothing more&hellip; I see this
Court's role as more limited than PG&amp;E's counsel
predicts."&nbsp; The Bankruptcy Court gave limited examples where
it could find the Commission would be in breach of the
reorganization agreement, but the Court recognized the
Commission&rsquo;s " historic practice for [authorizing the]
recovery of prudently incurred costs," and stated that only a
departure from this practice for the &ldquo;recoverable costs in
the agreement&rdquo; could be a breach. (Exhibit No. 122, Exhibit
C, pp. 6-10-6-11.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
concedes that the PSA would not result in the Bankruptcy Court
sitting as a super appellate court over the Commission decisions
affecting PG&amp;E.&nbsp; Moreover, our modification to the PSA,
which strikes Paragraph 6 from the PSA, requires PG&amp;E to omit
from the bankruptcy settlement plan Paragraph 6&rsquo;s
restrictions on the Commission&rsquo;s authority over dividends or
stock repurchase practices.&nbsp; In addition, in order to be
consistent with state law and to mitigate potential adverse effects
on PG&amp;E ratepayers, in this decision we have modified and
clarified various other provisions of the PSA, which could
otherwise have arguably restricted the Commission&rsquo;s overall
authority to set rates for PG&amp;E.&nbsp;&nbsp;&nbsp; Under these
circumstances, it is justifiable for the Commission to agree to the
enforcement provisions in paragraph 22, and for the Bankruptcy
Court to have jurisdiction to enforce the MSA, the settlement plan
incorporating the MSA, and the Court&rsquo;s confirmation order
based upon the MSA.</font></p>

<p><a name="_Toc59591898"></a><a name="_Toc56831877"></a><a name=
"_Toc56836113"></a><a name="_Toc56908570"></a><a name=
"_Toc56908721"></a><a name="consistency_ab1890"></a><b><font size=
"3" face="Times New Roman">D.&nbsp;&nbsp;Consistency with Assembly
Bill 1890 and &sect;&nbsp;368(a)</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At
one time there was uncertainty as to whether AB 1890 had limited
the Commission&rsquo;s authority to allow PG&amp;E to recover all
of the wholesale power costs it had booked into its Transition
Revenue Account (TRA), or all of its uneconomic generation-related
costs in its TCBA.&nbsp; The uncertainty was due to the AB 1890
provision (i.e. &sect;&nbsp;368(a)) putting the utilities at risk
for those costs not recovered by the time that the AB 1890 rate
freeze ended (i.e., no later than March 31, 2002).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All
parties recognize that there no longer is any uncertainty about the
Commission&rsquo;s authority to allow PG&amp;E&rsquo;s recovery of
its TCBA balance because AB 6X restored the Commission&rsquo;s
ratemaking authority over generation-related facilities owned by
the public utilities under our jurisdiction.&nbsp; As the
California Supreme Court held in <i>Southern California Edison Co.
v. Peevey, supra,</i> 31 Cal.4<sup>th</sup> at 793, &ldquo;after
the enactment of AB 6X in 2001,...PUC was authorized to approve
rates allowing SCE to recover the costs&hellip;.&rdquo;&nbsp;
Referring to AB 6X as a &ldquo;major retrenchment from the
competitive price-reduction approach of AB&nbsp;1890,&rdquo; the
Court found that AB 6X reemphasized &ldquo;PUC&rsquo;s duty and
authority to guarantee that the electric utilities would have the
capacity and financial viability to provide power to California
consumers.&rdquo;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Commission has the authority to allow the utilities to recover
their prudently incurred generation-related costs, because
AB&nbsp;6X eliminated AB&nbsp;1890&rsquo;s market valuation
requirement for the utilities&rsquo; retained generation assets and
AB 6X&nbsp; "allowed PUC to regulate the rates for power so
generated pursuant to ordinary&nbsp; &lsquo;cost-of-service&rsquo;
ratemaking.&rdquo;&nbsp; (<i>Id.</i> at 795.)&nbsp; Due to the
restoration of the Commission&rsquo;s ratemaking authority over
these assets, AB&nbsp;6X &ldquo;largely eliminated the category
of&nbsp; &lsquo;uneconomic&rsquo; generating asset costs&rdquo;
and, therefore the limit in &sect;&nbsp;368(a) &ldquo;no longer
applies to the generation-related costs of the utilities.&rdquo;
<i>Id.</i></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
view of the California Supreme Court&rsquo;s recent decision
finding that AB&nbsp;6X made &sect;&nbsp;368(a) inapplicable to the
utilities&rsquo; unrecovered costs, it is clear that the
Commission&rsquo;s authority to allow PG&amp;E to recover the
balance in its TCBA is not limited by AB&nbsp;1890.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;TURN
argues that under basic principles of utility ratesetting,
ratepayers cannot be forced to contribute capital to a utility and
utilities are not entitled to earn a return on their
expenses.&nbsp; (TURN Op. Br. p. 11-13.)&nbsp; We do not agree that
that principle applies to this settlement.&nbsp; In <i>Diablo
Canyon</i>, (1988) 30 CPUC 2d 189, and subsequent decisions for the
nuclear powerplants owned by PG&amp;E, SCE, and SDG&amp;E, the
Commission approved incremental cost incentive pricing that allowed
the utility to recover its operating expenses on the basis of
operating performance rather than actual cost, thus allowing the
utility to recover more than its actual operating expenses if
performance exceeded benchmarks.&nbsp; As we discussed above, in
<i>Southern California Edison Co. v Peevey, supra,</i> 31&nbsp;Cal.
4<sup>th</sup> at 793, the Court reemphasized the
Commission&rsquo;s duty and authority to guarantee that the
electric utilities would have the capacity and &ldquo;<u>financial
viability to provide power to California
customers</u>.&rdquo;&nbsp; (Emphasis added.)</font></p>

<p><a name="_Toc53556746"></a><a name="_Toc53561749"></a><a name=
"_Toc53562850"></a><a name="_Toc53563327"></a><a name=
"_Toc59591899"></a><a name="psa_public_interest"></a><b><font size=
"3" face="Times New Roman">VI.&nbsp;&nbsp;&nbsp;Whether the
Proposed Settlement Agreement Is<br />
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;in the Public
Interest</font></b></p>

<p><a name="_Ref53519665"></a><a name="_Ref53519668"></a><a name=
"_Toc53556747"></a><a name="_Toc53561750"></a><a name=
"_Toc53562851"></a><a name="_Toc53563328"></a><a name=
"_Toc59591900"></a><a name="adequacy_feasible_plan"></a><b><font
size="3" face="Times New Roman">A.&nbsp;&nbsp;&nbsp;Adequacy of a
Settlement Proposal in Achieving<br />
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Feasible Plan of
Reorganization&nbsp;</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Bankruptcy Code requires any plan of reorganization to be feasible
&ndash; to allow a debtor to successfully emerge from
bankruptcy.&nbsp; To be feasible, a proposed plan must be such that
if implemented it will leave the debtor in a situation where it is
not likely that the reorganization will be followed by
unanticipated liquidation or further reorganization:</font></p>

<blockquote>

<p><font size="3" face="Times New Roman">Before the bankruptcy
court may confirm a plan of reorganization, 11 U.S.C. &sect;
1129(a)(11) requires that it find that the plan is not likely to be
followed by unanticipated liquidation or further
reorganization.&nbsp; In other words, the plan must be
feasible.&nbsp; Under this feasibility test, the bankruptcy court
must look to the plan&rsquo;s projected income, expenses, assets
and liabilities and determine whether the plan will leave the
estate financially stable. &nbsp; <i>In re Pizza of Hawaii,
Inc.</i>, 40 B.R. 1014, 1017 (D. Hawaii 1984).&nbsp;</font></p>

</blockquote>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A necessary corollary of this requirement is the requirement that
the provisions of any proposed plan of reorganization can, in fact,
be implemented:</font></p>

<blockquote>

<p><font size="3" face="Times New Roman">[T]he feasibility test
contemplates the probability of actual performance of the
provisions of the plan. Sincerity, honesty, and willingness are not
sufficient to make the plan feasible, and neither are any visionary
promises. The test is whether the things which are to be done after
confirmation can be done as a practical matter under the
facts.&nbsp; <i>In re Clarkson</i>, 767 F.2d 417, 420
(8<sup>th</sup> Cir. 1985).</font></p>

</blockquote>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;It
is the Bankruptcy Court which ultimately will determine whether any
given proposed plan is feasible.&nbsp; And it is clear that the
Commission should not authorize any settlement unless the
Commission believes that the settlement is likely to result in a
feasible plan.&nbsp; For the reasons detailed below, the MSA
satisfies this requirement.</font></p>

<p><a name="_Toc53556748"></a><a name="_Toc53561751"></a><a name=
"_Toc53562852"></a><a name="_Toc53563329"></a><a name=
"_Toc59591901"></a><a name="msa_pge_emerge"></a><b><font size="3"
face="Times New Roman">1.&nbsp;&nbsp;The MSA Will Allow PG&amp;E to
Emerge Promptly From Bankruptcy</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
MSA<sup>14</sup> is fair, just and reasonable and in the public
interest.&nbsp; First, it adopts the regulatory asset and the cash
allowances of the PSA, and therefore will pay creditors in full,
and improve PG&amp;E&rsquo;s credit metrics.&nbsp; Second, the MSA
calls for the amortization of the regulatory asset &ldquo;mortgage
style&rdquo; over nine years.<sup>15</sup>&nbsp; Third, it offers
the state significant environmental benefits.<sup>16</sup>&nbsp;
Fourth, it provides for reduction of the regulatory asset on
account of any refunds obtained from energy suppliers.&nbsp;
Finally, it contains PG&amp;E&rsquo;s commitment not to
unilaterally attempt to disaggregate for the life of the
plan.<sup>17</sup></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There
are provisions in both the PSA and the MSA that enhance
PG&amp;E&rsquo;s fiscal soundness.&nbsp; These elements are: the
ratemaking treatment associated with the regulatory
asset;<sup>18</sup> the assurances of recovery of headroom within a
certain range<sup>19</sup> in 2003;<sup>20</sup> acknowledgement by
the Commission that the URG rate base established by D.02-04-016
shall be deemed just and reasonable and not subject to
modification;<sup>21</sup> imputation of a capital structure to
PG&amp;E;<sup>22</sup> and a Commission commitment not to
discriminate against PG&amp;E as compared with other
utilities.<sup>23</sup>&nbsp; Further elements of both the PSA and
the MSA enhancing the attractiveness of the Settlement Plan to
rating agencies are the assured recovery of the full amount that
PG&amp;E sought in the ATCP,<sup>24</sup> and the dismissal with
prejudice of PG&amp;E Corporation (PG&amp;E&rsquo;s parent) from
the Commission&rsquo;s Holding Company OII as to past
practices.<sup>25</sup>&nbsp; With those financial and regulatory
benefits in place we are confident PG&amp;E will be able to emerge
from bankruptcy and continue to provide safe, reliable
service.</font></p>

<p><a name="_Toc53556749"></a><a name="_Toc53561752"></a><a name=
"_Toc53562853"></a><a name="_Toc53563330"></a><a name=
"_Toc59591902"></a><a name="rating_agencies"></a><b><font size="3"
face="Times New Roman">2.&nbsp;&nbsp;The Rating Agencies (S&amp;P
and Moody&rsquo;s)</font></b></p>

<p><a name="_Toc53563331"></a><a name="_Toc53562854"></a><font
size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
says that it is essential that PG&amp;E&rsquo;s credit be rated
investment-grade upon emergence from bankruptcy.&nbsp; It believes
that these entities&rsquo; blessing of the plan, through the
assignment of investment-grade credit ratings, is crucial to
feasibility.&nbsp; PG&amp;E&rsquo;s witnesses testified:&nbsp;
&ldquo;It is critical for PG&amp;E to meet at least minimum
investment-grade ratings&rdquo;<sup>26</sup> if emergence is to
take place at all. &ldquo;PG&amp;E needs access to the liquidity
and efficiency of the investment grade debt market in order to
raise the approximately $8 billion required to emerge from
Chapter&nbsp;11.&rdquo;<sup>27</sup>&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Investment-grade
credit ratings are important not only to achieving a feasible plan
of reorganization, but also to ensuring on an ongoing basis that
PG&amp;E can reliably and efficiently raise capital to finance
construction of new infrastructure, accommodate seasonal
fluctuations in cash collections and disbursements, and meet its
obligations to serve customers.<sup>28</sup> &ldquo;Continuous
access to the capital markets and access to low cost capital
facilitates the funding of power procurement activities as well as
the capital expenditures necessary to sustain the safety and
reliability of a utility&rsquo;s
operations.&rdquo;<sup>29</sup></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Among
the important longer-term benefits PG&amp;E and ratepayers can
expect from PG&amp;E obtaining creditworthy status are a lower cost
of debt.<sup>30</sup>&nbsp; Because there would be a greater amount
of capital available and a lower risk associated with investment
grade debt compared to junk-rated debt, the cost of investment
grade debt is considerably less.&nbsp; As shown in the testimony of
Paul J. Murphy (Chapter 7), PG&amp;E&rsquo;s ability to issue
investment grade debt under the Settlement Plan saves ratepayers
approximately $2.1 billion in interest costs over 10 years
(compared to junk-rated debt).&rdquo;<sup>31</sup>&nbsp; Thus the
lower cost of a utility&rsquo;s debt translates into lower rates,
all else being equal.<sup>32</sup></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There
would also be lower transaction costs associated with an investment
grade rating.<sup>33</sup>&nbsp; A company that is non-investment
grade must generally post collateral to engage in purchase
transactions.&nbsp; &ldquo;Investment grade credit ratings are
critical for activities such as power procurement; without
investment grade ratings, PG&amp;E would need to post additional
collateral, further increasing its cost of
operations.&rdquo;<sup>34</sup>&nbsp; &ldquo;To acquire firm
pipeline capacity, PG&amp;E recently had to post nearly $20 million
of collateral, representing three months of payments.&nbsp; Had
PG&amp;E been investment grade, it would not have had to post
collateral.&rdquo;&nbsp; Moreover, a utility with a &ldquo;junk
bond&rdquo; rating would likely have to provide security or put up
cash as collateral in various contracts (such as for energy supply)
or to meet certain regulatory commitments (such as environmental
remediation requirements).&nbsp; &ldquo;Indeed, under such
conditions, energy procurement through long-term contracts, even if
accessible to a weak utility, creates a new set of problems.&nbsp;
If they include mark-to-market provisions, periodic market swings
could jeopardize the utility&rsquo;s remaining but limited credit
capacity.&nbsp; In addition, a financially-weak utility would
inevitably face less favorable terms at higher cost and for a more
limited duration.&rdquo;<sup>35</sup></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Also
investment grade credit ratings for PG&amp;E should require lower
working capital requirements,<sup>36</sup> should facilitate the
construction of new power supplies for its customers,<sup>37</sup>
and are crucial in order for PG&amp;E to carry out its public
purpose responsibilities in an appropriate manner in the
future.&rdquo;<sup>38</sup>&nbsp; And, as witness Murphy notes:
&ldquo;[t]he utility industry is capital-intensive.&nbsp;
PG&amp;E&rsquo;s financial forecast highlights this fact with
regard to PG&amp;E:&nbsp; over $8 billion of capital expenditures
are expected during the next five years.&nbsp; Ease of access to
the debt market on reasonable terms to fund such expenditures
serves the interests of customers as well, since investment-grade
debt is significantly more economical than non-investment-grade
debt.&rdquo;<sup>39</sup>&nbsp; Staff Witness Paul Clanon
concurred, concluding that &ldquo;[n]on-investment grade credit
ratings are bad for ratepayers.&rdquo;<sup>40</sup> Thus adopting a
long-term goal of maintaining and improving PG&amp;E&rsquo;s credit
ratings is good public policy and indeed it is the
Commission&rsquo;s "duty and authority to guarantee that the
electric utilities would have the capacity and financial viability
to provide power to California consumers." <i>Southern California
Edison Co. v. Peevey</i>, <i>supra,</i> 31 Cal. 4<sup>th</sup> at
793.</font></p>

