3. The Proposed Agreements

A. New Service Area Agreement

During the 25-year period of this agreement, PG&E, TID, and their affiliates⁹ (PG&E and TID) may not distribute electric power, directly or indirectly, in each others' service areas.¹⁰ PG&E and TID also may not build, own, lease, operate, control, acquire, extend, or connect any substation, transmission, or distribution facilities into the other's service territory to provide retail service to customers. The agreement further prohibits PG&E and TID from encouraging any person to enter the electric business, encouraging or supporting the removal or de-annexation of territory or load from the other's service area, or controlling another person or entity with respect to retail utility decisions, operations, and policies.

As exceptions to the above restrictions, the agreement permits the following activities by PG&E and TID in each others' service areas:

· Selling electricity to a wholesale utility for resale;

· Direct access transactions with customers, if certain requirements are met;

· Constructing or financing electric distribution or transmission facilities, if necessary to maintain reliability of service within the party's own service area, and the facilities will not serve retail customers in the other `s service area;

· Operations and maintenance for their own distribution and transmission facilities for the sole purpose of interconnecting with a generating source, if the facilities will not serve customers in the others' service area other than providing standby, station power, and start-up power to the generating source;

· Operations and maintenance on a single substation owned by a customer;

· Delivering retail electric power to any electric, water, recreation, or administrative facility owned or leased by PG&E or TID for its own use, so long as the facility is not used to serve retail customers in the other's service area;

· Continuing to serve customers that are electrically connected as of the effective date of the agreement pursuant to previous cross-border arrangements, or additional cross-border service as agreed to by PG&E and TID and approved by the Commission. TID may also continue to provide cross-border service in two areas north of the boundary line for its service area under the l953 agreement.

PG&E and TID have also agreed to limit their provision of certain services, referred to by PG&E as "core distribution services", to any person or entity serving customers in the others' service area. These services include:

· Business planning services

· Construction

· Engineering estimating

· Feasibility studies

· Financing

· Management services

· Mapping and record keeping

· Materials management

· Operations and maintenance

· Planning engineering

· Rate or tariff development

· Technical support.¹¹

However, the agreement permits PG&E and TID to provide certain services to an established local utility¹² in each others' service areas, including materials management. TID and PG&E may provide mapping and record keeping and two of the following four services per year to an established local utility within that utility's political boundaries or outside of its political boundaries if that utility has a defined expansion within PG&E's or TID's service area: (1) engineering and estimating, (2) operations and maintenance, (3) planning and engineering, and (4) construction. In addition, PG&E and TID may generally provide the following services without limitation¹³:

· mutual aid

· customer service

· demand side management

· energy efficiency services

· power control services

· revenue cycle services

· risk management for power supply purchases

· scheduling coordinator services on the customer's side of point of delivery, and

· supply aggregation.

Under certain circumstances, PG&E and TID may expand or reduce their service areas under the agreement. The agreement requires PG&E to petition the Commission for relief from its obligation to serve before reducing its service area, but does not specifically require Commission approval for an expansion of PG&E's service area or changes to TID's service area. TID may not reduce its service area unless TID has no continuing obligation to serve the territory being deleted.

Upon finalization of the new service area agreement, the 1953 Agreement is terminated. Neither PG&E nor TID may assign the new service area agreement without the prior written consent of the other.

B. The Tolling and Mutual Release Agreement

This agreement suspends any statutes of limitations applicable to legal or equitable actions between PG&E and TID with respect to claims involving the 1953 Agreement while this application is pending before the Commission. Upon closing of the asset transfer transactions authorized in this proceeding, this agreement will act as a mutual release of disputes related to the 1953 Agreement.

C. The Asset Sale Agreement

Under the asset sale agreement,¹⁴ PG&E will sell certain distribution and a few related transmission facilities that serve the Westside Zone to TID for the price of $15,111,825. The facilities to be sold generally include all electric distribution circuits and associated distribution facilities, meters, streetlights, and control and protective devices in the Westside Zone, associated easements and rights of way, certain distribution equipment located at PG&E's Patterson and Salado substations, three private line agreements that PG&E has assigned to TID, a portion of transmission poles with distribution underbuild, and a few associated transmission poles that would otherwise be stranded. PG&E will retain the following assets in the area:

· Most of the transmission lines, poles, and equipment¹⁵;

· The Salado Substation transmission equipment and land, except as otherwise provided in the agreement;

· The Patterson Substation security fences, concrete structures, underground conduits, and land;

· Supervisory control and data acquisition equipment (SCADA);

· Natural gas facilities;

· Land rights related to electric transmission and natural gas facilities;

· Certain distribution equipment necessary for PG&E's system integrity; and

· Other property and assets not included in the agreement.

