III. Description of Settlement

A. General Settlement Provisions

The proposed settlement agreement (Agreement) provides the following:

· Settlement Proceeds. PG&E will receive $2.7 million (the "Settlement Proceeds"), which Settlement Proceeds includes both PG&E's attorneys' fees in an amount not to exceed $500,000, and interest. [¶ 3.]⁵

· Suspension of CPN Pipeline Interconnections with LGS. The interconnections between the Calpine Entities and LGS will be rendered inoperable for a moratorium period of nine months, unless otherwise authorized by the CPUC. At the end of that nine-month period, if there still is no authorization by the CPUC, then LGS shall provide PG&E with written notification prior to commencement of any construction activity for installation of new interconnections or the renewed operation of the existing interconnections. PG&E reserves all rights concerning any such future actions taken by LGS. [¶¶ 4 and 7.]

· Ryer Island Meter Station Deliveries. The Calpine Entities are not currently delivering or selling natural gas to, or exchanging natural gas with, any third party at the Ryer Island Meter Station.⁶ In the event the Calpine Entities intend to recommence such activity, the Calpine Entities shall provide PG&E with written notice at least thirty-five days before the commencement of natural gas deliveries. The Settlement Agreement builds in a two-step notice procedure for PG&E to either consent or object to this activity. If PG&E objects, the Calpine Entities shall not make Ryer Island Meter Station deliveries without prior CPUC or court approval or a finding that such approval is not necessary. [¶ 5.]

· No Admission of Wrongdoing. The Settlement Agreement and its terms shall not constitute nor be taken to indicate an admission of liability or wrongdoing by any party, or that any party's position on any issue lacks merit. [¶ 11.]

· Effective Date of Provisions. Some of the terms of the Settlement Agreement, such as the Payment noted above, are not effective until issuance of a final CPUC approval; other terms, such as Suspension of CPN Pipeline Interconnections with LGS and no resumption of Ryer Island Meter Station deliveries, were effective immediately upon execution of the Settlement Agreement but are null and void if final CPUC approval is not obtained.

· Dismissal of Complaint. The Settlement Agreement provides that, upon its approval by the CPUC, the CPUC shall also concurrently order the dismissal of the Complaint with prejudice. [¶ 6.]

· Releases and Reservation of Rights. Upon approval of the Settlement Agreement by the CPUC, releases by each of the parties of the claims raised in the Complaint will become effective, subject to certain specified reservations of rights. Among them, PG&E reserves its rights to pursue (1) claims that relate to use of any interconnections to LGS without prior CPUC approval after the Effective Date, (2) claims of unauthorized public utility activities against the Calpine Entities and/or LGS in a new proceeding with respect to matters not raised in the Complaint, and (3) claims with respect to a change in the facts and circumstances relating to alleged unauthorized public utility activity from those facts and circumstances existing as of the Effective Date. The Settlement Agreement also specifies certain reservations of rights by the Calpine Entities and by LGS. Additionally, the Settlement Agreement does not preclude the Settlement Parties' respective rights to advance whatever position they desire before the CPUC on the policy issues relating to third party storage interconnections, or any other issues. [¶¶ 7, 8 and 9.]

· CPUC Approval. The Settlement Parties agree to cooperate fully in the timely preparation and filing of this joint motion for approval of the Settlement Agreement and dismissal of the Complaint with prejudice. If the CPUC approves the Settlement with modifications to the Settlement Agreement, and if a party decides in its sole discretion that the modifications are unacceptable, the Settlement Parties agree to negotiate in good faith to revise the Settlement Agreement in a manner that is acceptable to all Settlement Parties and designed to receive CPUC approval. [¶ 6.]

· PG&E's Proposal on Allocation of Settlement Proceeds.⁷ The joint motion for CPUC approval of the Settlement Agreement includes a proposal for allocation of Settlement Proceeds. With respect to the proposal for allocation of Settlement Proceeds, PG&E is exclusively responsible for the preparation of and the sole sponsor of this section of the motion. The Calpine Entities and LGS will not oppose PG&E's proposal on allocation of Settlement Proceeds, and shall remain neutral and express no opinion or position thereon. [¶ 6.]