<p><a name="_Toc59591903"></a><a name=
"fairness_reasonableness"></a><b><font size="3" face=
"Times New Roman">Fairness and Reasonableness</font></b></p>

<p><a name="_Toc59591904"></a><a name=
"relationship_risks"></a><b><font size="3" face=
"Times New Roman">1.&nbsp;&nbsp;Relationship of Settlement to
Parties&rsquo; Risks of<br />
&nbsp;&nbsp;&nbsp;&nbsp;Achieving Desired Results</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For
more than three years, the Commission and PG&amp;E have been in
continuous litigation against each other before the state appellate
courts, the federal courts, and the Bankruptcy Court.&nbsp; A
settlement between PG&amp;E and the Commission would end this
litigation and resolve claims totaling billions of dollars made by
PG&amp;E against the Commission and ratepayers.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prior
to the settlement, both the Commission and PG&amp;E faced risks and
consequences depending on the outcome of PG&amp;E&rsquo;s
litigation claims and proposal to disaggregate itself through the
asserted preemptive authority of the Bankruptcy Court.&nbsp; On the
one hand, PG&amp;E filed a complaint in federal court seeking
authority to recover billions of dollars of undercollected costs
(which PG&amp;E now estimates at $11.8 billion) from retail
ratepayers and to transfer its assets outside the regulatory reach
of the State of California.&nbsp; On the other hand, the Commission
and other agencies of the State, including the State Attorney
General, continue to fight PG&amp;E&rsquo;s proposals, vowing to
carry their opposition beyond the federal trial court and
Bankruptcy Court to the highest appellate levels.&nbsp; In
addition, the Commission had proposed an alternative plan of
reorganization in the Bankruptcy Court, and had obtained the
support of the OCC for its alternative plan.&nbsp; PG&amp;E just as
vigorously opposed the Joint Amended Plan, and threatened to carry
its opposition to the highest appellate levels.&nbsp; There was
skepticism regarding the feasibility of either plan of
reorganization.&nbsp; The litigation costs incurred by both sides
were enormous, and threatened to mount to even higher levels, given
the likelihood of additional appellate litigation.&nbsp; In short,
both parties faced enormous risks that they would fail to achieve
their desired results unless they reached a
settlement.&nbsp;</font></p>

<p><a name="_Toc53565583"></a><a name="_Toc59591905"></a><a name=
"risk_expense_etc"></a><b><font size="3" face=
"Times New Roman">2.&nbsp;&nbsp;Risk, Expense, Complexity, and
Likely Duration<br />
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Further Bankruptcy
Litigation</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From
the perspective of the Commission and ratepayers, the risks of
continued litigation in PG&amp;E&rsquo;s bankruptcy proceeding and
the federal court are that some combination of the Bankruptcy Court
and federal district and/or appellate courts ultimately may approve
PG&amp;E&rsquo;s request for injunctive relief, as well as its
proposal to disaggregate its traditional utility business into four
separate entities, three of which would be permanently outside the
jurisdiction of the Commission.&nbsp; The U.S. Court of Appeals for
the Ninth Circuit has recently ruled against PG&amp;E&rsquo;s
argument on express preemption issues. <i>See</i> <i>Pacific Gas
and Electric Co. v. People of the State of California</i>
(9<sup>th</sup> Cir. 2003) 2003 U.S. App. LEXIS 23568.&nbsp;
However, even if there is no express preemption a Bankruptcy Court
judge has affirmed the right of the Bankruptcy Court to impliedly
preempt the Commission where necessary to implement a financially
viable plan.&nbsp; (<i>Memorandum Decision Regarding Preemption and
Sovereign Immunity</i>, February 7, 2002, <i>In Re. Pacific Gas and
Electric Company</i>, Bankruptcy Case No.&nbsp;01&#8209;30923DM,
United States Bankruptcy Court, Northern District of
California.)<sup>41</sup></font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Moreover,
the Commission&rsquo;s costs and delays of further litigating
against PG&amp;E are likely to be massive, given the possibility of
appeals through several layers of the federal court system,
possibly all the way to the U.S. Supreme Court.&nbsp; On the other
hand, PG&amp;E faces similar risks, expenses, and delays.&nbsp;
Even if it were to prevail in persuading the Bankruptcy Court to
impliedly or expressly preempt state law and in so doing limit the
Commission&rsquo;s jurisdiction, the Commission has vowed to appeal
and further challenge PG&amp;E&rsquo;s plan through the
courts.&nbsp; If PG&amp;E were not to prevail, the Joint Amended
Plan would reduce the amount of money sought by
PG&amp;E.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
short, further litigation between PG&amp;E and the Commission in
and beyond the Bankruptcy Court would be costly, complex and
lengthy, potentially delaying any resolution as the case winds its
way through the federal appellate court system, no matter who
prevails at the trial court level.&nbsp;</font></p>

<p><a name="_Toc53565584"></a><a name="_Toc59591906"></a><a name=
"reasonable_other_claims"></a><b><font size="3" face=
"Times New Roman">3.&nbsp;&nbsp;Reasonableness of Settlement of
Other<br />
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Claims
and Litigation</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
presented testimony that identified $11.8 billion in unrecovered
costs of utility service which it claims are to be recoverable from
retail electric ratepayers.&nbsp; (Exs. 120 and 120c,
PG&amp;E/McManus.)&nbsp; PG&amp;E asserts that it is likely to
prevail on its claims before the Commission and/or the state and
federal courts. (Exs. 120, 120c, 121, PG&amp;E/McManus.)&nbsp;
PG&amp;E cites the ruling of Judge Walker in <i>PG&amp;E</i> v<i>.
Lynch</i>, which held that the &ldquo;cost of wholesale energy,
incurred pursuant to rate tariffs filed with FERC, whether these
rates are market-based or cost&#8209;based, must be recognized as
recoverable costs by state regulators and may not be trapped by
excessively low retail rates or other limitations imposed at the
state level.&rdquo;&nbsp; (Ex. 120 and 120c, PG&amp;E/McManus.)
&nbsp; PG&amp;E also presented testimony on its claims for cost
recovery under state law.&nbsp; (Ex. 120 and 120c,
PG&amp;E/McManus.)&nbsp; This testimony asserts that even if its
undercollected costs are not classified as wholesale costs
protected by the Filed Rate Doctrine under federal law, the costs
are still legitimate costs of utility service that PG&amp;E is
legally entitled to recover in full from retail ratepayers under
California state law.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Commission staff presented testimony arguing that PG&amp;E was
unlikely to prevail in <i>PG&amp;E</i> v<i>. Lynch</i>.&nbsp; (Ex.
122, p. 17, CPUC Staff/Clanon.)&nbsp; The staff relied on the
testimony of an expert who argued that Judge Walker&rsquo;s ruling
was incorrect.&nbsp; The Commission staff estimated that the net
present value of the estimated ratepayer contribution to the
settlement would be $7.129 to $7.229 billion.&nbsp; (Ex.122, p. 9,
CPUC Staff/Clanon.)<sup>42</sup>&nbsp; The components of these
ratepayer contributions use the same time frames and components
that PG&amp;E used to estimate its claims, <i>i.e.</i> the period
from the beginning of the energy crisis to the present.&nbsp; This
period treats PG&amp;E&rsquo;s 2001 and 2002 pre-tax headroom
revenues under the Commission&rsquo;s surcharge revenue decisions
as a ratepayer contribution under the settlement.&nbsp; The
Commission staff then quantified the net present value of the
regulatory asset, including the costs of taxes and return on the
asset.&nbsp; Using the Commission staff&rsquo;s estimate of
ratepayer contributions, the proposed settlement would allow
ratepayers to settle PG&amp;E&rsquo;s $11.8 billion in
pre&#8209;settlement claims at a cost of $7.1 to 7.2 billion, or
about 60 cents on the dollar, with PG&amp;E giving up $4.6 billion
in claims.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
its testimony, ORA questioned the accuracy of PG&amp;E&rsquo;s
calculation of undercollected costs in light of headroom revenues
reported in PG&amp;E&rsquo;s regulatory balancing accounts.&nbsp;
(Ex. 139, ORA/Reid, Danforth; Ex. 187, ORA/Bumgardner.)&nbsp; By
ORA&rsquo;s calculation, PG&amp;E had collected $694 million more
in headroom revenues during 2001- 2002 than PG&amp;E estimated in
its testimony. (Ex. 187, ORA/Bumgardner.)&nbsp; In response,
PG&amp;E said that the difference between ORA and PG&amp;E was that
ORA did not take into account anticipated additional costs or
reductions in revenue that PG&amp;E had accrued and reported in its
SEC financial reports under generally accepted accounting
principles (GAAP), but that had not yet flowed through
PG&amp;E&rsquo;s regulatory balancing accounts.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ORA
estimated the ratepayer contribution under the settlement using the
same time frame and components as Commission staff, to be in the
range of $9.0 to $9.1 billion, $1.9 billion higher than Commission
staff.&nbsp; (Ex. 139, ORA/Reid, Bumgardner; Ex. 187,
ORA/Bumgardner.)&nbsp; ORA estimated the amount of headroom
received by PG&amp;E in 2001 and 2002 to be $694 million more than
PG&amp;E&rsquo;s estimate.&nbsp; Additionally, ORA computed the net
present value of the regulatory asset to PG&amp;E to be only $1.5
billion.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
only other parties presenting any detailed testimony on the
strength and quantification of PG&amp;E&rsquo;s claims were The
Utility Reform Network (TURN) and the City and County of San
Francisco (CCSF).&nbsp; TURN&rsquo;s testimony relied primarily on
the legal position taken by the Commission staff&rsquo;s outside
expert as well as the position TURN itself took before the
California Supreme Court in the <i>SCE</i> case.&nbsp; TURN also
alleged that PG&amp;E&rsquo;s estimate of undercollected costs was
inflated.&nbsp; CCSF assumed that PG&amp;E&rsquo;s undercollected
procurement costs should be netted against $2.5 billion in power
generation revenues identified in the same exhibit.&nbsp; (Ex. 138,
p. 6, CCSF/Barkovich.)&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
argues that although it is possible for the Commission to quantify
the amount of PG&amp;E&rsquo;s various claims that the utility
would be giving up under the settlement, it is not so easy to
compare those claims to the costs ratepayers would bear under the
settlement.&nbsp; This is primarily because before any comparison
can be done, the costs of the settlement to ratepayers must be
netted against the quantifiable and unquantifiable benefits that
ratepayers will receive directly from the settlement itself.&nbsp;
In this regard, one of the direct and quantifiable benefits to
ratepayers under the settlement is that they receive over $670
million a year in estimated rate relief effective January 1, 2004,
and as much as $2.1 billion in interest cost savings over the next
ten years.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
record demonstrates that PG&amp;E has asserted total claims of
approximately $11.8&nbsp;billion, and that the ratepayer costs of
the Settlement Agreement, using the Commission staff&rsquo;s
calculations, are about 60% of those claims.&nbsp; This comparison
does not include the direct, positive benefits ratepayers will
obtain if this matter can be settled.&nbsp; Those benefits include
immediate rate reductions; the ability of the Commission to
regulate PG&amp;E on an integrated, cost of service basis; and the
environmental and public interest benefits offered by
PG&amp;E.&nbsp; PG&amp;E&rsquo;s forgoing its unilateral attempt to
transfer valuable utility assets to unregulated affiliates, and its
land conservation commitments are not readily quantifiable, but
they are nonetheless real and valuable.&nbsp; This comparison shows
that the ratepayer dollar settlement is fair and reasonable when
compared to the claims PG&amp;E would waive and release.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA states in Section 15 (Fees and Expenses): &ldquo;PG&amp;E shall
reimburse PG&amp;E Corporation &hellip;for all of (its)
professional fees and expenses incurred in connection with the
Chapter 11 Case.&rdquo;&nbsp; Also: &ldquo;PG&amp;E shall not
recover any portion of the amounts so paid or reimbursed to
PG&amp;E Corporation in retail rates; rather, such costs shall be
borne solely by shareholders through a reduction in retained
earnings.&rdquo;&nbsp; Because there is conflicting evidence in the
record regarding whether ratepayers would, in fact, directly or
indirectly pay PG&amp;E Corp&rsquo;s &ldquo;professional fees and
expenses incurred in connection with the Chapter 11 Case&rdquo;, we
must ensure that the Commission&rsquo;s intent of the settlement -
that ratepayers do not bear these costs - is satisfied.&nbsp; In
Joint Reply Comments of TURN and PG&amp;E on the Alternate
Decisions of Assigned Commissioner Peevey (filed December 15,
2003), these parties state that, with regard to professional fees
and expenses in connection with the Chapter 11 case, they
&ldquo;agree that the provision for PG&amp;E to reimburse PG&amp;E
Corporation should be deleted from the Settlement
Agreement.&rdquo;&nbsp; We shall make this change.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Further,
TURN and PG&amp;E state: &ldquo;In addition, as a condition
precedent to the Commission executing the Settlement Agreement,
PG&amp;E Corporation should agree in writing that it will not seek
reimbursement of such professional fees and expenses through the
Bankruptcy Court.&rdquo;&nbsp; PG&amp;E and TURN also state:&nbsp;
&ldquo;To the extent that PG&amp;E&rsquo;s not reimbursing PG&amp;E
Corporation results in PG&amp;E having more cash available at
emergence from Chapter 11, this cash should be used to pay valid
creditor claims and reduce the amount PG&amp;E has to
borrow.&rdquo;&nbsp; With all of these clarifications, we believe
that PG&amp;E ratepayers will not pay for PG&amp;E Corporation
litigation costs.&nbsp; It is our intent that ratepayers not pay
any of these costs, nor costs of any other PG&amp;E unit aside from
the utility itself.</font></p>

<p><a name="_Toc53565585"></a><a name="_Toc59591907"></a><a name=
"reasonable_rates"></a><b><font size="3" face=
"Times New Roman">4.&nbsp;&nbsp;Reasonableness of
Rates</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Analysis
of the reasonableness of the settlement must begin with the rates
themselves.&nbsp; The proposed rates under the PSA were originally
forecasted to be:<sup>43</sup></font></p>

