IX. Concern Regarding the Two-Way
Balancing Account for O&M

The settlement provides for a two-way balancing account for SONGS O&M for a limited period of time. SDG&E will have to apply for continuation after that time. The balancing account provides for full recovery of billed costs in excess of the authorized amount. While it is reasonable to provide an opportunity for full recovery, the balancing account guarantees it. We recognize that SDG&E owns only 20% of SONGS and is not the operating agent. Therefore, its ability to influence expenditures is limited. However, SDG&E participates in the decision-making process for SONGS costs, and has some ability to influence those decisions. We are concerned that 100% balancing account recovery effectively insulates SDG&E from being affected by those decisions, thus raising the question of whether SDG&E would have an incentive to minimize such costs. Therefore, if SDG&E subsequently applies for continuation of the balancing account, we require it to provide an exhibit addressing this concern.

Pursuant to the settlement, the two-way balancing account would remain in effect through SDG&E's next rate case cycle that will commence on January 1, 2008 and, after January 1, 2008, SDG&E would be allowed to file an application to continue the two-way balancing account. SDG&E's last general rate case covered a test year (2004) and three attrition years. Therefore, we interpret this to mean that the settlement would authorize the two-way balancing account from January 1, 2007 through December 31, 2011. Our approval of the settlement, as it pertains to the two-way balancing account, is conditioned on this assumption.