THE MODIFIED SETTLEMENT AGREEMENT

TABLE OF CONTENTS

Title Page

OPINION MODIFYING THE PROPOSED SETTLEMENT AGREEMENT OF PACIFIC GAS & ELECTRIC COMPANY, PG&E CORPORATION AND THE COMMISSION STAFF, AND APPROVING THE MODIFIED SETTLEMENT AGREEMENT 22

Summary 33

I. Introduction and Background 33

II. Procedural History 1010

III. Description of the PSA Terms and Conditions 1111

A. Structure of the Settlement Plan of Reorganization 1111

B. Financial Elements of the PSA 1111

1. Regulatory Asset 1111

2. Headroom 1313

3. Ratemaking Matters 1313

4. Dividends and Stock Repurchases 1414

C. Dismissal of Energy Crisis-Related Disputes 1414

D. Environmental Provisions 1515

E. Conditions Precedent to Effectiveness of Settlement Plan 1616

F. Other Provisions 1616

1. Assignability of DWR contracts 1616

2. Interest Rate Hedging 1717

3. Financing 1717

4. Fees and Expenses 1818

5. Releases 1818

6. Bankruptcy Court Supervision 1818

IV. Standard of Review 1818

V. Lawfulness of the PSA 2222

A. The Purpose of the Commission v. The Purpose of the Bankruptcy Court 2222

B. The Commission's Ability to Bind Future Commissions 2424

C. Jurisdiction of the Bankruptcy Court 3434

D. Consistency with Assembly Bill 1890 and § 368(a) 3737

VI. Whether the Proposed Settlement Agreement Is in the Public Interest 3939

A. Adequacy of a Settlement Proposal in Achieving Feasible Plan of Reorganization 3939

1. The MSA Will Allow PG&E to Emerge Promptly From Bankruptcy 4040

2. The Rating Agencies (S&P and Moody's) 4141

B. Fairness and Reasonableness 4444

1. Relationship of Settlement to Parties' Risks of Achieving Desired Results 4444

2. The Risk, Expense, Complexity, and Likely Duration of Further Bankruptcy Litigation 4545

3. Reasonableness of Settlement of Other Claims and Litigation 4646

4. Reasonableness of Rates 5151

5. Adequacy of Representation In the Settlement Process 5252

6. Release of PG&E Corporation 5353

C. Public Interest 5454

1. The Regulatory Asset 5454

2. Headroom 5555

3. Dividends 5757

4. Credit Rating 5959

5. Assignability of DWR Contracts 6161

6. Environmental Matters 6161

The Land Conservation Commitment (LLC) 6161

(a) The Stewardship Council 6262

(b) Environmental Opportunity For Urban Youth 6666

(c) Clean Energy Technology Commitment 6767

VII. The TURN Dedicated Rate Component Proposal 6767

VIII. Rulings Of The Administrative Law Judge (ALJ) 7575

IX. Comments on the Decision 7575

X. Assignment of Proceeding 7575

Findings of Fact 7676

Conclusions of Law 8282

ORDER 8686

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

OPINION MODIFYING THE PROPOSED SETTLEMENT AGREEMENT OF PACIFIC GAS & ELECTRIC COMPANY, PG&E CORPORATION AND THE COMMISSION STAFF, AND APPROVING THE MODIFIED SETTLEMENT AGREEMENT

Summary

This decision modifies and clarifies the Proposed Settlement Agreement (PSA) offered by Pacific Gas & Electric Company (PG&E), PG&E Corporation (Corp.), and the Commission staff. We find that the settlement agreement, with these modifications and clarifications, is fair, just and reasonable and in the public interest. Therefore, we can enter into the Modified Settlement Agreement (MSA).