<table border="0" cellspacing="0" cellpadding="0" width="594">
<tr>
<td valign="top"></td>
<td valign="top">
<p align="center"><u><font size="3" face=
"Times New Roman">Current</font></u></p>
</td>
<td valign="top">
<p align="center"><u><font size="3" face=
"Times New Roman">2004</font></u></p>
</td>
<td valign="top">
<p align="center"><u><font size="3" face=
"Times New Roman">2005</font></u></p>
</td>
<td valign="top">
<p align="center"><u><font size="3" face=
"Times New Roman">2006</font></u></p>
</td>
<td valign="top">
<p align="center"><u><font size="3" face=
"Times New Roman">2007</font></u></p>
</td>
<td valign="top">
<p align="center"><u><font size="3" face=
"Times New Roman">2008</font></u></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">Bundled Rate<br />
 (cents/Kwh)</font></p>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman"><br />
 13.87</font></p>
</td>
<td valign="top">
<p align="center"><font size="3" face="Times New Roman"><br />
 13.36</font></p>
</td>
<td valign="top">
<p align="center"><font size="3" face="Times New Roman"><br />
 13.32</font></p>
</td>
<td valign="top">
<p align="center"><font size="3" face="Times New Roman"><br />
 13.16</font></p>
</td>
<td valign="top">
<p align="center"><font size="3" face="Times New Roman"><br />
 13.18</font></p>
</td>
<td valign="top">
<p align="center"><font size="3" face="Times New Roman"><br />
 12.92</font></p>
</td>
</tr>
</table>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
initial revenue reduction in 2004 was updated by PG&amp;E, which
more recently forecast the revenue reduction in 2004 to be
approximately $670&nbsp;million, resulting in a projected 12.91
cents per kWh rate for 2004. (Ex. 117b, p.10-3.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
evaluating the rate impacts of a settlement it is important to bear
in mind that the ratemaking process contains significant elements
of art as well as science.&nbsp; All ratemaking proceedings are
inherently complex undertakings that require many judgment
calls.&nbsp; Projected system average rates under the settlement
are expected to be lower than current rates.&nbsp; Rates under the
settlement agreement lie between the rates ratepayers would see
under PG&amp;E&rsquo;s disaggregation plan and the Joint Amended
Plan were either to be implemented.&nbsp; (Ex. 122, p. 10,
Staff/Clanon)&nbsp; Accordingly, as to anticipated rates, the MSA
satisfies our concern that the settlement fall within the
&ldquo;reasonable range of outcomes&rdquo; that would result had
the case proceeded to trial.&nbsp; (<i>See, Southern Calif. Edison
Co.,</i> D.02-06-074.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
any case, the MSA will not be a major driver of PG&amp;E&rsquo;s
rates in the near term.&nbsp; The costs associated with the MSA
&ndash; principally the costs associated with the regulatory asset
&ndash; are only a small share of PG&amp;E&rsquo;s total costs, and
are dwarfed even by such relatively small cost components as
transmission costs.&nbsp; The proposed rate reduction is
reasonable.</font></p>

<p><a name="_Toc59591908"></a><a name=
"adequacy_representation"></a><b><font size="3" face=
"Times New Roman">5.&nbsp;&nbsp;Adequacy of Representation In the
Settlement Process</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA was negotiated by staff of the Commission, under the judicial
supervision and mediation of a United States Bankruptcy Court
judge.&nbsp; According to the judge, &ldquo;&hellip;[Y]ou should
know that the staff of the Public Utilities Commission, who
participated in the settlement process, in my opinion, displayed
diligence, competence and professionalism.&nbsp; I do not believe
that they overlooked opportunities to reduce costs to ratepayers,
even as they agreed that the company should be restored to
financial health.&rdquo;&nbsp; (Ex. 146, p.2.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
presence and involvement of Commission staff was adequate for
three&nbsp;reasons.&nbsp; First, there is no question regarding the
motives, independence, or professional competence of the
governmental representatives in the negotiations.&nbsp; Second, the
Commission staff has represented the Commission in the Bankruptcy
Court on the Commission&rsquo;s own plans of reorganization for
PG&amp;E.&nbsp; Finally, the Commission staff has played a
prominent role in representing the Commission before the
Legislature, the investment community, the rating agencies, and
other constituent groups throughout the California energy
crisis.&nbsp; We do not doubt the technical, financial, and
ratemaking expertise of the Commission staff.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
argues that the active participation of an independent, competent
Commission staff in the settlement is a significant indication of
the overall reasonableness and fairness of the PSA.&nbsp; In
addition to the Commission staff, other governmental participants
have endorsed the environmental provisions of the PSA, particularly
the Land Conservation Commitment. (Ex. 181.)&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Considering
adequacy of representation in a different manner, whether or not
representation was adequate in the bankruptcy settlement
negotiations is now moot because the fairness of the PSA has been
examined in this proceeding.&nbsp; In this investigation, where we
approve a MSA, it is clear that ratepayers have been adequately
represented by, among others, ORA, TURN, Aglet, and CCSF.&nbsp; We
find that the Commission and ratepayers had adequate representation
in the settlement process.&nbsp;</font></p>

<p><a name="_Toc59591909"></a><a name="release_corp"></a><b><font
size="3" face="Times New Roman">7.&nbsp;&nbsp;Release of PG&amp;E
Corporation</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Paragraph
10 of the PSA states in part:&nbsp; &ldquo;PG&amp;E and PG&amp;E
Corporation, on the one hand, and the Commission on the other, will
execute full mutual releases and dismissals with prejudice of all
claims, actions or regulatory proceedings arising out of or related
in any way to the energy crisis or the implementation of
AB&nbsp;1890 listed on Appendix C hereto.&rdquo;&nbsp; CCSF says
the release language should be modified to exclude PG&amp;E
Corporation.&nbsp; It believes there is no need for any release of
claims against PG&amp;E Corporation in this proceeding, because
such claims have nothing to do with helping PG&amp;E resolve its
bankruptcy.&nbsp; More importantly, it contends, the Commission
currently has no pending proceedings against PG&amp;E Corporation
and certainly none that are listed in Appendix C.&nbsp; Nor has
PG&amp;E Corporation any claims against the Commission.&nbsp; CCSF
argues that this release goes not to the Commission&rsquo;s claims,
but to the pending actions against PG&amp;E Corporation brought by
the California Attorney General and the City and County of San
Francisco in the Superior Court.&nbsp; The Commission, CCSF
maintains, should not provide PG&amp;E Corporation with this very
significant release as PG&amp;E Corporation is not providing any
consideration for the proposed release.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
will not accede to CCSF&rsquo;s request.&nbsp; It is not a party to
this settlement and it is not covered by the mutual releases; the
Commission is not a party to the Superior Court action.&nbsp; Our
objective in agreeing to mutual releases is to settle all matters
between the settling parties (and no others) and return to a
regulatory relationship not burdened with extraneous claims which,
by paragraph 10, we now relegate to history.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
clarify, however, that the MSA does not release any claims, which
are held by parties other than PG&amp;E and the Commission, against
PG&amp;E Corporation or its directors, through the dismissal of
PG&amp;E Corporation from Commission proceedings (e.g., the Holding
Company OII) or otherwise. We further clarify that the
Commission&rsquo;s dismissal and release of PG&amp;E Corporation in
no way affects the Business and Professions Code &sect;17200 Law
Enforcement Actions brought by the California Attorney General and
CCSF and these actions are not &ldquo;derivative&rdquo; of the
Commission&rsquo;s rights.</font></p>

<p><a name="_Toc59591910"></a><a name=
"public_interest"></a><b><font size="3" face=
"Times New Roman">C.&nbsp;&nbsp;Public Interest</font></b></p>

<p><a name="_Toc59591911"></a><a name=
"reg_asset_second"></a><b><font size="3" face=
"Times New Roman">1.&nbsp;&nbsp;The Regulatory Asset</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
regulatory asset has been described above.&nbsp; It is $2.21
billion amortized over nine years.&nbsp; It was sized to provide
for the revenue, cash flow, and capital structure requirements that
will enable PG&amp;E to emerge from bankruptcy as an investment
grade company.&nbsp; This asset, when combined with the headroom,
provides a $7.2 billion ratepayer contribution (exclusive of direct
and indirect ratepayer benefits under the PSA).&nbsp; (Ex. 122, p.
8.)&nbsp; As we have discussed above, this is a reasonable
compromise of the economic differences of the proponents of the
PSA.&nbsp; We also recognize that the settlement provides for
net-of-tax generator refunds or offsets&nbsp;received by PG&amp;E
in 2003 or thereafter, which may offset&nbsp;dollar for dollar the
amount of the regulatory asset.&nbsp; (PSA &para; 2d) This is a
further potential benefit for ratepayers.&nbsp;&nbsp; We understand
that these generator refunds or offsets are not "headroom" under
the settlement and will be applied solely to reduce the regulatory
asset.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This
further feature of the design of the regulatory asset is also in
the public interest with the following clarification.&nbsp; At the
time that there no longer is any outstanding balance for the
regulatory asset (e.g., after the nine-year amortization or earlier
if it is replaced with a dedicated rate component), the Commission
will determine how PG&amp;E shall refund or credit to the benefit
of its ratepayers any further refunds, claim offsets or other
credits from generators and other energy suppliers (e.g., El Paso
Natural Gas Company) to the extent that PG&amp;E subsequently
receives or realizes these refunds, claim offsets or other credits
or has not otherwise&nbsp; credited them against the regulatory
asset.&nbsp;</font></p>

<p><a name="_Toc59591912"></a><a name=
"headroom_second"></a><b><font size="3" face=
"Times New Roman">2.&nbsp;&nbsp;Headroom</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA&rsquo;s definition of headroom is:</font></p>

<blockquote>

<p><font size="3" face="Times New Roman">&ldquo;PG&amp;E&rsquo;s
total net after-tax income reported under Generally Accepted
Accounting Principles, less earnings from operations, plus
after-tax amounts accrued for bankruptcy-related administration and
bankruptcy &ndash; related interest costs, all multiplied by 1.67,
provided that the calculation will reflect the outcome of
PG&amp;E&rsquo;s 2003 general rate case (A.02-09-005 and
A.02-11-067).&rdquo;</font></p>

</blockquote>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Commission&rsquo;s definition of headroom is found in <u>Re
Proposed Policies, etc.,</u> (1996) D.96-12-076, 70 CPUC 2d
207:</font></p>

<blockquote>

<p><font size="3" face="Times New Roman">&ldquo;Freezing rates
stabilizes collected revenues (subject to sales variation), and
declining costs create &ldquo;headroom,&rdquo; i.e., revenues
beyond those required to provide service, that can be applied to
offset transition costs.&nbsp; The utilities&rsquo; reasonable
costs of providing service are currently identified as their
authorized revenue requirements.&nbsp; (70 CPUC 2d at
219.)</font></p>

<p><font size="3" face="Times New Roman">&ldquo;In general,
headroom revenues consist of the difference between recovered
revenues at the frozen rate levels (including the reduced rate
levels for residential and small commercial customers beginning in
1998) and the reasonable costs of providing utility services, which
for convenience we refer to as the authorized revenue
requirement.&rdquo;&nbsp; (70 CPUC 2d at 223.)</font></p>

</blockquote>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Clearly,
the PSA definition is not the same as the Commission&rsquo;s
definition.&nbsp; Nevertheless, the Commission will adopt the
definition in the PSA with the clarification that this definition
is not intended to and does not affect DWR&rsquo;s rights under
Assembly Bill (AB) 1X or the Rate Agreement, including DWR&rsquo;s
property rights to all revenue collected and remitted&nbsp; by
PG&amp;E&nbsp; for DWR&rsquo;s Power Charges and Bond Charges in
accordance with Commission orders.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
addition, we further clarify that for purposes of calculating the
headroom for 2003 (including the amount beyond the $875 million
cap) , in no event may the&nbsp; litigation costs,
bankruptcy-related costs or any other costs of PG&amp;E Corporation
or of any other PG&amp;E affiliate be included in the determination
of the headroom amount nor may any retention bonuses of
PG&amp;E&rsquo;s directors, officers, managers or any other
employees be included in such a determination.&nbsp; When PG&amp;E
submits its filing to the Commission to implement the MSA, PG&amp;E
must demonstrate to the satisfaction of the Commission that
PG&amp;E has fairly and accurately accounted for the headroom,
including compliance with these clarifications.&nbsp; Any headroom
revenues in 2003, which the Commission determines are in excess of
the $875 million cap for 2003 must be credited to PG&amp;E&rsquo;s
ratepayers.&nbsp; Rather than attempt here to resolve potential
disputes about headroom calculations, as ORA suggests, the
Commission can address the disputes, if any, at the time of
PG&amp;E&rsquo;s filing with the Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
MSA contemplates the use of headroom collected from ratepayers
through December 31, 2003 to be used to facilitate the financing of
the plan.&nbsp; The MSA also contemplates that retail rates will be
reduced on January 1, 2004, eliminating the collection of
additional headroom.&nbsp; To the extent that rates are not reduced
on January 1, 2004, and that additional headroom is collected from
ratepayers on and after that date, such headroom shall be refunded
to ratepayers under a method to be determined later by the
Commission.&nbsp;</font></p>

<p><a name="_Toc59591913"></a><a name=
"dividends_second"></a><b><font size="3" face=
"Times New Roman">Dividends</font></b></p>

<blockquote>

<p><b><font size="3" face=
"Times New Roman">6.&nbsp;&nbsp;&nbsp;&nbsp;<u>Dividend Payments
and Stock Repurchases.</u></font></b>&nbsp; The Parties acknowledge
that, for the Parent, as PG&amp;E&rsquo;s shareholder, to receive
the benefit of this Agreement, both PG&amp;E and its Parent must be
able to pay dividends and repurchase common stock when
appropriate.&nbsp; Accordingly, the Parties agree that, other than
the capital structure and stand-alone dividend conditions contained
in the PG&amp;E holding company decisions (D.96-11-017 and
D.99-04-068), the Commission shall not restrict the ability of the
boards of directors of either PG&amp;E or PG&amp;E Corporation to
declare and pay dividends or repurchase common stock.</p>

