The Settlement Agreement

The Settlement Agreement (Exhibit 3) was entered into as of the 17^th day of April 2003 by SCE, TURN, ORA, California Large Energy Consumer Association (CLECA), California Manufacturers and Technology Association (CMTA), Agricultural Energy Consumers Association (AECA), California Farm Bureau Federation (CFBA), and California City-County Street Light Association, and Federal Executive Agencies (collectively Settling Parties) in order to resolve the issues in A.03-01-019.

Pursuant to Rule 2.2(d), SCE tendered the Settlement Agreement on behalf of the Settling Parties.

I. Stipulated Post-PROACT Retail Rates

The Settling Parties have agreed upon new retail rates (settled post-PROACT rates) to be in effect from as early as July 1, 2003, and for a period of 12 months, regardless of their effective date, except as modified pursuant to Paragraph II.A.h below. Those rates are set forth in Attachment "A" to the Settlement Agreement.

This settlement differs conceptually from the application in that it calls for SCE to make a forecast of the date of full recovery of PROACT balance based upon the prior month's recorded PROACT balance and a forecast of the Surplus revenues during the current month, rather than to wait for the confirmation of actual recovery of that balance. While the latter would result in larger rate reductions because of the need to refund an overcollection, the Settlement Agreement provides for rate reductions sooner.

A. Settlement Assumptions

The assumptions utilized in these rates, which may call for their adjustment in the future and on a prospective basis, are:

a. With respect to the Direct Access Cost Responsibility surcharge (DA CRS), a shortfall from DA CRS of $325.6 million as of December 31, 2003 is to be financed by bundled service customers. The allocation of this $325.6 million to various rate groups is as set forth in Attachment "B" to the Settlement Agreement. The Settling Parties agree to this level of DA CRS shortfall without prejudice to their positions in R.02-01-011.

b. The settled post-PROACT rates reflect the revised 2003 sales forecast to which SCE and ORA stipulated in SCE's 2003 GRC subsequent to SCE's filing of Application 03-01-019. Such rates also reflect more precise levels of Present Rate Revenues (PRR) for bundled service customers, and a revenue requirement updated to reflect SCE's recent Energy Resource Recovery Account (ERRA) filing.

c. For purposes of the Settlement Agreement and the period during which these settled post-PROACT rates will remain in effect, subject to modifications pursuant to Paragraph II.A.h below, the parties hereto stipulate to the revenue requirement upon which the settled post-PROACT rates are based.¹ Any under- or over-collection of revenues compared to those eventually authorized by the Commission in various other proceedings, except those resulting from the DA CRS shortfall, will be trued-up through the operation of SCE's ratemaking mechanisms for the post-PROACT period as shown in Table II-1 on page 22 of Exhibit SCE-1 filed with the application. Any implementation of a Commission decision concerning the DA CRS shortfall will take place consistent with the process described in Section II.D below.

d. On the fifth workday of each month, SCE will determine the end-of-month recorded PROACT balance for the previous month and will forecast the end-of-month PROACT balance for the current month. If the forecast indicates that PROACT balance will be fully recovered by the end of the current month, SCE will file an advice letter on the 10^th workday of the current month to implement the new rates at the beginning of the following month. For example, if on the fifth workday of June 2003, when SCE determines the recorded PROACT balance for May 2003, SCE forecasts that PROACT balance will be recovered by the end of June 2003, then on the 10^th workday of June 2003, SCE will file an advice letter to implement the new rates on July 1, 2003.

e. If the recorded PROACT balance at the end of the month during which SCE's forecast indicated that PROACT balance would be recovered is over-collected, SCE will transfer such an over-collection to the Energy Resource Recovery Account (ERRA) for return to customers through the operation of that account. If the recorded balance is under-collected, SCE will first use any remaining balance in the Catch-Up Surcharge Revenue Memorandum Account to eliminate such under-collection. Any then-remaining under-collected PROACT balance will be transferred to the ERRA.

f. SCE may not be able to make bill presentation for SCE Delivery, SCE Generation, and DWR charges under the settled rates until September 1, 2003, due to the press of other decisions to be implemented in SCE's billing system. Between the implementation of post-PROACT rates and September 1, 2003, SCE will use the current method of crediting the Direct Access customers by first billing them at the lower total bundled service rate and then crediting them with the bundled service Generation rate component (including SCE Generation and DWR charges) less any DA CRS cap.

g. Settled rates will remain in effect for 12 months, except as provided for in Paragraph II.A.h below.

h. SCE shall apply to the rate structure and levels agreed to herein the revenue requirement change approved in Phase 1 of its 2003 GRC or any other proceedings in which the Commission approves a revenue requirement change for SCE on the effective date of the Commission decisions in those proceedings. Any such revenue requirement change will be reflected in SCE's rates on a system average percentage change (SAPC) basis until Phase 2 GRC rates are implemented, consistent with applicable law and Commission decisions.

B. Effect on AB 1890 10% Bill Reduction

This Settlement Agreement does not resolve the question of the continued operation or elimination of the 10% bill reduction provided to residential and small commercial customers in Assembly Bill (AB) 1890. This matter is to be addressed in Phase 2 of SCE's general rate case (GRC).

C. No Effect on Litigation Settlement

The transfer to the ERRA of any uncollected PROACT balance, as described in Paragraph II.A.e. above, is not inconsistent with any provision of SCE's federal settlement with the Commission, shall constitute full recovery of PROACT for purposes of that federal settlement, and shall not operate to constrain or continue to constrain SCE's ability to rebalance its capital structure to levels authorized by the Commission. TURN in particular agrees to this without waiver of or prejudice to its position in the SCE v. Lynch litigation.

D. Effect on Other Proceedings

This Settlement Agreement is intended only to provide for new retail customer rates until the Commission approves rates in Phase 2 of SCE's 2003 GRC. The assumptions made and issues disposed of are intended to be disposed of and made solely for purposes of settling the issues raised in the application. While this Settlement Agreement resolves the current undercollected balance in SCE's Baseline Balancing Account (BBA), no other pending proceeding is intended to be affected.

SCE will file a notice in the Baseline OIR (R.01-05-047) that this Settlement Agreement resolves the issues related to SCE's current BBA undercollection. The Settling Parties hereto agree that, as of the date these rate reductions go into effect, the balance of SCE's BBA will be amortized in rates over 12 months, no additional undercollection will accrue and the account will be terminated at the end of the 12-month amortization period. Furthermore, the Settling Parties agree that the resolution and allocation of SCE's BBA does not constitute any admission or precedent regarding the appropriate allocation of BBA balances in R.01-05-047 for either Pacific Gas and Electric Company or San Diego Gas & Electric Company.²

These settlement rates assume a DA CRS shortfall of $325.6 million as of December 31, 2003. In the event the Commission in R.02-01-011 issues a decision that results in a different amount of DA CRS shortfall than $325.6 million, the difference in amount will be allocated to rate groups based on the methodology adopted by the Commission in R.02-01-011 and will be prospectively reflected in rates provided for in Phase 2 of SCE's 2003 GRC. The allocation of the $325.6 million to various rate groups is set forth in Attachment B to the Settlement Agreement to be utilized only for determining the amount to be paid back to bundled service customers in each rate group when DA customers start paying back their obligations to bundled service customers. This Settlement Agreement resolves matters which are, in many respects, contested by one or more of the Settling Parties. Participation in this Settlement Agreement by any party does not constitute an admission regarding positions asserted in the application, in any protest thereto, or in any statements made to the Commission.