PG&E is selling the facilities to TID on an "as-is" basis. TID has relied on its own inspection of the assets in entering into the agreement. TID has agreed to continue to use the assets for electric distribution and transmission.

PG&E will connect new customers and install new meters in the Westside Zone until the closing date.¹⁶ PG&E will read most customer meters in the Westside Zone on the Saturday and Sunday before the closing date, but may read meters for customers who had electric bills over $100,000 during 2001 on the closing date. PG&E will issue a final bill to customers after reading the meters. If PG&E is unable to obtain any closing meter reads as scheduled, PG&E and TID will cooperate in obtaining the remaining meter reads or mutually acceptable approximations of these meter reads. TID will also cooperate with any collection efforts by PG&E. PG&E will refund parties to electric line extension agreements their deposits, if any, related to the electric portion of these agreements. The purchase price for assets will be increased to reflect the new cost less depreciation of additional service and facilities installed to connect new customers or new load of existing customers and new meters installed by PG&E after December 5, 2000.

TID will pay both the costs of PG&E's work necessary to disconnect the assets from PG&E's system, and its own work necessary to operate the assets independently from PG&E's system. TID will also construct a 12 kV intertie in the Crows Landing area at its own expense and will pay for connection of the intertie to PG&E facilities.

For a period of 90 days after the closing date, if TID cannot locate particular replacement parts needed to operate the facilities, PG&E will sell replacement parts to TID at its fully loaded cost, if consistent with PG&E's operational needs. However, PG&E is no longer obligated to provide replacement parts if the cumulative cost of replacement parts sold to TID exceeds $75,000.

If the consent of a customer is required to transfer the customer's special facilities to TID, PG&E has agreed to send the customer a written request to agree to this transfer. If the customer's written request is received at least 10 business days before the closing date, the special facilities agreement will be assigned to TID on the closing date. Otherwise, the special facilities agreement between PG&E and the customer will not be assigned, but PG&E will remit any payments received for special facilities in the Westside Zone to TID.

TID has agreed to either provide direct access to customers in the Westside Zone who presently receive direct access from PG&E or to obtain the customer's written consent to receive bundled TID service instead of direct access service.

Under the agreement, TID is generally responsible for taxes resulting from this transaction. TID and PG&E shall pro-rate state and local real property taxes for the tax year of the asset sale closing.

PG&E has disclosed that hazardous substances, including PCB's may be present, at, in, on, under, about, contained in, or incorporated in the assets to be sold to TID. However, except as disclosed in the agreement, to PG&E's current knowledge, there has been no release of hazardous substances from or affecting any assets that requires remediation, and no governmental authority has notified PG&E of a pending hazardous substances investigation, proceeding, clean-up, abatement, or similar order related to the assets.

With certain exceptions, PG&E and TID have agreed to indemnify, defend, and hold each other harmless from and against any and all claims and liability, which arise out of or relate to this agreement, except for claims resulting from the other party's sole negligence or intentional misconduct. TID has agreed to hold PG&E harmless from causes of action arising under environmental laws, except for the environmental conditions disclosed in the agreement or for which PG&E has agreed to indemnify TID. PG&E and TID have waived any right to punitive, incidental, indirect, special, or consequential damages that result from claims against each other and will cooperate in the defense of third party claims.

Except for approval of the Commission, FERC, and the Bankruptcy Court, TID has agreed to obtain any necessary governmental approvals or permits necessary to implement the agreement.

Remaining conditions to be satisfied by the parties before the closing date and transfer of the assets are discussed in the closing agreement.

D. The Installment Sales Agreement

Under the installment sales agreement, PG&E has agreed to sell a 60 kV tap line to Patterson Frozen Foods (Patterson Frozen Foods tap line) and related easements located in the City of Patterson to TID.

The negotiated purchase price is $67,221. TID has agreed to pay the entire purchase price except for one dollar as a down payment on the closing date. The final payment of one dollar is due by no later than seven years after the closing date.¹⁷ TID may take possession of the property on the closing date, but PG&E will retain legal title until the final payment is made.

Upon receipt of the final payment, PG&E will assign the easements to TID and give TID a bill of sale for the property, free and clear of all liens and encumbrances, other than the mortgage on the property. PG&E will take all reasonable steps to remove the mortgage lien from the property within 30 days after delivery of the assignment and bill of sale.