</blockquote>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
discussed above, this paragraph is not in the public interest and
is stricken.&nbsp; It says the Commission &ldquo;shall not
restrict&rdquo; PG&amp;E from paying dividends or repurchasing
common stock.&nbsp; There are numerous possibilities during the
next nine years as to reasons why parties could challenge the
reasonableness of PG&amp;E's dividend practices or PG&amp;E's
rates.&nbsp; For example, it is possible that during the next nine
years, PG&amp;E may engage in unreasonable and imprudent
conduct.&nbsp; Depending upon the size of the disallowance of
costs, this could limit PG&amp;E's ability to collect revenues from
its ratepayers that would be necessary for dividend payments.&nbsp;
PG&amp;E also may be financially unable to perform all of its
public service obligations under section 761 of the Public
Utilities Code if it paid unreasonably high dividends.&nbsp; Under
either of these examples, Paragraph 6 of the PSA could restrict the
Commission from ruling against PG&amp;E concerning any allegations
of unreasonable dividend practices.&nbsp; There are many other
possibilities where this issue could arise during the nine
years.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Paragraph
6 is not reasonable and is not in the public interest, because it
is unreasonable to expect the Commission to agree blindly (i.e,
without knowing all future circumstances) to preclude future
Commissions from deciding potential issues, if any.&nbsp; We do not
have a record in this proceeding to support whether future dividend
practices or stock repurchasing practices are reasonable or
unreasonable.&nbsp; Further, the Commission cannot know at this
time if, in the future, parties will raise issues relating to the
reasonableness of PG&amp;E's dividend practices or PG&amp;E's
rates, or the prudency or legality of PG&amp;E&rsquo;s conduct
which could limit PG&amp;E&rsquo;s ability to collect revenues
necessary for dividends.&nbsp; We cannot know if due to its
dividend practices in the future, PG&amp;E were to have
insufficient funds to perform its public service obligations.&nbsp;
It is therefore unreasonable and not in the public interest to have
a provision in the PSA for the Commission to effectively decide
these future hypothetical issues in PG&amp;E&rsquo;s favor without
any record to support it.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
discussed above, under traditional cost-of-service ratemaking,
PG&amp;E should be able to provide dividends or repurchase common
stock. PG&amp;E and SCE lost their creditworthiness and stopped
paying dividends during the energy crisis due to skyrocketing
wholesale procurement costs and the uncertainty caused by AB
1890&rsquo;s deviation from cost-of-service ratemaking.&nbsp;
However, as the California Supreme Court explained in <i>Southern
California Edison Co. v. Peevey</i>, <i>supra</i>, 31
Cal.4<sup>th</sup> at 795, the passage of AB 6X in January 2001
&ldquo;allowed PUC to regulate the rates for power so generated
pursuant to ordinary &lsquo;cost-of-service&rsquo;
ratemaking.&nbsp; PUC was thus authorized to permit SCE such
recovery of past costs as necessary to render the utility
financially viable and to ensure SCE would be able to continue
serving its customers through electricity generated in its retained
plants.&rdquo;&nbsp; The Court contrasted the &ldquo;competitive
price-reduction approach&rdquo; of AB 1890 with the cost-of-service
rate regulation restored by AB 6X, which reemphasized the
Commission&rsquo;s &ldquo;duty and authority to guarantee that the
electric utilities would have the capacity and financial viability
to provide power to California consumers.&rdquo;&nbsp; <i>Id</i>.
at 793.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Therefore,
we have every reason to believe that in all likelihood, under our
cost-of-service ratemaking authority, PG&amp;E will be able to
declare and pay dividends and maintain investment grade credit
ratings.&nbsp; That being said, we cannot predict the future, and
we find it unreasonable for a settlement provision to preclude the
Commission from deciding in the future whether or not
PG&amp;E&rsquo;s dividend or common stock repurchase practices are
reasonable.</font></p>

<p><a name="_Toc59591914"></a><a name="credit_rating"></a><b><font
size="3" face="Times New Roman">4. &nbsp;&nbsp;Credit
Rating</font></b></p>

<blockquote>

<p><font size="3" face="Times New Roman">PSA paragraph 2g.
states:</font></p>

<p><b><font size="3" face=
"Times New Roman">g.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></b>
The Commission recognizes that the establishment, maintenance and
improvement of Investment Grade Company Credit Ratings is vital for
PG&amp;E to be able to continue to provide safe and reliable
service to its customers.&nbsp; The Commission further recognizes
that the establishment, maintenance and improvement of
PG&amp;E&rsquo;s Investment Grade Company Credit Ratings directly
benefits PG&amp;E&rsquo;s ratepayers by reducing PG&amp;E&rsquo;s
immediate and future borrowing costs, which, in turn, will allow
PG&amp;E to finance its operations and make capital expenditures on
its distribution, transmission, and generation assets at a lower
cost to its ratepayers.&nbsp; In furtherance of these objectives,
the Commission agrees to act to facilitate and maintain Investment
Grade Company Credit Ratings for PG&amp;E.</p>

</blockquote>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
discussed above, we do not find any reason to modify this
provision, and we agree that it is in the public interest for
PG&amp;E to achieve and maintain an investment grade credit
rating.&nbsp; Therefore, the Commission will act to facilitate and
maintain such an investment grade credit rating for PG&amp;E, which
is part of the Commission's task in setting rates that are just and
reasonable.&nbsp; Quoting <i>FPC v.&nbsp; Hope Natural Gas Co.,
supra,</i> 320 U.S. at 603, the California Supreme Court in <i>20th
Century Insurance Company v. Garamendi</i> (1994) 8
Cal.4<sup>th</sup> 216, 294 stated that the regulated entity has a
legitimate concern that "there be enough revenue not only for
operating expenses but also for the capital costs of the
business.&nbsp; These include service on the debt and dividends on
the stock&hellip;[The return on equity] should be sufficient to
assure confidence in the financial integrity of the enterprise, so
as to maintain its credit and to attract capital."</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consequently,
the Commission is already obligated in setting just and reasonable
rates to authorize a sufficient return on equity for the utility to
maintain its creditworthiness.&nbsp; To commit to act to maintain
PG&amp;E's creditworthiness, as provided in this paragraph 2.g., is
consistent with the law.&nbsp; However, as discussed above, we feel
compelled to clarify that the Commission&rsquo;s commitment does
not require the Commission to guarantee such creditworthiness when
there are factors threatening PG&amp;E's investment grade credit
rating besides the Commission's actions.&nbsp; We may authorize a
sufficient return on equity, but imprudence or unreasonable conduct
by PG&amp;E may be the cause of PG&amp;E not maintaining its
creditworthiness.&nbsp; External forces in the marketplace may
threaten PG&amp;E's creditworthiness.&nbsp; Therefore, we must
clarify that this paragraph does not mean that the ratepayers will
always have to pay higher rates to guarantee PG&amp;E's investment
grade credit rating.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indeed,
we interpret this paragraph in this way, because we must also
balance the consumers&rsquo; interests in setting just and
reasonable rates.<i>&nbsp; 20th Century Insurance Company v.
Garamendi, supra,</i> 8 Cal.4<sup>th</sup> at 294.&nbsp; For
example, we must take into account the imprudence or unreasonable
costs of a utility when we set rates.<i>&nbsp; See City and County
of San Francisco v. PUC</i> (1971) 6 Cal.3d 119, 129.&nbsp; If
PG&amp;E's own imprudence were to result in a disallowance that
threatened PG&amp;E's investment grade credit rating, it is
PG&amp;E's actions that would be responsible for this threat.&nbsp;
Therefore, we do not interpret this paragraph to require the
Commission to pass along imprudently incurred costs to the
ratepayers.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
discussed above, however, we do not foresee this being a realistic
problem in light of the decades in which PG&amp;E and the other
California utilities have had outstanding credit ratings, even when
the Commission has on occasion disallowed imprudently incurred
costs.</font></p>

<p><a name="_Toc53556764"></a><a name="_Toc53561767"></a><a name=
"_Toc53562868"></a><a name="_Toc53563345"></a><a name=
"_Toc59591915"></a><a name="assignability_dwr_second"></a><b><font
size="3" face="Times New Roman">5.&nbsp;&nbsp;Assignability of DWR
Contracts</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section
7 of the PSA provides for PG&amp;E&rsquo;s agreement to the
assignment and legal and financial responsibility for the DWR
Contracts, subject to certain conditions precedent, as discussed
earlier.&nbsp; Staff Witness Clanon testified that PG&amp;E is
currently dispatching most of these contracts and that it made
sense from a policy perspective to put financial responsibility in
with operational responsibility.&nbsp; Inasmuch as DWR&rsquo;s
presence in the electricity power procurement business was an
emergency measure, he further testified that such assignment was
consistent with the Commission&rsquo;s policy of getting DWR out of
the business as quickly as possible.&nbsp; (RT: 424: 2-19)&nbsp; We
conclude that it is in the public interest for DWR to get out of
the business as quickly as possible, consistent with the conditions
for assignment set forth in this provision.&nbsp;</font></p>

<p><a name="_Toc59591916"></a><a name="env_matters"></a><b><font
size="3" face="Times New Roman">6.&nbsp;&nbsp;Environmental
Matters</font></b></p>

<h4><a name="_Toc46916209"></a><a name="_Toc53556765"></a><a name=
"_Toc53561768"></a><a name="_Toc53562869"></a><a name=
"_Toc53563346"></a><a name="_Toc59591917"></a><a name=
"lcc"></a><b><font size="3" face="Times New Roman">The Land
Conservation Commitment(LLC)</font></b></h4>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
PSA provides a substantially increased opportunity for
environmentally beneficial use and access by the public to 140,000
acres of land associated with PG&amp;E&rsquo;s hydroelectric
facilities (PSA &para; 17), without compromising the ability of
PG&amp;E to generate electricity from those facilities.&nbsp; In
1999 PG&amp;E proposed to sell these lands to the highest
bidder.&nbsp; The PSA would remove forever that possibility, and
replace the spectre of loss of public control with the promise of
perpetual public access.&nbsp; The PSA&rsquo;s provisions for
PG&amp;E&rsquo;s either donating theland or granting conservation
easements go much further than simply maintaining the status quo
&ndash; the people of California can look to a partnership of the
environmental community, state and local governments, and
environmental stewardship organizations to preserve the lands and
improve public access where desirable.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
proposed corporation and its governing board established in the PSA
will ensure that PG&amp;E complies with the requirement to donate
the lands or grant conservation easements and will provide
significant public (and Commission) oversight and participation
into improvements made to the lands and the lands&rsquo; ultimate
disposition.&nbsp; Membership of the governing board would include
representatives from PG&amp;E, the Commission, the California
Department of Fish and Game, the State Water Resources Control
Board, the California Farm Bureau Federation, and three public
members to be named by the Commission, plus others.&nbsp; This
board should play an historic role in the protection of
California&rsquo;s environment.&nbsp; The PSA expressly provides
that enhancements to the lands not interfere with PG&amp;E&rsquo;s
hydroelectric operations, maintenance, or capital
improvements.&nbsp; Funding is provided by $70 million to be paid
over ten years, to be recovered in retail rates.</font></p>

<p><a name="_Toc59591918"></a><a name=
"stewardship_council"></a><b><font size="3" face=
"Times New Roman">(a)&nbsp;&nbsp;The Stewardship
Council</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Fourteen
parties served testimony regarding the land conservation commitment
taking a diversity of positions and making numerous suggestions for
improvement.&nbsp; Consequently, the presiding Administrative Law
Judge (ALJ) encouraged the parties to resolve their differences
through a stipulation.&nbsp; The ALJ waived the notice requirements
of Rule 51 (Stipulations).</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
September 25, 2003, Association of California Water Agencies,
California Farm Bureau Federation, California Hydropower Reform
Coalition, California Resources Agency, ORA, Regional Council of
Rural Counties, State Water Resources Control Board, Tuolumne
Utility District, U.S. Department of Agriculture-Forest Service,
which are parties, and non-parties California Forestry Association,
California Wilderness Coalition, Central Valley Regional Water
Control Board, Mountain Meadows Conservancy, Natural Resources
Defense Council, Northern California Council Federation of Fly
Fishers, The Pacific Forest Trust, Inc., Planning and Conservation
League, Sierra Club California, Sierra Foothills Audobon Society,
Sierra Nevada Alliance, Trust for Public Land and U.S. Department
of Interior-Bureau of Land Management presented to the Commission a
&ldquo;Stipulation Resolving Issues Regarding The Land Conservation
Commitment&rdquo; (the Land Conservation Commitment Stipulation
(Ex. 181)), that implements Paragraph 17 and Appendix E of the
Settlement Agreement and constitutes an enforceable contract among
those parties.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Several
parties had indicated that the governing board of the Stewardship
Council,<sup>44</sup> as proposed in the PSA, would be more
effective and representative if it was expanded to include the
fuller array of interests and expertise of the public agencies,
local government and trade associations, environmental
organizations, and ratepayer organizations who have worked on the
watershed land protection issue.&nbsp; The stipulation provides
that, after its formation, the by-laws will be amended to provide
that, in addition to the five members provided for in the PSA, the
governing board will include one representative each from the
California Resources Agency, the Central Valley Regional Water
Quality Control Board, Association of California Water Agencies,
Regional Council of Rural Counties, California Hydropower Reform
Coalition, The Trust for Public Land, ORA, and California Forestry
Association.&nbsp; (Ex.&nbsp;181&nbsp;&para;&nbsp;10(a).)&nbsp; In
addition, the U.S. Department of Agriculture-Forest Service and
U.S. Department of Interior-Bureau of Land Management will together
designate a federal liaison who will participate in an advisory and
non-voting capacity.&nbsp; The Commission will name three
additional board members to further provide for public
representation.&nbsp; This board ensures that all of the key
constituencies are represented in the development and
implementation of the land conservation plan.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
stipulation provides that decisions of the governing board will be
made by consensus, that meetings will be public, and that there is
a dispute resolution process.&nbsp; The stipulation delineates a
planning and assessment process that will examine all of the
subject lands in the context of their watershed and county.&nbsp;
For each parcel, the plan will assess its current natural resource
condition and uses, state its conservation and/or enhancement
objectives, whether the parcel should be donated in fee or be
subject to a conservation easement, or both, that the intended
donee has the capability to maintain the property interest so as to
preserve or enhance the beneficial public values, that the donation
will not adversely impact local tax revenue, assurance that known
contamination be disclosed, appropriate consideration of whether to
split the parcel, a strategy to undertake appropriate physical
measures to enhance the beneficial public values, a plan to monitor
the impacts of disposition and implementation of the plan, and an
implementation schedule.&nbsp; Consistent with Appendix E to the
PSA, the plan may also consider whether land &ldquo;without
significant public interest value&rdquo; should be sold to private
entities with few or no restrictions.&nbsp; The stipulation does
not alter &sect;&nbsp;851 authority.&nbsp; Any proposed disposition
will be presented to the Commission for public notice, hearing, and
approval.&nbsp; The stipulation is expected to enhance the existing
environmental and economic benefits of the Watershed Lands and
Carizzo Plains on an overall basis.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
agree that the LCC as supplemented by the LCC stipulation will
provide ratepayers with substantial benefits and is in the public
interest.&nbsp; PG&amp;E will undertake a study of all of these
lands to determine current public values, and to recommend
strategies and measures to preserve and enhance such values in
perpetuity.&nbsp; PG&amp;E will then implement such strategies and
measures within six months after final receipt of all required
government approvals no longer subject to appeal.&nbsp; The
planning process, including surveys and inspections of
140,000&nbsp;acres, will likely cost $20 million or less (Ex. 127a,
pp. 4-5, CHRC/Sutton), and thus the balance of the $70 million will
be available to implement physical measures, such as planting of
trees to enhance fish and wildlife habitat and water quality,
construction or improvement of recreational access, and protection
of Tribal or other historical sites.&nbsp; The LCC limits the
discretion of PG&amp;E to take inconsistent action in future
proceedings.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
State Water Resources Control Board argues that the term
&ldquo;beneficial public values,&rdquo; as used in Appendix C of
the PSA, be modified to state that any agricultural, sustainable
forestry and outdoor recreation uses on transferred lands
&ldquo;must be environmentally sensitive.&rdquo;&nbsp; (SWRCB Op.
Br. at 6.)&nbsp; PG&amp;E opposes this modification, it argues that
the term &ldquo;environmentally sensitive&rdquo; is hopelessly
vague and, rather than clarifying the land conservation commitment,
would only result in more confusion and debate.&nbsp; It asserts
that the language in Appendix E has been crafted to give the
Stewardship Council direction and the flexibility to determine how
best to preserve and enhance the beneficial public values of the
lands.&nbsp; The combination of state agency representation on the
governing board with consensus voting, as well as the
Commission&rsquo;s &sect;&nbsp;851 approval process and CEQA
review, will ensure that recreational uses that unduly harm the
environment are not permitted.&nbsp; We agree with PG&amp;E&rsquo;s
reasoning.</font></p>