B. Allocation of Settlement Proceeds

PG&E alone sponsors the portion of the motion relating to allocation of the settlement proceeds. PG&E describes the process as a mechanical allocation of the settlement proceeds into the applicable rate components, consistent with the accounting rules established in PG&E's tariffs. PG&E's design is to have the proceeds flow to Commission-adopted tariff rate components as if the alleged activities had not occurred, and PG&E, its ratepayers, and the cities and counties for which PG&E collects franchise fees charges, and franchise fee surcharges under Schedule G-SUR are compensated accordingly.

The settlement amount of $2.7 million is first adjusted by $278,749, representing actual outside attorneys' fees for PG&E up to December 18, 2003. From the net proceeds of $2.421 million, PG&E's core (residential and small business) customers will receive $81,372 and its non-core (large business) customers will receive $176,081. PG&E's shareholders will receive the remaining "non-protected" settlement proceeds of $1,666,927.

PG&E explains the calculation in detail. The net proceeds of $2.421 million were allocated 50 percent, or $1,210,626, to the alleged activity related to the Ryer Island Meter Station, and 50 percent to the alleged activity at Interconnections A and B, as those terms are defined in the complaint. According to PG&E, this allocation is based on a reasonable approximation of the alleged shortfall that occurred for each type of activity.

PG&E then used the applicable Rate Schedules to allocate the Settlement Proceeds. For activity related to the Ryer Island Meter Station, PG&E deemed Schedule G-NT - Gas Transportation Service to Noncore End Use Customers to be the applicable schedule, since industrial plants are the predominant facilities in this area. With respect to Interconnections A and B, PG&E relied on Gas Schedule G-EG - Gas Transportation Service to Electric Generators, because electric generation plants are the facilities downstream of these interconnections. PG&E further assumed the use of the Silverado Path for backbone service under Schedule G-AA - As Available Transportation On-System, and the calculation of monthly franchise fee surcharges under Schedule G-SUR - Customer Procured Gas Franchise Fee Surcharge.

PG&E developed a spreadsheet listing all applicable rate components in effect for each month of the alleged activity. It calculated a simple average for the period that the alleged activity occurred for each applicable rate component. It allocated the proceeds on a pro rata basis to each rate component based on their proportionate share of each applicable total rate.

With respect to the $1,210,626 that PG&E allocated to the alleged activity at the Ryer Island Meter Station, the revenue-protected costs - those subject to balancing account treatment and allocable to ratepayers - are $81,372 to core and $163,648 to noncore customers. The non-protected costs, or those allocable to PG&E's shareholders, are $753,667. The franchise fees and G-SUR charges allocated to cities and counties are $188,560, and the CPUC fees are $23,380.

With respect to the $1,210,626 that PG&E allocated for the alleged activity at Interconnections A and B, there are $12,433 revenue protected costs for noncore, but none for core customers, since schedule G-EG is exempt from Public Purpose Program surcharges. The non-protected costs are $916,260. The franchise fees and G-SUR charges to cities and counties are $229,730, and the CPUC fees are $52,203.

In total, the revenue-protected costs allocated to ratepayers are $81,372 to core customers, and $176,081 to noncore customers. The non-protected costs allocated to PG&E's shareholders are $1,669,927. The franchise fees and G-SUR charges allocated to cities and counties are $418,289, and the CPUC fees are $75,582.

Once PG&E receives the settlement proceeds, PG&E will credit the revenue-protected portion ($257,453) to the appropriate gas balancing accounts for each of the rate components, which accrue interest until rates are adjusted in the next appropriate gas proceeding or true-up filing. Once the applicable rate component is determined, the settlement proceeds will be flowed through as if they were billed at the time of the alleged activity, using simple averaged rates.