Under the agreement, TID must keep the electric facilities in good working order and maintain the property in its current condition. TID may make improvements to the property. TID may not connect with customers or electric generators from any point on the property between the point of interconnection with PG&E's transmission system and the metering point of the Patterson substation without PG&E's prior written consent.

TID has acknowledged that hazardous substances may be present on the easements. TID is not responsible for remediation of any hazardous substances in the soil or groundwater within the easements which existed before TID took possession of the easements or result solely from PG&E's activities.

TID has agreed to pay taxes, assessments, and other expenses related to the property during the term of this agreement.

TID has agreed to indemnify, defend, and hold harmless PG&E from any claims arising from or connected to its use of the property, except for claims resulting from PG&E's sole negligence or willful misconduct. TID is also required to maintain certain insurance coverage during the term of the agreement.¹⁸

TID may assign this agreement to PID or WPA, and may also lease all or part of the property to PID or WPA after the closing date, without PG&E's consent.

E. The Private Electrical Lines Assignment and Assumption Agreement

In this agreement, PG&E assigns to TID three private electrical line agreements with customers in the Westside Zone. TID is responsible for carrying out all of PG&E's obligations under the agreement and for obtaining any required consents to this assignment from the affected persons.

F. The Patterson and Salado Substation Leases

These leases grant TID a limited right to enter the Patterson and Salado substation properties in order to operate and maintain certain assets purchased from PG&E. PG&E has reserved all other rights of use and access to the property.

Under each lease, TID will pay PG&E rent in the amount of $3,000 per year. The term of each lease is seven years, unless the parties agree to an extension or the lease is terminated earlier.

TID has acknowledged in the leases that hazardous substances may exist at both the Salado and Patterson substations and has agreed to accept both properties in "as-is" condition, at its sole risk and expense.¹⁹ TID is not responsible for remediation of pre-existing contamination at either property.

Under both leases, TID may not interfere with PG&E's use of the primary substation property or perform activities that would cause PG&E to violate Commission General Orders or other legal requirements. TID may not drill, bore, or excavate within 10 feet of any PG&E underground facility. TID must obtain all necessary governmental approvals and permits for its activities and comply with all legal requirements. TID must notify PG&E of any hazardous substances used, stored, or generated on the property. PG&E has reserved the right to install a protective cap over exposed soil at the Patterson substation and to remediate hazardous substances on the site as required by governmental authorities.

TID has agreed to indemnify, defend, and hold PG&E harmless from all claims that arise from or are connected with TID's activities at the substation properties, except for claims caused by PG&E's negligence or willful misconduct. TID has also agreed to carry certain insurance coverage during the lease terms.²⁰

Neither PG&E nor TID may assign the leases without the prior written consent of the other.

G. The Closing Agreement

The closing agreement sets forth conditions that must be met in order for the transfer of PG&E assets to take effect. These conditions include:

· Execution of the above agreements;

· Execution of an operating agreement, which establishes procedures for the daily operation of PG&E's and TID's electric facilities to minimize interference with each other's operations;

· FERC approval of an interconnection agreement filed by PG&E regarding the interconnection of PG&E's electric facilities with those electric facilities transferred to TID;

· Completion of work necessary to disconnect the assets sold to TID from PG&E's system and for TID to operate the assets independently;

· TID's construction of a non-metallic fence and gate around the Salado substation;

· TID's timely submittal of a secondary spill containment plan and an environmental plan for the leased premises at the Patterson and Salado substations and PG&E's approval of these plans.

· Approval of this transaction by the Commission, FERC, and the Bankruptcy Court; and

· TID's acquisition of all other necessary government approvals and permits.

The closing agreement also specifies a dispute resolution process for all conflicts arising between PG&E and TID under the above agreements, except for the service area agreement. PG&E and TID must first attempt to resolve any disagreements through good faith negotiations. If after 60 days the conflict remains unresolved, either party may initiate mediation. If the conflict has not been resolved within 60 days after the commencement of mediation, either party may initiate binding arbitration. The arbitration shall be conducted in accordance with American Arbitration Association (AAA) Arbitration Rules for Commercial Disputes by a neutral arbitrator who has had at least 10 years of experience in adjudicating business disputes.²¹

The closing agreement provides that under certain circumstances, PG&E and TID may terminate the above agreements, except for the service area agreement. Neither PG&E nor TID may assign the closing agreement without the prior written consent of the other.