<p><a name="_Toc59591919"></a><a name=
"env_urban_youth"></a><b><font size="3" face=
"Times New Roman">(b)&nbsp;&nbsp;Environmental Opportunity For
Urban Youth</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Greenlining Institute has asked us to expand the LCC to address the
needs of low-income urban PG&amp;E ratepayers.&nbsp; A majority of
PG&amp;E&rsquo;s ratepayers live in urban areas, not in the Sierra
foothills, where the vast majority of the 140,000 acres are
located.&nbsp; In order to ensure that environmental benefits of a
substantial nature are realized by PG&amp;E&rsquo;s urban
ratepayers, our modified Settlement Agreement will augment the
$70&nbsp;million devoted to environment activities by
$30&nbsp;million.&nbsp; These additional funds shall be expended to
provide a wilderness experience for urban youth, especially
disadvantaged urban youth, and to acquire and maintain urban parks
and recreation areas.&nbsp; We direct that the acquisition of such
parks and recreation areas be focused on creating an environment
that will particularly serve the needs of urban low-income
youth.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Of
the $30&nbsp;million, to be expended in equal installments over
10&nbsp;years, we will expect approximately 1/3 would be used to
provide seed money that would establish a permanent program for
young people who are least likely to enjoy the wonder of
California&rsquo;s natural beauty.&nbsp; This program would allow
disadvantaged, inner city youth to experience the environment in
nature&rsquo;s own setting.&nbsp; The program would select young
citizens in an urban setting, and provide the means to visit these
watershed lands for a week or two.&nbsp; While there, they would be
exposed to living in the outdoors and see how the actions of man
interact with animal and plant life, both favorably and
unfavorably.&nbsp; The 2/3 balance of the $30&nbsp;million would be
used to acquire urban parks and recreation areas for inner city
youth.&nbsp; We will use our three appointments to the Stewardship
Council to champion this $30&nbsp;million allocation, among their
other duties.</font></p>

<p><a name="_Toc46916210"></a><a name="_Toc53556766"></a><a name=
"_Toc53561769"></a><a name="_Toc53562870"></a><a name=
"_Toc53563347"></a><a name="_Toc59591920"></a><a name=
"clean_energy_tech"></a><b><font size="3" face=
"Times New Roman">(c)&nbsp;&nbsp;Clean Energy
TechnologyCommitment</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under
the PSA, PG&amp;E will establish a shareholder-funded non-profit
corporation dedicated to supporting research and investment in
clean energy technologies primarily in PG&amp;E&rsquo;s service
territory. (PSA &para; 18.)&nbsp;&nbsp; The non-profit
corporation&rsquo;s governing board will include
Commission-selected appointees, PG&amp;E-selected appointees, and
appointees jointly selected by the Commission and PG&amp;E.&nbsp;
PG&amp;E proposes an initial endowment of the non-profit
corporation at $15 million over five&nbsp;years (not to be
recovered in rates).&nbsp; We view this commitment as part of the
Commission&rsquo;s, and the State&rsquo;s, ongoing policies
encouraging energy efficiency, demand response, renewable
generation, and the entire range of more environmentally-friendly
options for meeting load growth.&nbsp; However, $15&nbsp;million is
inadequate.&nbsp; We believe an additional $15&nbsp;million (not to
be recovered in rates) will assure adequate planning and
funding.</font></p>

<p><a name="_Toc59591921"></a><a name="turn"></a><b><font size="3"
face="Times New Roman">VII.&nbsp;&nbsp;The TURN Dedicated Rate
Component Proposal</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;TURN
recommends that the Commission approve the PSA modified to
substitute the issuance of $2.03 billion in energy recovery bonds
(ERBs) secured by a dedicated rate component (DRC) in lieu of the
regulatory asset.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;TURN
claims that this alternate financing structure will achieve all of
the goals of the PSA, including restoring PG&amp;E to creditworthy
status, within the overall time frame contemplated by the PSA, at a
cost to ratepayers of $2.8 billion less than the cost of the PSA
(TURN/Florio, Ex. 141).&nbsp; The TURN modification is a
securitization of a future stream of revenues.&nbsp; California
used such securitized financing for the rate reduction bonds (RRBs)
which were issued by PG&amp;E and the other California utilities in
1997 in conjunction with electric restructuring.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;TURN
explains its proposal as follows:&nbsp; In a securitization, steps
are taken to legally separate the underlying assets (here the right
to future cash flows to be collected from the utility&rsquo;s
customers through a DRC) from the originating company.&nbsp; The
assets are sold to a &ldquo;special purpose entity&rdquo; through a
&ldquo;true sale&rdquo; to ensure that the assets would not become
part of the estate of the originating company for bankruptcy
purposes.&nbsp; Thus, PG&amp;E would sell the right to receive the
DRC to a special purpose entity.&nbsp; That entity in turn would
sell a note to a trust.&nbsp; The trust would then issue bonds
secured by the proceeds of the note, which itself would be secured
by the right to the DRC owned by the special purpose
entity.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;TURN
proposes that the ERBs be structured in the same manner as the
AAA-rated RRBs.&nbsp; The ERBs would be paid within nine years, but
with a stated maturity of eleven years.&nbsp; The actual legal
maturity is one to two years beyond the estimated bond redemption
date to cover the risk that energy use deviates from projections at
the time of issuance.&nbsp; A revenue requirement consisting of
principal, interest, servicing fees, and a small
overcollateralization component would be included as a separate
component of utility rates.&nbsp; As was the case for the RRBs, a
true-up mechanism would reduce the tariff if overcollections exceed
5% of projected revenue requirements, while the tariff would be
increased if customer demand is less than projected.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
would receive the proceeds from the sale of the bonds as cash up
front.&nbsp; So long as the transaction is structured so that the
proceeds are considered to be &ldquo;debt&rdquo; under IRS
definitions, taxes are not due on the proceeds of the bonds.&nbsp;
Instead, PG&amp;E would owe taxes over time as service is actually
provided and tariff revenue is received.&nbsp; To account for
taxes, the $1.2 billion which TURN proposes that ratepayers
contribute to PG&amp;E, is grossed-up by $825&nbsp;million.&nbsp;
ERBs would be issued in the amount of $2.03 billion.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
order for ERBs to be freely marketable, they will need a credit
rating from at least one nationally recognized rating agency.&nbsp;
The rating agencies assign a credit rating related to the
likelihood that the issuer will be able to pay full principal and
interest on the rated security in a timely manner in accordance
with the terms of the security.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
tariff revenue requirement recovery mechanism must be irrevocable,
prohibiting the Commission or any other governmental agency from
rescinding, altering, or amending the tariff or transition property
in any way that would reduce or impair its value.&nbsp; The bond
recovery tariff must be nonbypassable by utility customers.&nbsp;
The tariff is usually assessed as a distribution charge applicable
to the monopoly utility service.&nbsp; Therefore, regardless of who
generates the energy delivered to the customer, the tariff charge
will be collected.&nbsp; The transaction must be structured so that
bondholders are protected from interruption or impairment of cash
flow in the event of a utility bankruptcy, usually accomplished by
a &ldquo;true sale&rdquo; to a bankruptcy-remote special purpose
entity, along with other steps to ensure that in a future utility
bankruptcy, the special purpose entity would not be substantively
consolidated with the transferor.&nbsp; Finally, the rating
agencies will assess qualitative factors including the legal and
regulatory framework, political environment, transaction structure,
the utility as servicer of the debt, regional economic factors, and
cash flow.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;TURN
asserts that the Commission has the legal authority to establish
the right of utilities to future revenues, and to establish
transferable rights to such future revenues.&nbsp; The California
Supreme Court very recently noted the broad constitutional and
statutory authority of the Commission and described it as
&ldquo;far-reaching.&rdquo;&nbsp; (<i>Southern California Edison
Co. v. Peevey, supra,</i> 31 Cal.4<sup>th</sup> 781.)&nbsp; The
Court also noted that the Commission&rsquo;s authority &ldquo;has
been liberally construed&rdquo; in past judicial
decisions.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PG&amp;E
counters with the argument that TURN&rsquo;s proposal suffers from
three fundamental flaws:&nbsp; (1) it will not work; (2) even if it
could work, it would delay PG&amp;E&rsquo;s emergence from Chapter
11 to such an extent that the interest-rate risk alone would
swallow the claimed savings; and (3) even if it could work, it
achieves most of its savings by shifting the payment of income
taxes from customers to PG&amp;E in violation of normal ratemaking
principles.&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A
witness for PG&amp;E testified that absent authorizing legislation,
a rating agency could not see a short cut way to create a property
right in future tariff collections that would be irrevocable and
could not be changed by the legislature or other governmental body
unless adequate compensation had been made to safeguard bondholder
rights.&nbsp; Moreover, the structure would have to shield
investors from the potential bankruptcy of the underlying utility
by providing for an absolute transfer (or true sale) of the future
tariff collections away from the utility to a special purpose
vehicle or trust.&nbsp; Finally, the tariff surcharge would have to
be nonbypassable to minimize the potential that future collections
could decline.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
our opinion, the Commission cannot provide the essential elements
of a securitization financing.&nbsp; An essential element of any
rate securitization is the creation of a property right in future
revenues.&nbsp; Future utility rate collections are normally an
expectancy, not amounting to a present property right.&nbsp; For
that expectancy to be turned into a property right, the utility
must provide service to customers.&nbsp; Only when the service is
provided does the utility have a right to payment.&nbsp; In the
case of the RRBs, the Legislature bridged this gap by enacting a
statute that created an enforceable property right in the future
rate collection.&nbsp; (Pub. Util. Code &sect;&nbsp;843(c)
(&ldquo;Transition property shall constitute property for all
purposes, including for contracts securing rate reduction bonds,
whether or not the revenues and proceeds arising with respect
thereto have accrued&rdquo;).)&nbsp; Potential lenders in this
securitization are expected to require legislation to provide
assurance that the bonds will have the protections that TURN
envisions this Commission can provide.&nbsp; Moreover, application
of a DRC will increase the risk of successfully completing a
reorganization.&nbsp; There is no assurance that all parties whose
approval of the transaction is required will be able to reach
agreement.&nbsp; An adverse tax ruling, inadequate legislative
mandate, weak structuring of a bankruptcy-remote financing entity,
or assessment by the ratings agencies that the securitization bonds
be treated as part of the PG&amp;E credit structure are all factors
that could negatively impact the transaction and could place at
risk the achievement of PG&amp;E&rsquo;s emergence from bankruptcy
in a financially sound manner.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
need not analyze all PG&amp;E&rsquo;s points as we are of the
opinion that TURN&rsquo;s proposed securitization financing cannot
be achieved without legislation.&nbsp; TURN&rsquo;s proposal is
that the Commission should reject the regulatory asset in favor of
a securitization financing of a type that has never been done
before without legislation.&nbsp; TURN&rsquo;s own witnesses
acknowledge that every utility securitization financing done to
date has been pursuant to express enabling legislation.&nbsp; (Ex.
143, p. 23, TURN/McDonald.)</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Replacing
the regulatory asset with a dedicated rate component authorized by
appropriate legislation will substantially reduce the cost of the
bankruptcy to ratepayers without impairing the credit of a
reorganized PG&amp;E. While the exact savings ultimately achievable
by a DRC are yet to be determined, we believe they will be not less
than $1 billion over the term of the financing. Such a result would
be a benefit to both the utility and its ratepayers and would
represent an optimal solution to the problem of financing the
repayment of PG&amp;E&rsquo;s properly accrued unreimbursed costs.
Because that solution can only be accomplished through new
legislation, we do not make it a condition of approving the
settlement. However, upon approval by all parties to the settlement
agreement, as modified by this decision, and confirmation of the
modified plan of reorganization by the Bankruptcy Court, the
Commission shall sponsor or co-sponsor urgency legislation to
effectuate replacing the regulatory asset with a dedicated rate
component as specifically agreed to by TURN and PG&amp;E in their
joint reply comments filed December 15, 2003 and discussed more
specifically below. Upon the effectiveness of such legislation
without substantial deviation from the language that was agreed to
by PG&amp;E and TURN, PG&amp;E shall petition this Commission for
expeditious approval of the replacement of the regulatory asset by
a financing structure based on a dedicated rate component as
described herein.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December 15, TURN and PG&amp;E filed joint reply comments on this
alternate urging the Commission to &ldquo;&hellip;make it a
condition precedent to the Commission&rsquo;s executing the
Settlement Agreement that PG&amp;E agree in writing that, after
effectuating the Settlement Plan of Reorganization and exiting from
Chapter 11, PG&amp;E will seek as expeditiously as practical to
refinance up to the full amount of the Regulatory Asset and
associated federal and state income and franchise taxes using a
securitized financing supported by a DRC, provided the following
conditions are met:</font></p>

<table border="0" cellspacing="0" cellpadding="0">
<tr>
<td valign="top">
<ul>
  <li>
    <p>&nbsp;&nbsp;&nbsp;</p>
  </li>
</ul>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">Authorizing legislation
satisfactory to the Commission, TURN and PG&amp;E is passed and
signed into law allowing securitization of up to the full
unamortized amount of the Regulatory Asset and associated federal
and state income and franchise taxes and providing for the
collection in PG&amp;E&rsquo;s rates of any portion of the
associated tax gross-up not securitized.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<ul>
  <li>
    <p>&nbsp;&nbsp;&nbsp;</p>
  </li>
</ul>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">The Commission determines
that, on a net present value basis, the refinancing will save
ratepayers money compared to the Regulatory Asset over the term of
the securitized debt.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<ul type="disc">
<li><font size="3" face="Times New Roman">&nbsp;</font></li>
</ul>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">The refinancing will not
adversely affect PG&amp;E&rsquo;s company and debt credit
ratings.</font></p>
</td>
</tr>

