Assignment of Proceeding

Geoffrey F. Brown is the Assigned Commissioner and Robert Barnett is the assigned ALJ in this proceeding.

Findings of Fact

1. SDG&E should be authorized to recover through rates the costs and expenses for owning and operating the Palomar Energy Center before actually acquiring the facility.

2. A fixed monthly revenue requirement of $7,600,100 and a variable O&M rate of $3.08 per MWh, both subject to update prior to going into effect on the first month of commercial operation of the Palomar Energy Center, are reasonable.

3. SDG&E's proposed overall cost recovery regulatory plan addressing the length of time it will be in effect, the balancing accounts in which revenue will be accumulated, and how additional items like fuel costs, heat rate incentives, reliability must run (RMR) revenues, and imputed franchise fee payments to the city of Escondido will be handled, is reasonable.

4. All Palomar Energy Center costs should be recovered in SDG&E's commodity rates through its EECC except for costs allocated to the RMR function which should be recovered from all customers through the RS rate component.

5. Any rewards or penalties associated with the adopted heat rate incentive for the Palomar Energy Center will be recorded in SDG&E's ERRA for recovery in commodity rates. Any Palomar Energy Center-related RMR revenues

received from the CAISO will recorded in SDG&E's NGBA to offset commodity costs. Finally, the "imputed franchise fees" paid to Escondido on gas delivered to the Palomar Energy Center will be recorded in the ERRA for recovery in commodity rates.

6. The fixed monthly revenue requirement and variable O&M rate will be reset in SDG&E's next GRC/COS proceeding, projected to occur in 2008.

7. The ROE that should be applied to recover SDG&E's investment in the Palomar Energy Center should be the then currently applicable ROE.

8. The incentive compensation loader for non-union employees should be a rate of 18.0%, which represents the non-union non-executive average.

9. A negative 3.5% net salvage rate should be applied to the Palomar Energy Center steam generation unit.

Conclusion of Law

ORDER

IT IS ORDERED that:

1. San Diego Gas & Electric's (SDG&E) cost recovery and ratemaking mechanisms necessary to recover the reasonable costs of acquiring, owning, and operating the Palomar Energy Center are approved with the modifications in Ordering Paragraph 2.

2. When SDG&E files its update advice letter prior to the Palomar Energy Center entering commercial operation, SDG&E will update in the advice letter (i) the fixed monthly revenue requirement to reflect the Return on Equity then in effect, (ii) the fixed monthly revenue requirement to reflect an 18.0% loader for non-union employees, and, (iii) the fixed monthly revenue requirement to reflect a negative 3.5% net salvage rate for the steam generator.

3. No later than 30 days prior to the expected date of operation of the Palomar Energy Center, SDG&E shall file its update advice letter to comply with this order and D.04-06-011. The advice letter shall modify Schedule EECC, Reliability Services rates, the ERRA account, and to make changes to any other regulatory accounts that are required pursuant to this order. The advice letter shall be effective on the expected operation date of the Palomar Energy Center, subject to Energy Division determining that it is in compliance with this order.

4. Application 04-11-003 is closed.

This order is effective today.

Dated August 25, 2005, at San Francisco, California.

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