STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

February 9, 2004 Agenda ID #3248

Ratesetting

TO: PARTIES OF RECORD IN APPLICATION 03-02-005

This is the draft decision of Administrative Law Judge (ALJ) Prestidge. It will not appear on the Commission's agenda for at least 30 days after the date it is mailed. The Commission may act then, or it may postpone action until later.

When the Commission acts on the draft decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the draft decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure." These rules are accessible on the Commission's Website at http://www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages. Finally, comments must be served separately on the ALJ and the Assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail, or other expeditious method of service.

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief

Administrative Law Judge

ANG:hkr

Attachment

ALJ/TOM/hkr DRAFT Agenda ID #3248

Ratesetting

Decision DRAFT DECISION OF ALJ PRESTIDGE (Mailed 2/9/2004)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Pacific Gas and Electric Company for Authorization to Lease Certain Electric Distribution Facilities Serving the Mountain House Area of San Joaquin County, and to Sell Certain Related Electric Distribution Facilities, to the Modesto Irrigation District Pursuant to Public Utilities Code Section 851.

(U 39 M)

Application 03-02-005

(Filed February 7, 2003)

DECISION GRANTING AUTHORIZATION FOR PG&E
TO LEASE AND SELL CERTAIN ELECTRIC DISTRIBUTION FACILITIES
SERVING THE MOUNTAIN HOUSE AREA OF SAN JOAQUIN COUNTY
TO MODESTO IRRIGATION DISTRICT
PURSUANT TO PUBLIC UTILITIES CODE SECTION 851

TABLE OF CONTENTS

Title Page

DECISION GRANTING AUTHORIZATION FOR PG&E
TO LEASE AND SELL CERTAIN ELECTRIC DISTRIBUTION
FACILITIES SERVING THE MOUNTAIN HOUSE AREA
OF SAN JOAQUIN COUNTY TO MODESTO IRRIGATION
DISTRICT PURSUANT TO PUBLIC UTILITIES CODE SECTION 851 2 2

1. Summary 2 2

2. Background 3 3

3. The Agreements 5 5

A. The License and Lease Agreement 5 5

B. The Purchase and Sale Agreement 9 9

C. The Wood Pole Lease Agreement 13 13

4. Environmental Review 14 14

5. Ratemaking Considerations 16 16

A. Allocation of PG&E's Gain on Sale and Lease Revenues
Between Shareholders and Ratepayers 16 16

B. Requirement for Annual "True-Up" of NBCs Owed by MOD 22 22

6. Discussion 23 23

7. Final Categorization and Review and Comment Period 24 24

8. Assignment of Proceeding 25 25

Findings of Fact 25 25

Conclusions of Law 28 28

ORDER 29 29

DECISION GRANTING AUTHORIZATION FOR PG&E
TO LEASE AND SELL CERTAIN ELECTRIC DISTRIBUTION FACILITIES SERVING THE MOUNTAIN HOUSE AREA OF SAN JOAQUIN COUNTY
TO MODESTO IRRIGATION DISTRICT
PURSUANT TO PUBLIC UTILITIES CODE SECTION 851

1. Summary

This decision grants the application of Pacific Gas and Electric Company (PG&E) for Commission authorization to lease and sell certain electric distribution facilities to the Modesto Irrigation District (MOD)¹ and to lease MOD space on PG&E's wood transmission poles pursuant to Section 851.² ³ ⁴ This transaction is necessary to implement § 9610, which provides that effective January 1, 2001, PG&E may no longer provide electric distribution service to customers in the Mountain House Area of San Joaquin County (Mountain House Area).⁵ ⁶ Under § 9610, MOD began serving electric distribution customers in the Mountain House Area on January 1, 2001, and needs to utilize the facilities that PG&E proposes to sell and lease in this application in order to provide service. MOD also needs to use space on PG&E's wood transmission poles for certain distribution assets sold to MOD that are attached to the poles.

PG&E will continue to provide gas service to customers in the Mountain House Area.

We defer our decision regarding the allocation of PG&E's gain resulting from the sale of assets to MOD to our upcoming gain on sale rulemaking, which shall be initiated in the near future.

¹ MOD is an irrigation district organized under California law. The Irrigation District Law (Water Code Sections 20500 et seq.) provides that an irrigation district (district) may purchase or lease electric power from any public or private entity and may acquire, operate, lease and control plants for the generation, transmission, distribution, sale and lease of electric power. (Water Code Sections 22115, 22120.) Districts may generally sell power to municipalities, public utility districts, or persons either within or outside of district boundaries, with certain limitations specified by law. (Id.; see also Pub. Util. Code §§ 8101, 9601(c), and 9607.) ² All Code references are to the Public Utilities Code, unless otherwise stated. ³ The application was filed on February 7, 2003. In Resolution ALJ 176-3107, dated February 13, 2003, we preliminarily categorized this proceeding as ratesetting and preliminary determined that hearings were necessary. ⁴ On March 10, 2003, the Commission Office of Ratepayer Advocates (ORA) filed a protest, which addressed ratemaking aspects of the application only. PG&E and ORA subsequently filed a stipulation regarding certain factual issues and agreed to address the ratemaking issues through briefing. Therefore, no hearings were held in this proceeding. ⁵ Section 9610 was enacted as part of Assembly Bill (AB) 2638 (Stats. 2000, chapter 1042), which became effective January 1, 2001. Section 9610 expires by its own terms on December 31, 2025. ⁶ Under § 9610, from January 1, 2001 through December 31, 2025, no electric service corporation may provide electric distribution or transmission service to retail customers in either of the following areas:

(1) The MOD electric service area as defined in the August 15, 1940, Purchase of Properties agreement between MOD and PG&E; (2) The Mountain House Community Services District.

MOD and PG&E may both provide electric transmission and distribution service to retail customers in the purchase zone described in Exhibit B of the Asset Sale Agreement by and between PG&E and MOD dated July 23, 1997, contained in Application 97-07-030. This area is considered to be within both PG&E's and MOD's service territories. Except as stated above, MOD may not provide electric transmission or distribution service to retail customers in PG&E's service territory.