<tr>
<td valign="top"></td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<ul type="disc">
<li><font size="3" face="Times New Roman">&nbsp;</font></li>
</ul>
</td>
<td valign="top">
<p><font size="3" face="Times New Roman">PG&amp;E obtains, or
determines that it does not need, a private letter ruling form the
Internal Revenue Service that neither the refinancing nor the
issuance of securitized bonds is a presently taxable
event.&rdquo;</font></p>
</td>
</tr>
</table>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On
December 16, the assigned ALJ issued a ruling asking parties to
comment on the joint TURN/PG&amp;E comments. Comments to the
TURN/PG&amp;E proposal were filed by Aglet Consumer Alliance
(Aglet); the Official Committee of Unsecured Creditors (OCC);
Merced Irrigation District (Merced); Coalition of California
Utility Employees (CUE); the California Large Energy Consumers
Association (CLECA) and the California Manufacturers &amp;
Technology Association (CMTA); ORA; the Energy Producers and Users
Coalition, California Chamber of Commerce, Western States Petroleum
Association, Silicon Valley Manufacturing Group, California
Retailers Association, the Agricultural Energy Consumers
Association, (Business Coalition); the Peninsula Ratepayers
Association; the City of Palo Alto; and the City and County of San
Francisco (CCSF).&nbsp; The OCC, CUE, CLECA , CMTA and the Business
Coalition filed comments in support of the TURN/PG&amp;E
proposal.&nbsp; Aglet, Merced, ORA and the CCSF filed comments
seeking delay of the proceeding, seeking further opportunity for
parties to respond as well as requesting financial documentation
related to the TURN/PG&amp;E proposal.&nbsp; We believe that the
parties have already had a sufficient opportunity to examine issues
related to the dedicated rate component in this proceeding.&nbsp;
Furthermore, as discussed above, the TURN/PG&amp;E proposal
contemplates a future petition to be filed at this Commission, for
expeditious approval of the replacement of the regulatory asset by
a dedicated rate component and requires a Commission determination
that, on a net present value basis, the refinancing will save
ratepayers money compared to the Regulatory Asset over the term of
the securitized debt.&nbsp; Interested parties will have the
opportunity to participate before the Commission when that petition
is filed.&nbsp; We believe that there has been sufficient
development in the current record to fully support the
Commission&rsquo;s adoption of the TURN/PG&amp;E proposal in this
matter.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;TURN
and PG&amp;E estimate that, based on current interest rates,
refinancing using the DRC can save ratepayers about one billion
dollars (nominal), while still allowing a substantial immediate
rate reduction. We look forward to rapid passage of the necessary
enabling legislation so we can validate this estimate. We have
reviewed the proposed findings of facts, conclusions of law and
ordering paragraphs submitted by TURN and PG&amp;E in support of
their joint accord on the DRC, and we find them to be reasonable.
We incorporate them as revisions to this decision, consistent with
their comments.&nbsp; We attach as Appendix D the authorizing
legislation that is satisfactory to both TURN and PG&amp;E.&nbsp;
At our meeting on January 8, 2004, we will formally request the
introduction of enabling legislation in order to facilitate early
introduction and expedited consideration of the DRC proposal by the
Legislature and the Governor.</font></p>

<p><a name="_Toc59591922"></a><a name="alj"></a><b><font size="3"
face="Times New Roman">VIII.&nbsp;&nbsp;Rulings Of The
Administrative Law Judge (ALJ)</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
request of CCSF for official notice of various documents filed with
the Bankruptcy Court is granted to the extent set forth in this
decision.&nbsp; (See footnotes 2 and 27.)&nbsp; The request of CCSF
for official notice of San Francisco Superior Court Case No. CGC
02-404453, is denied.&nbsp; The petition of CCSF to set aside
submission is denied.&nbsp; The rulings of the ALJ regarding
admissibility of evidence, status as an intervenor, and status
regarding intervenor compensation, are affirmed, except that the
testimony of Peninsula Ratepayers&rsquo; Association is admitted
and Peninsula Ratepayers&rsquo; Association is authorized to seek
intervenor compensation.</font></p>

<p><a name="_Toc59591923"></a><a name="comments"></a><b><font size=
"3" face="Times New Roman">IX.&nbsp;&nbsp;Comments on the
Decision</font></b></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
draft decision of the Commission was mailed to the parties in
accordance with Article 19 of the Commission&rsquo;s Rules of
Practice and Procedure.&nbsp; Numerous parties filed Comments and
Reply Comments to the draft Decision as well as Reply Comments to
the TURN/PG&amp;E December 15, 2003 proposal.&nbsp; We have
considered the parties&rsquo; views in light of the requirement
that comments must focus on factual, legal, or technical errors in
the draft decision, and that comments merely rearguing parties
positions will be accorded no weight (Rule 77.3 of the
Commission&rsquo;s Rules of Practice and
Procedures).&nbsp;</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consistent
with Rule 77.3, and based on the current state of the record, we
have made various changes to the draft decision.&nbsp; These
revisions range from the correction for minor typographical errors
to more detailed revisions that change outcomes, as described in
body of the decision.</font></p>

<p><a name="_Toc59591924"></a><a name=
"assignment_proceeding"></a><b><font size="3" face=
"Times New Roman">X.&nbsp;&nbsp;Assignment of
Proceeding</font></b></p>

<p><font size="3" face="Times New Roman">Commissioner Michael R.
Peevey is the Assigned Commissioner and Robert Barnett is the
assigned ALJ in this proceeding.</font></p>

<p><a name="_Toc370798913"></a><a name="_Toc59591925"></a><a name=
"findings_fact"></a><b><font size="3" face=
"Times New Roman">Findings of Fact</font></b></p>

<p><font size="3" face="Times New Roman">1.&nbsp;&nbsp;The PSA is
not in the public interest and must be modified.</font></p>

<p><font size="3" face="Times New Roman">2.&nbsp;&nbsp;On November
8, 2000, PG&amp;E filed suit in the U.S. District Court for the
Northern District of California against the five commissioners in
their official capacity (the &ldquo;Rate Recovery
Litigation&rdquo;).&nbsp; PG&amp;E&rsquo;s complaint alleged that
the Commission violated federal law by not allowing PG&amp;E to
collect in rates its costs of procuring wholesale energy.&nbsp; The
Commission denied PG&amp;E&rsquo;s allegations.</font></p>

<p><font size="3" face="Times New Roman">3.&nbsp;&nbsp;On April 6,
2001, PG&amp;E filed for protection under Chapter 11 of the U.S.
Bankruptcy Code, and has been operating under Bankruptcy Court
supervision and protection since that date.</font></p>

<p><font size="3" face="Times New Roman">4.&nbsp;&nbsp;On September
20, 2001, PG&amp;E and PG&amp;E Corporation, as co-proponents,
proposed a plan of reorganization for PG&amp;E in its Chapter 11
proceeding.&nbsp; That plan provided for the disaggregation of
PG&amp;E&rsquo;s historic businesses into four companies, three of
which would be regulated by the FERC rather than this Commission,
as a means of raising the money necessary to pay all valid creditor
claims in full and exit Chapter 11.</font></p>

<p><font size="3" face="Times New Roman">5.&nbsp;&nbsp;On August
30, 2002, the Commission and the Official Creditors Committee filed
a joint amended plan of reorganization for PG&amp;E.</font></p>

<p><font size="3" face="Times New Roman">6.&nbsp;&nbsp;PG&amp;E and
the Commission have vigorously opposed and litigated against the
plans proposed by each other.</font></p>

<p><font size="3" face="Times New Roman">7.&nbsp;&nbsp;Bankruptcy
confirmation hearings on the competing plans of reorganization
started on November 18, 2002, and were ongoing on March 11, 2003,
when the Bankruptcy Court entered an order staying further
confirmation and related proceedings for sixty days to facilitate a
mandatory settlement process under the supervision of Bankruptcy
Court Judge Randall Newsome.&nbsp; The stay was later extended to
June 20, 2003.&nbsp;</font></p>

<p><font size="3" face="Times New Roman">8.&nbsp;&nbsp;PG&amp;E is
not authorized to reimburse PG&amp;E Corporation or any other unit
of PG&amp;E for professional fees and expenses in connection with
the Chapter 11 case, nor is PG&amp;E authorized to charge
ratepayers directly or indirectly for these costs.</font></p>

<p><font size="3" face="Times New Roman">9.&nbsp;&nbsp;On July 25,
2002 in PG&amp;E&rsquo;s federal district court case against the
Commission, U.S. District Judge Vaughan&nbsp;Walker denied the
Commission&rsquo;s motion to dismiss and denied PG&amp;E&rsquo;s
and the Commission&rsquo;s motions for summary judgment.&nbsp; In
the course of his ruling denying the motions, Judge Walker held
that the federal filed rate doctrine applies to purchases of energy
at market based rates, but he found that there were numerous
factual disputes and he set the matter for trial.&nbsp; The federal
district court case has been stayed by the US Court of Appeals for
the Ninth Circuit pending the appeal by the Commission of the
District Court&rsquo;s denial of a motion to dismiss.</font></p>

<p><font size="3" face="Times New Roman">10.&nbsp;&nbsp;In the
PG&amp;E&rsquo;s federal district court case and other proceedings,
PG&amp;E claims to be entitled to recover from ratepayers $11.8
billion of unrecovered costs of utility service.&nbsp; The
Commission disputes this claim.</font></p>

<p><font size="3" face="Times New Roman">10.&nbsp;&nbsp;PG&amp;E
also claims to be entitled to retain $2.5 billion in wholesale
power generation revenues collected from retail ratepayers for
September 2000 through January 2001.&nbsp; The Commission disputes
these claims.</font></p>

<p><font size="3" face="Times New Roman">11.&nbsp;&nbsp;In the
ATCP, ORA claims that $434 million of costs of procuring power
through the California Power Exchange should be disallowed as
imprudently incurred.&nbsp; PG&amp;E disputes ORA&rsquo;s
claim.</font></p>

<p><font size="3" face="Times New Roman">12.&nbsp;&nbsp;On June 19,
2003, certain of the Commission&rsquo;s staff and PG&amp;E
announced that they had reached agreement on a proposed settlement
that would resolve the competing plans of reorganization in the
Bankruptcy Court, PG&amp;E&rsquo;s case against the Commission in
the U.S. District Court, and various pending Commission
proceedings, all as set forth in the PSA.</font></p>

<p><font size="3" face="Times New Roman">13.&nbsp;&nbsp;There are
substantial litigation risks to PG&amp;E, the Commission, and ORA,
and corresponding risks to ratepayers, in going to hearings on all
issues and it is reasonable to approve a settlement that
appropriately balances those risks.</font></p>

<p><font size="3" face="Times New Roman">14.&nbsp;&nbsp;PG&amp;E
has asserted claims, which total approximately $11.8&nbsp;billion,
and the ratepayer costs of the settlement ($7.2 billion), are about
60% of those claims.&nbsp; In addition there are direct, positive
benefits ratepayers will obtain.&nbsp; Those benefits include
immediate rate reductions; the ability of the Commission to
regulate PG&amp;E on an integrated, cost-of-service basis; and
environmental betterments.&nbsp; The ratepayer dollar settlement is
fair and reasonable when compared to the claims PG&amp;E would
waive and release.</font></p>

<p><font size="3" face="Times New Roman">15.&nbsp;&nbsp;It is in
the public interest that PG&amp;E emerge from bankruptcy
promptly.</font></p>

<p><font size="3" face="Times New Roman">16.&nbsp;&nbsp;To emerge
from bankruptcy PG&amp;E should pay its creditors.&nbsp; All
allowed claims should be paid in full.&nbsp; PG&amp;E Corp.
litigation costs should not be paid by ratepayers.&nbsp; The dollar
amount of the modified settlement is a reasonable compromise of the
differences between PG&amp;E and the Commission.&nbsp; The headroom
revenue is part of the total revenue package which we find
reasonable and in the public interest.</font></p>

<p><font size="3" face="Times New Roman">17.&nbsp;&nbsp;If this MSA
is implemented, the initial revenue reduction in 2004 is projected
to be approximately $670&nbsp;million.</font></p>

<p><font size="3" face="Times New Roman">18.&nbsp;&nbsp;Paragraph 6
of the PSA is unreasonable and not in the public interest, because
it requires the Commission not to restrict PG&amp;E from paying
dividends or repurchasing common stock, regardless of the
circumstances, evidence or merit of any challenges to PG&amp;E's
dividend practices.&nbsp;</font></p>

<p><font size="3" face="Times New Roman">19.&nbsp;&nbsp;The
presence and involvement of Commission staff in negotiating the PSA
was adequate.&nbsp; The motives, independence, and professional
competence of the governmental representatives in the negotiations
are beyond dispute.&nbsp; The ratepayers had adequate
representation in the settlement process.</font></p>

<p><font size="3" face="Times New Roman">20.&nbsp;&nbsp;The MSA
will result in a feasible plan to permit PG&amp;E to emerge from
bankruptcy.</font></p>

<p><font size="3" face="Times New Roman">21.&nbsp;&nbsp;The MSA is
fair, just and reasonable and in the public interest.&nbsp; First,
it adopts the regulatory asset and the cash allowances of the PSA,
and therefore will pay creditors in full, improving
PG&amp;E&rsquo;s credit metrics.&nbsp; Second, the MSA calls for
the amortization of the regulatory asset &ldquo;mortgage
style&rdquo; over nine years.&nbsp; Third, it offers the State
significant environmental benefits.&nbsp; Fourth, it provides for
reduction of the regulatory asset by any refunds obtained from
energy suppliers.&nbsp; Finally, it contains PG&amp;E&rsquo;s
commitment not to unilaterally disaggregate for the life of the
plan.</font></p>

<p><font size="3" face="Times New Roman">22.&nbsp;&nbsp;On
September 9, 2003, the ALJ encouraged the parties to resolve their
differences with respect to the Land Conservation Commitment in
Paragraph 17 and Appendix E to the PSA.&nbsp;</font></p>

<p><font size="3" face="Times New Roman">23.&nbsp;&nbsp;On
September 25, 2003, PG&amp;E, California Resources Agency, ORA,
Association of California Water Agencies, California Farm Bureau
Federation, California Hydropower Reform Coalition, Regional
Council of Rural Counties, State Water Resources Control Board,
Tuolumne Utility District, U.S. Department of Agriculture-Forest
Service and non-parties California Forestry Association, California
Wilderness Coalition, Central Valley Regional Water Control Board,
Mountain Meadows Conservancy, Natural Resources Defense Council,
Northern California Council Federation of Fly Fishers, The Pacific
Forest Trust, Inc., Planning and Conservation League, Sierra Club
California, Sierra Foothills Audobon Society, Sierra Nevada
Alliance, Trust for Public Land and U.S. Department of
Interior-Bureau of Land Management presented to the Commission a
Stipulation Resolving Issues Regarding The Land Conservation
Commitment (the &ldquo;Land Commitment Stipulation&rdquo;) that
implements Paragraph&nbsp;17 and Appendix E of the PSA and
constitutes an enforceable contract among those parties.</font></p>

<p><font size="3" face="Times New Roman">24.&nbsp;&nbsp;The Land
Conservation Commitment Stipulation is reasonable in light of the
whole record, consistent with law, and in the public
interest.</font></p>

<p><font size="3" face="Times New Roman">25.&nbsp;&nbsp;Under the
LCC, no lands will be transferred or encumbered unless PG&amp;E
first applies for and obtains approval from the Commission pursuant
to &sect;&nbsp;851.</font></p>

<p><font size="3" face="Times New Roman">26.&nbsp;&nbsp;It is in
the public interest for PG&amp;E to provide $30 million for
environmental enhancements benefiting ratepayers in its urban areas
in addition to the $70 million of environmental enhancements, which
PG&amp;E has provided in the PSA (&para; 17) for rural
areas.</font></p>

<p><font size="3" face="Times New Roman">27.&nbsp;&nbsp;It is in
the public interest for PG&amp;E to provide $30 million for clean
energy technology.</font></p>

<p><font size="3" face=
"Times New Roman">28.&nbsp;&nbsp;TURN&rsquo;s proposal to use a
securitized financing supported by a dedicated rate component
cannot feasibly be done without express enabling legislation.&nbsp;
To wait for legislation would entail unreasonable delay in
resolving PG&amp;E&rsquo;s Chapter 11 proceeding.&nbsp; Most of the
savings claimed by TURN result from requiring PG&amp;E to pay the
taxes due on collections from ratepayers in violation of normal
ratemaking principles.</font></p>

