2. Background

2.1. Litigation and Settlement

El Paso Natural Gas Company, its parent corporation and its affiliates (El Paso) have been subject to numerous investigations, complaints and litigation regarding extremely high natural gas and electricity prices in California and several Western states during the 15-month period from March 1, 2000 through May 31, 2001. El Paso's involvement in these high prices, for example, was an issue in a complaint proceeding brought by this Commission before the Federal Energy Regulatory Commission (FERC) in Docket Nos. RP00-241-000, et al. It was also the focus of investigations by the Attorney General (AG) of California and the AGs of Nevada, Washington, and Oregon; 15 separate plaintiffs' lawsuits in San Diego Superior Court; and federal court lawsuits brought by the California AG, Pacific Gas and Electric Company (PG&E), and Southern California Edison Company (SCE).

After years of controversy, El Paso and parties have elected to settle these disputes. The "Settlement" consists of:

a. A settlement filed at FERC on June 4, 2003 (providing structural relief to California shippers utilizing the El Paso system);

b. A Master Settlement Agreement (MSA), an Allocation Agreement, and separate settlement agreements, filed in San Diego Superior Court on June 26, 2003 (providing most of the consideration payable by El Paso to resolve these disputes); ¹ and

c. Stipulations for Judgment which will be filed in the United States District Court for the Central District of California (which will also provide structural relief).

The Settlement is between the Governor of the State of California; this Commission; the California AG; the California Department of Water Resources (CDWR); PG&E; SCE; the AGs of Nevada, Oregon, and Washington; law firms representing plaintiffs in 15 lawsuits; and El Paso. The Settlement also involves the California Electricity Oversight Board (CEOB) by its proposed resolution of a dispute between the CEOB, the Commission and El Paso concerning El Paso's
long-term wholesale power contracts with CDWR. The final effectiveness of the MSA is subject to completion of a variety of preconditions.²

In the Settlement, El Paso has agreed to provide an estimated $1.5 billion (nominal value) in consideration for resolving all of this litigation. The approximately $1.5 billion is composed of:

1. $900 million in cash at $45 million per year for 20 years (15 years if El Paso achieves an investment grade credit rating) with a prepayment option for El Paso;

2. $125 million reduction in El Paso's long-term contracts with CDWR;

3. $352 million in up front cash; and

4. Proceeds from the sale of more than 26 million shares of El Paso Corporation stock (estimated to be worth about $227 million at the time the MSA was executed, or about $8.60 per share).

Under the Allocation Agreement, parties have agreed to hundreds of millions of dollars of consideration payable to persons and entities beyond the ratemaking jurisdiction of this Commission (e.g., to the AGs of Nevada, Oregon, and Washington; municipalities; noncore gas customers). Parties have also agreed to consideration of an estimated $1 billion (nominal value) that will ultimately benefit the California public utilities and ratepayers under our jurisdiction. Approximately $600 million of the estimated $1 billion will be allocated to gas and electric utilities directly under our jurisdiction. Further, about $425 million will be payable to CDWR, which CDWR has committed to use to reduce the CDWR revenue requirement paid by ratepayers under our jurisdiction.

The estimated consideration of $1.5 billion depends upon proceeds from the sale of El Paso stock, which may generate more or less proceeds than now estimated. Moreover, an iterative process involving municipalities' claims and the payment of attorneys' fees makes the precise residual amount of consideration for the public utilities' ratepayers unknown at this time. Nonetheless, a reasonable estimate for the Commission's jurisdictional allocations to provide a context for the application of the ratemaking and accounting procedures is as stated in the Order Instituting Rulemaking (OIR):

TABLE 1

ESTIMATED ALLOCATIONS

UNDER COMMISSION JURISDICTION

Line No.	Consideration Affecting the Rates of Commission Jurisdictional Customer Groups	Estimated Allocation (Nominal Dollars in Millions)
1	Electric
2	Reduction of CDWR Revenue Requirements	$ 425
3	PG&E Electric Customers	$ 210
4	SCE Electric Customers	$ 195
5	SDG&E Electric Customers	$ 60
6	Subtotal Electric	$ 890
7	Gas
8	PG&E Core Gas Customers	$ 75
9	SoCalGas Core Gas Customers	$ 36
10	SDG&E Core Gas Customers	$ 29
11	Southwest Core Gas Customers	$ 5
12	Subtotal Gas	$ 145
13	Total Electric and Gas	$ 1,035

The specific agreements that comprise the Settlement, including issues regarding the substantive merits of the Settlement, are before FERC, San Diego Superior Court, and the United States District Court for the Central District of California. The ratemaking treatment for utilities under our jurisdiction, and the fair allocation of the proceeds to ratepayers, is before this Commission.

2.2. OIR and Scoping Memo

We instituted this rulemaking to consider proposals for accounting and ratemaking mechanisms to equitably distribute the proceeds from the Settlement to those under our jurisdiction. The OIR included our proposals, and asked for comments, along with objections, if any, to the preliminary categorization, lack of evidentiary hearing, or proposed schedule. No objections were filed.

By Scoping Memo dated July 30, 2003, the issues were identified, the final schedule adopted, and other procedural matters addressed. Comments and alternative proposals were timely filed and served on August 4, 2003, by PG&E, SCE, jointly by San Diego Gas & Electric Company and Southern California Gas Company (SDG&E/SoCalGas), Southwest Gas Corporation (Southwest), The Utility Reform Network (TURN), representatives of certain classes of California electric utility ratepayers (Electric Classes), jointly by School Project for Utility Rate Reduction and the Association of Bay Area Governments Publicly Owned Energy Resources (SPURR/ABAG POWER), and jointly by William P. Bower and Thomas L. French (Bower & French). Reply comments were timely filed on August 14, 2003, by PG&E, SCE, SDG&E/SoCalGas, Electric Classes, SPURR/ABAG POWER, Bower & French, and the Commission's Office of Ratepayer Advocates. On August 14, 2003, CDWR served a memorandum to assist the Commission with CDWR-related issues.

By Ruling dated August 27, 2003, additional ratemaking treatment was proposed for a limited group of six PG&E customers not otherwise covered in the OIR. Comments were filed and served on September 3, 2003, by PG&E. Reply comments were filed and served on September 8, 2003, by the City of Palo Alto (Palo Alto).