VII. Assignment of Proceeding

Carl W. Wood is the Assigned Commissioner and Michael J. Galvin is the assigned ALJ in this proceeding.

Findings of Fact

1. SCE and the Commission entered into a Settlement Agreement, settling the matters at issue in Southern California Edison Company, Plaintiff, vs. Loretta M. Lynch, et al., then pending before the United States District Court for the Central District of California in Case No. 00-12056-RSWL (Mcx).

2. The Settlement Agreement lays out a framework for the restoration of SCE's investment grade credit rating. As part of that framework, the Settlement Agreement identified the need to mitigate procurement-related obligation risks.

3. The Settlement Agreement provides for SCE to apply to the Commission for its approval of SCE incurring up to $250 million in Recoverable Costs during the Rate Repayment Period to acquire financial instruments and engage in other transactions intended to hedge fuel cost risks associated with SCE's URG and QF and interutility contracts. Pending such determination by the Commission, SCE shall record such costs in a tracking account.

4. On October 5, 2001, the District Court entered judgment approving the Settlement Agreement.

5. Resolution E-3761 authorized SCE to establish a RMMA for tracking costs incurred from hedging fuel cost risks effective October 5, 2001.

6. A $1 increase in the price of gas at the SoCalBorder results in a $130 million increase in SCE's annual QF payments.

7. Under swap contracts, SCE must agree to pay a fixed price each month for a specified volume of gas. As the price of gas fluctuates, the contract becomes

more or less valuable. If the price of gas falls, SCE would be required to post collateral.

8. Under a hedging option, SCE receives the difference between the gas price and a strike price multiplied by the volume of gas covered by the option if the price of gas rises above that strike price for the period covered by the option. No collateral is required.

9. Moody's views the cash flows of procurement-related obligations to be fairly predictable because most of the volatility has been eliminated or reduced by actions of SCE and others.

10. Testimony regarding the volumes hedged, price-per-option, transaction structure, and competitive quotes to support the reasonableness of the $208.8 million cost SCE incurred from hedging is under seal.

11. Resolution E-3765 provides for all recoverable hedging costs to be recorded in the SRBA.

12. In D.87-06-021, we defined reasonable to mean that at a particular time any of the practices, methods, and acts engaged in by a utility follows the exercise of reasonable judgment in light of facts known or which should have been known at the time the decision was made. The act or decision is expected by the utility to accomplish the desired result at the lowest reasonable cost consistent with good utility practices. Good utility practices are based upon cost effectiveness, reliability, safety, and expedition.

13. SCE's financial situation in the late 2001 precluded SCE from posting collateral (cash or letter of credit) for any swap contracts.

Conclusions of Law

1. The $208.8 million balance is SCE's RMMA is reasonable and qualifies as recoverable cost.

2. Information placed under seal should remain sealed because, if disclosed, it would provide competitors an insight to SCE's hedging strategy and bargaining position and place SCE and its ratepayers at a disadvantage in seeking future hedging options or swaps.

3. This order should be effective immediately to allow for the expeditious closing of SCE's RMMA.

ORDER

IT IS ORDERED that:

1. The $208.8 million hedging costs amortized for 2002 and 2003 in Southern California Edison Company's (SCE) Risk Management Memorandum Account (RMMA) is reasonable and qualifies as recoverable costs. This amount shall be transferred to SCE's Settlement Rate Balancing Account (SRBA).

2. SCE shall submit an advice letter within 10 days after the effective date of this order to transfer the $208.8 million balance in the RMMA to the SRBA. SCE shall file an advice letter to close the RMMA, dispose of the balance in the account, and delete the RMMA from its tariff when the Settlement hedging transactions expired, subject to written approval by the Energy Divison.

3. Information placed under seal shall remain sealed except upon the execution of a mutually accepted non-disclosure agreement or further order or ruling of the Commission the Administrative Law Judge, or the assigned Commissioner.

4. The application is granted as set forth above.

5. This proceeding is closed.

This order is effective today.

Dated February 13, 2003, at San Francisco, California.

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