<p><font size="3" face="Times New Roman">29.&nbsp;&nbsp;A properly
constructed securitized financing, if authorized by legislation
that complies with normal ratemaking principles regarding taxation,
has the potential to save ratepayers money over the longer
term.</font></p>

<p><font size="3" face="Times New Roman">30.&nbsp;&nbsp;It is a
condition precedent to the Commission&rsquo;s executing the MSA
that PG&amp;E agree in writing, that, after effectuating the
Settlement Plan of Reorganization and exiting from Chapter 11,
PG&amp;E will seek as expeditiously as practical to refinance the
unamortized portion of the Regulatory Asset and associated federal
and state income and franchise taxes using a securitized financing
supported by a dedicated rate component, provided the following
conditions are met:&nbsp; (a) authorizing legislation satisfactory
to the Commission, TURN and PG&amp;E is passed and signed into law
allowing securitization of up to the full unamortized amount of the
Regulatory Asset and associated federal and state income and
franchise taxes, and providing for the collection in
PG&amp;E&rsquo;s rates of any portion of the associated tax
gross-up not securitized; (b) the Commission determines that, on a
net present value basis, the refinancing will save ratepayers money
compared to the Regulatory Asset over the term of the securitized
debt; (c) the refinancing will not adversely affect
PG&amp;E&rsquo;s company and debt credit ratings; and (d) PG&amp;E
obtains, or determines it does not need, a private letter ruling
from the Internal Revenue Service that neither the refinancing nor
the issuance of the securitized bonds is a presently taxable
event.&nbsp; PG&amp;E may accomplish the securitization in up to
two tranches up to one year apart, and should issue sufficient
callable or short-term debt as part of its Chapter 11 exit
financing to accommodate the refinancing using a dedicated rate
component.&nbsp; The cost of the callable or short-term debt will
be recovered in rates in accordance with paragraph 13f of the
MSA.&nbsp; The provisions of paragraph 13d will not apply to the
refinancing.&nbsp; PG&amp;E will proceed with the first tranche as
expeditiously as practical after the passage of authorizing
legislation and will pursue the refinancing in good faith. &nbsp;
The first tranche will be no less than the full unamortized balance
of the Regulatory Asset.&nbsp; The second tranche will be for the
remaining associated federal and state income and franchise taxes;
provided that, in the event sufficient generator and energy
supplier refunds have not yet been received, PG&amp;E will not be
required to securitize more than $3 billion in total in both
tranches.&nbsp; PG&amp;E will use the securitization proceeds to
rebalance its capital structure to maintain the capital structure
provided for under the Settlement Agreement.&nbsp; PG&amp;E will
report to the Commission on the progress of its securitization
efforts every 60 days following the effective date of the
authorizing legislation.</font></p>

<p><font size="3" face="Times New Roman">31.&nbsp;&nbsp;Both TURN
and PG&amp;E have agreed that the authorizing legislation attached
as Appendix E is acceptable and, if enacted by the Legislature,
would satisfy condition (a) in Finding of Fact 30.</font></p>

<p><font size="3" face="Times New Roman">It is a further condition
precedent to the Commission&rsquo;s executing the MSA that PG&amp;E
Corporation agree in writing that it will not seek reimbursement in
the Bankruptcy Court for any of its professional fees and expenses
incurred in connection with PG&amp;E&rsquo;s Chapter 11
proceeding.&rdquo;</font></p>

<p><a name="_Toc370798914"></a><a name="_Toc59591926"></a><a name=
"conclusions_law"></a><b><font size="3" face=
"Times New Roman">Conclusions of Law</font></b></p>

<p><font size="3" face="Times New Roman">1.&nbsp;&nbsp;The PSA
offered by PG&amp;E and the Commission staff is unreasonable and
not in the public interest unless it is modified.</font></p>

<p><font size="3" face="Times New Roman">2.&nbsp;&nbsp;When
entering into the settlement agreements or contracts, the
Commission may not act inconsistently with state law.</font></p>

<p><font size="3" face="Times New Roman">3.&nbsp;&nbsp;The
Commission must strike the phrase &ldquo;notwithstanding any
contrary state law&rdquo; in Paragraphs 21 and 32 of the PSA that
provide that the Parties agree that the settlement agreement, the
settlement plan and any court orders are intended to be binding and
enforceable under federal law notwithstanding any contrary state
law, because we can only enter into a settlement if it is
consistent with state law.</font></p>

<p><font size="3" face="Times New Roman">4.&nbsp;&nbsp;In light of
the constitutional requirement that the Commission actively
supervise and regulate public utility rates and the statutory
requirements under the &sect;&sect;451, 454, 728 that the
Commission ensure that the public utilities' rates are just and
reasonable, the Commission must retain its authority to set just
and reasonable rates during the nine-year term of the settlement
..</font></p>

<p><font size="3" face="Times New Roman">5.&nbsp;&nbsp;The
Commission cannot be powerless to protect PG&amp;E's ratepayers
from unjust and unreasonable rates or practices during the
nine-year term of the proposed settlement.</font></p>

<p><font size="3" face="Times New Roman">6.&nbsp;&nbsp;The
government may not contract away its right to exercise the police
power in the future.</font></p>

<p><font size="3" face="Times New Roman">7.&nbsp;&nbsp;Entering
into the Modified Settlement Agreement (MSA) is fully consistent
with the Commission's exercise of its ratemaking authority, because
we find that the regulatory asset provision is reasonable and a
necessary part of the settlement, and we will still decide the
overall retail electric rates for PG&amp;E's customers in pending
and future proceedings.</font></p>

<p><font size="3" face="Times New Roman">8.&nbsp;&nbsp;Paragraph 6
of the PSA is unreasonable and contrary to the public interest,
because it would restrict the Commission from ruling against
PG&amp;E concerning allegations of unreasonable dividend or stock
repurchasing practices even though we do not have a record in this
proceeding to support whether future dividend practices or stock
repurchasing practices are reasonable or unreasonable.</font></p>

<p><font size="3" face="Times New Roman">&nbsp; 8a. Paragraph 15 of
the PSA should be modified to delete the words &ldquo;PG&amp;E
Corporation and&rdquo; from the first sentence and the entire last
sentence.&rdquo;</font></p>

<p><font size="3" face="Times New Roman">9.&nbsp;&nbsp;Paragraph
2.g.&rsquo;s commitment that the Commission will act to facilitate
and maintain the investment grade credit ratings does not guarantee
such a credit rating when there are other causes, besides the
Commission&rsquo;s actions (e.g., PG&amp;E's imprudent conduct
resulting in a disallowance), which are responsible for any threats
to PG&amp;E's investment grade credit rating.</font></p>

<p><font size="3" face="Times New Roman">10.&nbsp;&nbsp;The
Bankruptcy Court has jurisdiction over the plan of reorganization
and over the parties to enforce the settlement agreement,
settlement plan and the Court&rsquo;s own confirmation order, as
well as jurisdiction over the implementation of the bankruptcy
plan.</font></p>

<p><font size="3" face="Times New Roman">11. &nbsp;AB&nbsp;6X made
&sect;&nbsp;368(a) inapplicable to the utilities&rsquo; unrecovered
costs, and it is clear that the Commission&rsquo;s authority to
allow PG&amp;E to recover the balance in its TCBA is not limited by
AB&nbsp;1890.</font></p>

<p><font size="3" face="Times New Roman">12.&nbsp;&nbsp;The
Commission and ratepayers had adequate representation in the
settlement process.</font></p>

<p><font size="3" face=
"Times New Roman">13.&nbsp;&nbsp;TURN&rsquo;s proposed
securitization financing cannot be achieved without legislation.
However, if legislation satisfactory to the Commission, TURN and
PG&amp;E is enacted, then the Commission will have sufficient
authority to implement securitization financing to allow PG&amp;E
to refinance the unamortized portion of the Regulatory Asset under
the MSA subsequent to the effectuation of the Settlement Plan of
Reorganization and PG&amp;E&rsquo;s emergence from
bankruptcy.</font></p>

<p><font size="3" face="Times New Roman">14.&nbsp;&nbsp;The MSA
does not release any claims, which are held by parties other than
PG&amp;E and the Commission, against PG&amp;E Corporation or its
directors, through the dismissal of PG&amp;E Corporation from
Commission proceedings (e.g., the Holding Company OII) or
otherwise.&nbsp; The Commission&rsquo;s dismissal and release of
PG&amp;E Corporation in no way affects the Business and Professions
Code &sect;17200 Law Enforcement Actions brought by the California
Attorney General and CCSF and these actions are not
&ldquo;derivative&rdquo; of the Commission&rsquo;s
rights.</font></p>

<p><font size="3" face="Times New Roman">15.&nbsp;&nbsp;The
definition of &ldquo;Headroom&rdquo; in the MSA is not intended to
and does not affect DWR&rsquo;s rights under Assembly Bill (AB) 1X
or the Rate Agreement, including DWR&rsquo;s property rights to all
revenue collected and remitted by PG&amp;E for DWR&rsquo;s Power
Charges and Bond Charges in accordance with Commission
orders.&nbsp;</font></p>

<p><font size="3" face="Times New Roman">16.&nbsp;&nbsp;The MSA
(the &ldquo;Settlement Agreement&rdquo; in Appendix C of this
order) is not contrary to state law and is fair, just and
reasonable and in the public interest; therefore, it should be
approved and adopted.</font></p>

<p><font size="3" face="Times New Roman">17.&nbsp;&nbsp;The rulings
of the presiding Administrative Law Judge are affirmed, except that
the testimony of Peninsula Ratepayers&rsquo; Association is
admitted and Peninsula Ratepayers&rsquo; Association is authorized
to seek intervenor compensation.</font></p>

<p><font size="3" face="Times New Roman">18.&nbsp;&nbsp;The
Commission has inherent authority under the California Constitution
and Public Utilities Code &sect;&sect; 451 and 701 to enter into
and execute a settlement agreement.</font></p>

<p><font size="3" face="Times New Roman">19.&nbsp;&nbsp;The
Commission has authority under Public Utilities Code &sect; 701 and
Rule&nbsp;51 to approve the Land Conservation Commitment (LCC)
Stipulation.</font></p>

<p><font size="3" face="Times New Roman">20.&nbsp;&nbsp;Under the
LCC, the Commission retains its existing authority under
&sect;&nbsp;851 to approve or disapprove of any proposed
disposition or encumbrance of PG&amp;E&rsquo;s property.</font></p>

<p><font size="3" face="Times New Roman">21.&nbsp;&nbsp;Should
PG&amp;E agree to the Modified Settlement Agreement and the
Bankruptcy Court approve it as part of the settlement plan, the
Modified Settlement Agreement will be binding upon future
Commissions.&nbsp; The modifications and clarifications in this
decision must be considered part of the Settlement Plan and
reflected in the Confirmation Order, in order for the Commission to
enter into the MSA consistent with state law.&nbsp; Therefore, any
references in the MSA to the &ldquo;Settlement Plan&rdquo;or
&ldquo;Confirmation Order&rdquo; are references to the Settlement
Plan and/or Confirmation Order, which adopt, incorporate or reflect
the MSA.</font></p>

<p align="center"><a name="_Toc370798915"></a><a name=
"_Toc59591927"></a><a name="order"></a><b><font size="3" face=
"Times New Roman">ORDER</font></b></p>

<p><b><font size="3" face="Times New Roman">IT IS
ORDERED</font></b> that:</p>

<p><font size="3" face="Times New Roman">1.&nbsp;&nbsp;The Proposed
Settlement Agreement offered by PG&amp;E and the Commission staff
is modified by deleting Paragraph 6 (&ldquo;Dividend Payments and
Stock Repurchases&rdquo;), deleting the phrase
&ldquo;notwithstanding any contrary state law&rdquo; in Paragraphs
21 and 32, adding $30 million of environmental benefits for
PG&amp;E&rsquo;s urban ratepayers, and adding $15 million to assure
adequate planning and funding of clean energy
technology.</font></p>

<p><font size="3" face="Times New Roman">2.&nbsp;&nbsp;We require
as a condition to our entering into the MSA that this decision
(without any concurrences, dissents, or its appendices) be attached
to the MSA as an appendix and that Paragraph 27 of the PSA be
modified to explicitly state that the attached Commission decision
reflects the understanding of the parties to the
settlement.</font></p>

<p><font size="3" face="Times New Roman">3.&nbsp;&nbsp;At the time
that there no longer is any outstanding balance for the regulatory
asset (e.g., after the nine-year amortization or earlier if it is
replaced with a dedicated rate component), PG&amp;E must make a
compliance filing for the Commission to determine how PG&amp;E
shall refund or credit to the benefit of its ratepayers any
further&nbsp; refunds, claim offsets or other credits from
generators and other energy suppliers (e.g., El Paso Natural Gas
Company) to the extent that PG&amp;E subsequently receives or
realizes these refunds, claim offsets or other credits or has not
otherwise&nbsp; credited them against the regulatory
asset.</font></p>

<p><font size="3" face="Times New Roman">4.&nbsp;&nbsp;For purposes
of calculating the headroom for 2003 (including the amount beyond
the $875 million cap) , in no event may the&nbsp; litigation costs,
bankruptcy-related costs or any other costs of PG&amp;E Corporation
or of any other PG&amp;E affiliate be included in the determination
of the headroom amount nor may any retention bonuses of
PG&amp;E&rsquo;s directors, officers, managers or any other
employees be included in such a determination.</font></p>

<p><font size="3" face="Times New Roman">5.&nbsp;&nbsp;The
Settlement is also modified by deleting authorization for PG&amp;E
to reimburse PG&amp;E Corporation for professional fees and
expenses in connection with the Chapter 11 case.&nbsp; As a
condition precedent to the Commission executing the Settlement
Agreement, PG&amp;E Corporation should agree in writing that it
will not seek reimbursement of such professional fees and expenses
through the Bankruptcy Court.</font></p>

<p><font size="3" face="Times New Roman">6.&nbsp;&nbsp;The Land
Conservation Commitment Stipulation in Exhibit 181 is approved and
adopted.</font></p>

<p><font size="3" face="Times New Roman">7.&nbsp;&nbsp;The Modified
Settlement Agreement (the &ldquo;Settlement Agreement&rdquo; in
Appendix C) is approved and adopted by the Commission.</font></p>

<p><font size="3" face="Times New Roman">8.&nbsp;&nbsp;The rulings
of the Presiding Administrative Law Judge are affirmed, except that
the testimony of Peninsula Ratepayers&rsquo; Association is
admitted and Peninsula Ratepayers&rsquo; Association is authorized
to seek intervenor compensation.</font></p>

