4. Proposed Settlement

With the Energy Division evaluation before them, SoCalGas, ORA and TURN negotiated a proposed Settlement Agreement that they contend resolves all issues in Phase 2 of this proceeding. The proposed Settlement Agreement is appended to this decision as Attachment A.

The settlement provides that the GCIM, as modified, would continue on an annual basis until modified by further Commission order. The settlement adopts several modifications premised on those proposed by the Energy Division. The most significant modifications would (1) increase the tolerance band below the benchmark from ½% to 1%, (2) reduce the percentage of savings below the benchmark tolerance band that customers would share with shareholders, and (3) limit the maximum amount of savings customers would share with shareholders.

Under the existing mechanism, savings greater than ½% below the benchmark are shared equally between customers and shareholders. Under the settlement, the sharing bands below the benchmark, as a percentage of annual gas commodity benchmarks, would be as follows:

Sharing Band Ratepayer % Shareholder %

0% - 1% 100% 0%

1% - 5% 75% 25%

5% and above 90% 10%

Additionally, under the settlement, the shareholder award in any given year would be capped at 1½% of actual annual gas commodity costs.

The settlement also modifies the GCIM to provide that, beginning in Year Nine, SoCalGas will include the shareholder benefits of the GCIM from the most recent monthly report in the utility's core monthly gas pricing advice letter submitted to the Energy Division, with copies to ORA. Under the existing GCIM, shareholders do not share the savings until after approval of the utility's annual application, resulting in a lag of one to two years after savings were realized.

The settlement further establishes physical gas storage inventory targets for SoCalGas and formalizes the utility's goal of making maximum use of its interstate transportation capacity. Finally, the NYMEX system is eliminated as a benchmark index.

The settlement would have a significant impact on the Year Seven shareholder award. The SoCalGas application and ORA's audit of the Year Seven GCIM, which ended on March 31, 2002, are being considered by the Commission in another proceeding, Application (A.) 01-06-027. In that proceeding, dealing with a chaotic year of soaring gas prices, SoCalGas asserts that it was able to procure gas at $223.6 million below the GCIM benchmark. It stated that the shared savings under the mechanism totaled $212.2 million, and that shareholders thus would be entitled to an incentive award of $106.1 million. Under the settlement agreement in this proceeding, however, SoCalGas agrees to apply the 1½% cap on shareholder awards to Year Seven, thus reducing the award to $30.8 million. This would have the effect of increasing benefits to ratepayers from about $106 million to about $181 million.