Proposed Settlement Agreement

The settling parties recommend that the proposed settlement agreement be promptly adopted in order to ensure stability in the natural gas market for the coming winter season, and to prevent the disruption of natural gas supplies and other adverse consequences. The following is a summary of the key agreements in the proposed settlement agreement.⁴

Under the proposed settlement agreement, the existing market structure, rates, tariffs, and terms and conditions of service for PG&E's gas transmission and storage system, as adopted in the Gas Accord and as modified by subsequent decisions, would continue for the Gas Accord II period.⁵ The rates for transmission and core storage services for the Gas Accord II period are to be equal to the adopted rates in effect on January 1, 2002. The rates for market center storage services for the Gas Accord II period are to be equal to the adopted rates in effect on April 1, 2002. Customer access charges for noncore customers are to be equal to the adopted rates in effect on January 1, 2002.

The proposed settlement agreement would allow existing holders of firm transportation or storage rights on the PG&E system to extend those rights for the Gas Accord II period, or until the first day the subject transportation or storage arrangements are under the jurisdiction of the Federal Energy Regulatory Commission (FERC), whichever occurs first. Once the settlement agreement is approved by the Commission, each existing firm shipper will be given the opportunity to renew, for the Gas Accord II period, up to the full contract demand quantity on the same contract path. In order to qualify for renewal of their contract, each shipper must continue to meet PG&E's credit worthiness standard contained in PG&E's Commission-approved Gas Rule 25. Except for the expiration date, the renewal process for the existing firm storage contracts is similar to the procedure described above for the gas transportation contracts.

The proposed settlement agreement also establishes the rules for an open season. In this process, all firm transportation and storage rights that are not subject to extension will be offered to the public on a non-discriminatory basis for the Gas Accord II period, or until the first day the subject transportation or storage arrangements are under FERC's jurisdiction. The open season for transmission capacity would include unsold transmission capacity on the Redwood and Baja paths, up to approximately 200 MDth/day on the Redwood Path due to expanded capacity, and transmission capacity that is relinquished or not extended. A market concentration limit would also be established for each transmission path, which the settling parties contend is consistent with the Commission's recent decision in D.01-12-018 approving the Comprehensive Settlement for SoCalGas.

The proposed settlement agreement would also fix the level of firm intrastate transportation and storage rights currently held by PG&E's Core Procurement, as authorized by the Commission in PG&E's most recent Biennial Cost Allocation Proceeding (BCAP). Thus, PG&E's Core Procurement Department would not participate in the open season for additional intrastate capacity. However, the proposed settlement agreement provides that after the open season, PG&E's Core Procurement Department may elect to increase (if capacity is available) or decrease (through capacity assignments) its firm transmission and storage capacity holdings as necessary during the term of the settlement. The proposed settlement agreement also states that PG&E's Core Procurement Department is to be treated equally with other shippers and is not to be granted any undue preference.

The proposed settlement agreement also extends PG&E's Core Procurement Incentive Mechanism (CPIM) for the Gas Accord II period, and permits PG&E and consumer advocates to propose modifications to the CPIM prior to or during the Gas Accord II period.

Under the proposed settlement agreement, PG&E's gas financial risk management program would continue through the Gas Accord II period.⁶ In addition, the proposed settlement agreement calls for PG&E to post on a quarterly basis the names and contact information for shippers and storage holders, as well as a separate quarterly posting (without identifying individual shippers) of the relative market shares of the top five shippers by contract paths.

The proposed settlement agreement also calls for the postponement of the existing procedural schedule for issues identified in the February 26, 2002 Scoping Memo (Scoping Memo) until the Fall of 2002. If the proposed settlement agreement is approved, all of the Scoping Memo issues would be deemed resolved through the Gas Accord II period. The proposed settlement agreement also states that on or before August 1, 2002, PG&E will undertake a settlement process with the parties in an attempt to resolve the Scoping Memo issues by stipulation or settlement. The signatories to the proposed settlement agreement have also reserved all of their rights with respect to the issues identified in the Scoping Memo, and PG&E has reserved its right to modify Application (A.) 01-10-011, or to file a superceding application for the period beginning January 1, 2004.

The joint motion states that the proposed settlement agreement is supported by a wide and diverse cross-section of gas and electric industry representatives. The settling parties contend that this widespread support is indicative of a reasonable and balanced resolution of all the issues for the one-year Gas Accord II period, and that approval of the proposed settlement agreement is in the public interest.

The settling parties further contend that prompt approval of the proposed settlement agreement is vitally important, and consistent with the public interest, because gas transportation and storage must be arranged in advance of the 2002-2003 winter heating season. Extending the existing firm gas transportation and storage contracts on the PG&E system, and conducting an open season for available capacity, will ensure that these contractual arrangements will be in place for the upcoming winter season. The settling parties also point out that the one-year Gas Accord II period is appropriate because gas supplies and associated transportation arrangements are typically on a fixed one-year basis.

The settling parties also contend that approval of the settlement without modification will promote stability in the gas market by providing commercial certainty to gas industry participants. This certainty will allow participants to compete regionally in the supply basins for long-term supply contracts, which will help reduce supply disruptions, price volatility, and other harmful effects.

The settling parties also point out that the proposed settlement agreement would only extend the Gas Accord market structure and rates for an additional year, and that the contract extensions and open season process will only establish capacity rights for the one-year period. Although several parties have recommended changes to the proposed settlement agreement, the settling parties recommend that the Commission decline to make any of the changes to ensure that the settlement can be implemented in a timely manner. The settling parties also assert that it would be unreasonable to entertain any fundamental changes to the Gas Accord market structure at this point.