<p><font size="3" face="Times New Roman">9.&nbsp;&nbsp;It is a
condition precedent to the Commission&rsquo;s executing the MSA
that PG&amp;E agrees, in writing, that after effectuating the
Settlement Plan of Reorganization and exiting from Chapter 11,
PG&amp;E will seek as expeditiously as practical to refinance the
unamortized portion of the Regulatory Asset and associated federal
and state incomes and franchise taxes using a securitized financing
supported by a dedicated rate component, provided the following
conditions are met:&nbsp; (a) authorizing legislation satisfactory
to the Commission, TURN and PG&amp;E is passed and signed into law
allowing securitization of up to the full unamortized amount of the
Regulatory Asset and associated federal and state income and
franchise taxes, and providing for the collection in
PG&amp;E&rsquo;s rates of any portion of the associated tax
gross-up not securitized; (b) the Commission determines that, on a
net present value basis, the refinancing will save ratepayers money
compared to the Regulatory Asset over the term of the securitized
debt; (c) the refinancing will not adversely affect
PG&amp;E&rsquo;s company and other debt credit ratings; and (d)
PG&amp;E obtains, or determines it does not need, a private letter
ruling from the Internal Revenue Service that neither the
refinancing nor the issuance of the securitized bonds is a
presently taxable event.&nbsp; PG&amp;E may accomplish the
securitization in up to two tranches up to one year apart, and
should issue sufficient callable or short-term debt as part of its
Chapter 11 exit financing to accommodate the refinancing using a
dedicated rate component.&nbsp; The cost of the callable or
short-term debt will be recovered in rates in accordance with
paragraph 13f of the MSA.&nbsp; The provisions of paragraph 13d
will not apply to the refinancing.&nbsp; PG&amp;E will proceed with
the first tranche as expeditiously as practical after the passage
of authorizing legislation and will pursue the refinancing in good
faith.&nbsp; The first tranche will be no less than the full
unamortized balance of the Regulatory Asset.&nbsp; The second
tranche will be for the associated federal and State income taxes
and franchise taxes; provided that, in the event sufficient
generator and energy supplier refunds have not yet been received,
PG&amp;E will not be required to securitize more than $3 billion in
total in both tranches.&nbsp; PG&amp;E will use the securitization
proceeds to rebalance its capital structure to maintain the capital
structure provided for under the Settlement Agreement.&nbsp;
PG&amp;E will report to the Commission on the progress of its
securitization efforts every 60 days following the effective date
of the authorizing legislation.</font></p>

<p><font size="3" face="Times New Roman">10.&nbsp;&nbsp;It is a
further condition precedent to the Commission executing the MSA
that PG&amp;E Corporation agree in writing that it will not seek
reimbursement in the Bankruptcy Court for any of its professional
fees and expenses incurred in connection with PG&amp;E&rsquo;s
Chapter 11 proceeding.</font></p>

<p><font size="3" face="Times New Roman">11.&nbsp;&nbsp;Upon
PG&amp;E&rsquo;s and PG&amp;E Corporation&rsquo;s written consent
to the conditions precedent in Ordering Paragraphs 9 and 10, the
Commission authorizes the Executive Director to sign the Modified
Settlement Agreement (&ldquo;Settlement Agreement&rdquo; in
Appendix C) on behalf of the Commission.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This order is effective today.</font></p>

<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dated December 18, 2003, at San Francisco, California.</font></p>

<table border="0" cellspacing="0" cellpadding="0" width="736">
<tr>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td colspan="2" valign="top">
<p><font size="3" face="Times New Roman">MICHAEL R.
PEEVEY</font></p>
</td>
</tr>

<tr>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top"></td>
<td colspan="2" valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
President</font></p>
</td>
</tr>

<tr>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top"></td>
<td colspan="2" valign="top">
<p><font size="3" face="Times New Roman">GEOFFREY F.
BROWN</font></p>
</td>
</tr>

<tr>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top"></td>
<td colspan="2" valign="top">
<p><font size="3" face="Times New Roman">SUSAN P.
KENNEDY</font></p>
</td>
</tr>

<tr>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
<td valign="top"></td>
<td colspan="2" valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Commissioners</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">I will file a
concurrence.</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">/s/ GEOFFREY F.
BROWN</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Commissioner</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">I will file a
dissent.</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">/s/ LORETTA M.
LYNCH</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr height="7">
<td colspan="3" height="7" valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Commissioner</font></p>
</td>
<td height="7">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">I will file a
dissent.</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">/s/ CARL W.
WOOD</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Commissioner</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">&nbsp; D0312035
Commissioner Brown Concurrence</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">&nbsp; D0312035
Commissioner Wood Dissent</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>

<tr>
<td colspan="3" valign="top">
<p><font size="3" face="Times New Roman">&nbsp; D0312035 Cover
Letter Re Lynch Dissent</font></p>
</td>
<td>
<p><font size="3" face="Times New Roman">&nbsp;</font></p>
</td>
</tr>
</table>

<p><font size="3" face="Times New Roman">&nbsp; D0312035 Appendix
A&nbsp;<br />
 &nbsp; D0312035 Appendix B<br />
&nbsp; D0312035 Appendix C<br />
&nbsp; D0312035 Appendix D<br />
&nbsp; D0312035 Appendix E</font></p>

<div align="center"><font size="3" face="Times New Roman"></font>
<hr size="2" width="100%" align="center" />
</div>

<p><u><font size="3" face="Times New Roman">Endnotes</font></u></p>

<table border="0" cellspacing="0" cellpadding="0" width="651">
<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">1</font></p>
</td>
<td colspan="2" valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">&ldquo;Headroom&rdquo; is
defined below.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">2</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">The PSA and the Settlement
Plan are two different documents. The PSA is provided in Appendix
A.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">3</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">This material is taken
from the record in this proceeding as well as the record in
PG&amp;E&rsquo;s bankruptcy proceeding, documents, and pleadings of
which the Commission may take official notice.&nbsp; The record in
PG&amp;E&rsquo;s Chapter 11 proceeding is available on the website
of the U.S. Bankruptcy Court, Northern District of California,
http://www.canb.uscourts.gov.&nbsp; In addition, documents relating
to the Commission&rsquo;s various plans and filings in the
bankruptcy proceeding can be found in the record of this proceeding
as well as on the CPUC website at
http://www.cpuc.ca.gov/static/industry/electric/pge+bankruptcy.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">4</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><i><font size="3" face="Times New Roman">San Diego Gas &amp;
Electric Co.</font></i>, Decision (D.) 92-12-019, 46 CPUC 2d 538
(1992); <i>Dunk</i> v<i>. Ford Motor Co.</i> (1996) 48 CA4th 1794,
56 Cal. Rptr. 483; <i>Officers for Justice</i> v<i>. Civil Service
Commission</i>, (9<sup>th</sup> Cir. 1982) 688 F.2d 615; <i>Diablo
Canyon</i>, D. 88-12-083, (1988) 30 CPUC 2d 189; <i>Amchem
Products</i> v<i>. Windsor</i>, (1997) 521 U.S. 591.</p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">5</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">&nbsp; Rates, terms, and
conditions of interstate electric transmission service will remain
subject to FERC regulation pursuant to the Federal Power Act (FPA),
as they have been since 1998.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">6</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">In order to protect
PG&amp;E against the possibility that the State and/or federal
taxing authorities successfully assert that the regulatory asset
should be taxed in full in the year in which it is established
rather than as it is amortized, the proposed settlement authorizes
PG&amp;E to create a Tax Tracking Account to record such a tax
payment and to collect it from the ratepayers over time rather than
all at once.&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">7</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">The PSA defines headroom
as follows:&nbsp; &ldquo;PG&amp;E&rsquo;s total net after-tax
income reported under Generally Accepted Accounting Principles,
less earnings from operations, plus after-tax amounts accrued for
bankruptcy-related administration and bankruptcy-related interest
costs, all multiplied by 1.67, provided that the calculation will
reflect the outcome of PG&amp;E&rsquo;s 2003 general rate case
(A.02-09-005 and A.02-11-067).&rdquo;&nbsp;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">8</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><i><font size="3" face="Times New Roman">PG&amp;E</font></i>
v<i>. Lynch, et al.</i>, U.S. District Court, Northern District of
California, Case No.&nbsp;C&#8209;01-3023-VRW.</p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">9</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">This estimate is not based
on an appraisal or other formal valuation but on PG&amp;E&rsquo;s
understanding that Sierra lands are worth $2,000 per acre or more
on average.&nbsp; Also, a March 9, 2001, <i>Los Angeles Times</i>
article estimated that the watershed lands alone are worth $370
million.&nbsp; (Ex. 101 at 1-14/Smith.)</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">10</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">PG&amp;E counsel:&nbsp;
&ldquo;Rather, in our view, the decision for the Commission is a
binary one.&nbsp; That is, vote the settlement up, approve it, and
adopt it, or vote it down.&nbsp; We are not here to renegotiate a
settlement . . . .&rdquo;&nbsp; (R.T. (PHC) pp. 3-4.)</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">11</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Among other things, the
Commission may enter into contracts to rent offices
&sect;&nbsp;306(a); may procure books, stationery, furniture, etc.,
(&sect;&nbsp;306(d)); may hire consultants and advisory services
(&sect;&sect;&nbsp;631, 1094); may contract with state agencies
(&sect;&nbsp;274); may award grants (&sect;&nbsp;276.5(c)); and may
hire experts to prepare EIRs and Negative Declarations (Rule
17).&nbsp; Water Code &sect;&nbsp;80110 grants the Commission
express authority to enter into an agreement with the Department of
Water Resources with respect to charges under
&sect;&nbsp;451.&nbsp; (D.02-03-053, at p.&nbsp;8.)</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">12</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">During the energy crisis,
the skyrocketing wholesale power costs and AB 1890&rsquo;s rate
freeze had caused both SCE and PG&amp;E to face mounting debts and
lose their creditworthiness. Both utilities sued the Commission in
federal district courts. The California Supreme Court upheld the
Commission&rsquo;s settlement with SCE, which&nbsp; provided for
SCE&rsquo;s recovery of its costs, which were incurred but
unrecovered during the AB 1890 rate freeze.&nbsp; <i>Id.</i> at
791.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">13</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">In <i>Southern California
Edison Co.</i>, 31 Cal.4<sup>th</sup> at 802-805, the Supreme Court
found that a hearing, decision with findings and vote in a public
meeting were not statutorily required, because the Commission had
&ldquo;maintained&rdquo; and not &ldquo;changed&rdquo; SCE's
rates.&nbsp; That case had a very unique factual situation. The
Commission frequently has proceedings, issues written decisions
with findings, and votes in public meetings, because the far more
typical situation addressing a public utility&rsquo;s recovery of
costs, such as the present case, involves changes to the public
utility&rsquo;s rates.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">14</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">The changes this decision
makes in the PSA are shown in the redlined copy of the PSA in
Appendix B.&nbsp; The version of the settlement which we approve
(i.e., the MSA) is in Appendix C, where it is referred to as the
&ldquo;Settlement Agreement.&rdquo;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">15</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">&ldquo;Nine years is
sufficiently short to provide the needed cash flows to improve
PG&amp;E&rsquo;s credit statistics, while moderating rate
impacts.&rdquo;&nbsp; Exhibit 122 at 20.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">16</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 101a,
PG&amp;E/Smith, &para;&para; 17-18.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">17</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><i><font size="3" face="Times New Roman">Id.</font></i>
Statement of Intent &para; 3; Agreement &para; 11(b).&nbsp;</p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">18</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 101,
PG&amp;E/Smith, &para; 2.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">19</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">$775 million to $875
million.&nbsp; Exhibit 101a, PG&amp;E/Smith, &para;
8(b).</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">20</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Should 2003 headroom
collections fall outside the prescribed range, &ldquo;the
Commission shall take such action in 2004 as is necessary&rdquo; to
return overcollections to ratepayers, or to allow PG&amp;E to
recoup any undercollections.&nbsp; <i>Id.</i></font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">21</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 101,
PG&amp;E/Smith, &para; 2f.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">22</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">The PSA, paragraph 3(b),
provides part that &ldquo;the authorized equity ratio for
ratemaking purposes shall be no less than 52 percent, except for a
transition period as provided below [setting floor equity ratio of
48.6 percent in &rsquo;04 and &lsquo;05].&rdquo;</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">23</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 101, 1-9:2-6,
PG&amp;E/Smith.&nbsp; <i>See generally</i> Exhibit 101a,
PG&amp;E/Smith, &para; 2(f).</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">24</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 101a,
PG&amp;E/Smith, &para; 10 and App. C.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">25</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><i><font size="3" face="Times New Roman">Id.</font></i></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">26</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 122 at 11,
Staff/Clanon.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">27</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 103,
PG&amp;E/Harvey.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">28</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 103, 2-9:3-16,
PG&amp;E/Harvey.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">29</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 112,
7-19:30-7-20:5, PG&amp;E/Murphy.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">30</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 103, 2-10:3-25,
PG&amp;E/Harvey; Exhibit 122 at 14, Staff/Clanon.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">31</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 103, 2-6:4-9,
PG&amp;E/Harvey.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">32</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 112, 7-20:2-5,
PG&amp;E/Murphy.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">33</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 103, 2-10:26-11:4,
PG&amp;E/Harvey.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">34</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 112, 7-20:24-27,
PG&amp;E/Murphy.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">35</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 110, 6-10:22-30,
PG&amp;E/Fetter.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">36</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 103, 2-11:5-16,
PG&amp;E/Harvey.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">37</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 112, 7-20:19-20,
PG&amp;E/Murphy; <i>see also</i> Exhibit 122 at 13,
Staff/Clanon.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">38</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 110, 6-3:6-8,
PG&amp;E/Fetter.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">39</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 110, 6-10:17-22,
PG&amp;E/Fetter.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">40</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 122 at 12,
Staff/Clanon; <i>see also id.</i> at 13 (referencing Murphy
testimony).</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">41</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">A copy of the February 7,
2002, Bankruptcy Court decision, Docket No. 4710, is available on
the Bankruptcy Court&rsquo;s website at
http://www.canb.uscourts.gov.</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">42</font></p>
</td>
<td valign="top"></td>
<td colspan="2" valign="top">
<p><font size="3" face="Times New Roman">&nbsp;</font></p>

<p><font size="3" face="Times New Roman">2001 and 2002 Pre-Tax
Headroom<br />
 2003 Pre-Tax Headroom<br />
 NPV of the Regulatory Asset<br />
 NPV of the Tax Component of the Regulatory Asset<br />
 Estimated Ratepayer Contribution</font></p>
</td>
<td valign="top">
<p><font size="3" face=
"Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td valign="top">
<p><b><font size="3" face="Times New Roman">In
$Millions</font></b></p>

<p><font size="3" face="Times New Roman">$3,200<br />
 $775 to $875<br />
 $2,210<br />
 $944<br />
<br />
 $7,129 to 7,229</font></p>
</td>
<td></td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">43</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">Exhibit 122, p. 7
(Clanon).</font></p>
</td>
</tr>

<tr>
<td valign="top">
<p><font size="3" face="Times New Roman">44</font></p>
</td>
<td colspan="2" valign="top"></td>
<td colspan="4" valign="top">
<p><font size="3" face="Times New Roman">The stipulation provides
that, once the PG&amp;E Environmental Enhancement Corporation (EEC)
is formed, its governing board will change its name to Pacific
Forest and Watershed Lands Stewardship Council, referred to herein
as the Stewardship Council.</font></p>
</td>
</tr>
</table>

<p><font size="3" face="Times New Roman"></font></p>
</div>
</body>
</html>


</TEXT>
</DOCUMENT>
</SUBMISSION>
