II. OVERVIEW

The purpose of this Gas Accord II Settlement Agreement (Agreement, Settlement, or Settlement Agreement) is to establish the market structure, rates, and terms and conditions of service for the Pacific Gas and Electric Company (PG&E) transmission and storage system under the jurisdiction of the Public Utilities Commission of the State of California (CPUC or Commission), and to develop guidelines for contracting for PG&E's gas transmission service, for the period January 1, 2003, to December 31, 2003, and for storage service, for the period April 1, 2003, to March 31, 2004 (hereinafter the Gas Accord II Period).

The following key agreements are reached in this Settlement:

· The existing market structure, rates, tariffs, and terms and conditions of service for the PG&E gas transmission and storage system, as adopted in the Gas Accord and as modified by subsequent CPUC-approved settlements, will be extended for the Gas Accord II Period.

· The rates for transmission and core storage services for the Gas Accord II Period will 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 will be equal to the adopted rates in effect on April 1, 2002. Customer access charges for noncore customers will be equal to the adopted rates in effect on January 1, 2002. Customer Class Charges and shrinkage rates are not set in the Gas Accord and continue to be subject to change.

· Any changes that the Commission might adopt with respect to the Gas Accord market structure, rates, tariffs, or terms and conditions of service, will be implemented on a prospective basis only, commencing January 1, 2004, for transmission, and April 1, 2004, for storage.

· Existing shippers with firm transmission and storage contract exhibits in effect in 2002 (hereinafter, Contracts) will be allowed to extend their Contract terms 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. Each Contract and governing Gas Transportation Service Agreement (GTSA) continues to be subject to General Order 96-A.

· All Natural Gas Service Agreements will remain in effect, in accordance with their terms, for the Gas Accord II Period. A customer with negotiated terms as of December 31, 2002, may extend these terms at the customer's option.

· PG&E will conduct an open season for Line 401 expansion capacity, unsold transmission and storage capacity, and any transmission and storage capacity relinquished during the Contract extension process. The term of awarded contracts will be for the Gas Accord II Period, or until the first day the subject transportation or storage arrangements are under the jurisdiction of the FERC, whichever occurs first. In the open season, PG&E will reserve 100 MDth/d of Redwood Path firm capacity for on-system requests, and will limit off-season awards initially to 340 Dth/d until on-system requests are filled, as explained more fully in Section V.E.3.b, below.

· Contracts resulting from the open season process will have the same status as contracts that are extended pursuant to the Contract extension process.

· PG&E's Core Procurement will not require additional transmission and storage capacity in the open season above the amounts established in the Gas Accord Decision 97-08-055, as modified in 2000 BCAP Decision 01-11-001. The current Core Procurement Incentive Mechanism (CPIM) will be extended for the Gas Accord II Period. Nothing in this Settlement will preclude PG&E and consumer advocates from proposing and implementing changes to the CPIM, as permitted by the existing CPIM, during the Gas Accord II Period.

· PG&E's authority to administer a financial risk management program will be continued through the Gas Accord II Period.

· The Contract extension and open season process will be conducted according to the procedures developed in this Settlement. Parties will learn the results of the Contract extension process prior to the end of the open season.

· If they have not otherwise expired in accordance with their one-year term, all contracts that result from the Contract extension and open season process specified in this Settlement will terminate upon a change to FERC jurisdiction. In that event, subject to FERC approval, PG&E will provide contract holders the option to convert to a FERC-approved contract at the same rates and material terms.

· Upon approval of this Settlement by the CPUC, all "unresolved issues" identified in the February 26, 2002 Scoping Memo (hereinafter, Scoping Memo Issues) shall be deemed to be resolved through the Gas Accord II period.

· The Parties propose that the existing procedural schedule for litigation of the Scoping Memo Issues be extended, in accordance with the schedule set forth in Part IV hereof, with hearings in November 2002.

· PG&E reserves the right to amend Application 01-10-011, or to file a new Application with the CPUC, to address the market structure, rates, and terms and conditions of service for its gas transmission and storage system for the period beginning January 1, 2004. Likewise, all Parties reserve all of their rights with respect to the Scoping Memo Issues, except that they agree to the procedural schedule change set forth in Section IV, below.

· Creditworthiness requirements for shippers and storage customers shall be in accordance with PG&E Gas Rule 25. PG&E stipulates that it will not propose any changes to Gas Rule 25 that would take effect prior to completion of the contract extension and open season process established in this Settlement.

This Agreement is entered into by the Settlement Parties, as identified by their signatures on this Settlement Agreement, and their concurrence in a joint motion to be filed contemporaneously herewith. This Settlement shall become effective immediately, except that provisions requiring CPUC approval shall become effective on the effective date of a CPUC order approving the Settlement.

Of paramount concern to the Settlement Parties is to resolve regulatory issues so as to provide for an orderly and efficient market for the upcoming year, prior to the start of the 2002-2003 winter heating season, and to provide contract certainty. The intent of this Settlement is to achieve an expeditious resolution of issues, consistent with the public interest, and by this means avoid any potential supply disruptions or high costs from an inefficient and more uncertain market.

The Settlement Parties, including PG&E, acknowledge that one year of contract certainty for transportation and storage arrangements is important to PG&E shippers and end-use customers, because, among other things, gas supply and associated transportation arrangements often are arranged on a full one-year basis. The Settlement Parties recognize that PG&E currently has a proposal before the FERC that includes a transition period that would extend for a term even longer than the one-year Gas Accord II Period established in this Settlement, should a contracting party sign a FERC-approved contract.

This Agreement is a negotiated compromise of issues and is broadly supported by parties who are marketers, shippers, wholesale and retail end-use customers, and regulatory representatives. Nothing contained herein shall be deemed to constitute an admission or an acceptance by any party of any fact, principle, or position contained herein. Notwithstanding the foregoing, the Settlement Parties, by signing this Agreement and by joining the motion to adopt the Agreement filed before the Commission, acknowledge that they pledge support for Commission approval and subsequent implementation of these provisions.

This Agreement is to be treated as a complete package not as a collection of separate agreements on discrete issues or proceedings. To accommodate the interests of different parties on diverse issues, the Settlement Parties acknowledge that changes, concessions, or compromises by a party or parties in one section of this Agreement necessitated changes, concessions, or compromises by other parties in other sections.

In the event the Commission rejects or modifies the Agreement, the Settlement Parties reserve their rights under Rule 51.7 of the Commission's Rules of Practice and Procedure.

PG&E will not seek to recover any incremental costs associated with implementing the provisions of this Settlement Agreement.