II.
RECITALS

A. SCOPE OF THE AGREEMENT

On October 2, 2000, SDG&E filed Application 00-10-008 in the Third Annual Transition Cost Proceeding. In response to Assembly Bill ("AB") 265 and Commission Decision 00-09-040, this Application contained, among other things, prepared direct testimony supporting the reasonableness of SDG&E's electricity procurement operations and expenses during the Record Period of July 1, 1999 through August 31, 2000. On February 7, 2001 the California Department of Water Resources ("CDWR") initiated procurement of SDG&E's "net short" electric power requirements thereby obviating the need for SDG&E, after that date, to procure energy for its bundled customers in excess of its utility retained generation. During the course of ORA's discovery in this proceeding, ORA reviewed the electric procurement practices of SDG&E through February 7, 2001. The purpose and scope of this Settlement Agreement is to resolve and settle all issues relating to the reasonableness of SDG&E's electric procurement practices from July 1, 1999, through February 7, 2001. This Settlement Agreement effectuates the Memorandum of Understanding executed between SDG&E and ORA on June 15, 2001, and is the "ORA Settlement Agreement" described and referenced in a Memorandum of Understanding dated June 18, 2001 by and among the CDWR, SDG&E, and, as to certain sections therein, Sempra Energy (referred to herein as the "DWR/SDG&E MOU").

B. SDG&E's POSITION AND PRESENTATION

SDG&E's electric energy procurement activities from July 1, 1999 through August 31, 2000, including the policies supporting them, are addressed in the written prepared direct testimony of witness William Reed, Wayne Sakarias, Dr. Stephen C. Pirrong and Matt Harris (served with SDG&E's application) and the prepared rebuttal testimony of each of these witnesses (served on April 26, 2001). Additional information on SDG&E's electric energy procurement practices and policies after August 31, 2000 through February 7, 2001 were provided in various filings made with the Commission and in responses to numerous data requests.

C. ORA'S POSITION AND PRESENTATION

ORA is the staff component of the Commission responsible for representing the perspective of utility customers in Commission proceedings. In that capacity ORA staff members conducted a thorough review of SDG&E's electric energy procurement activities. In a report dated April 5, 2001, ORA witnesses Steve Linsey, Douglas C. Smith, Louis Irwin, Littlejon Jan Reid and Scott Logan addressed SDG&E's electric procurement activities from July 1, 1999 to August 31, 2000. In a declaration to be filed as an attachment to the motion to adopt this Settlement Agreement, ORA witness Steve Linsey will address ORA's review of SDG&E's electric procurement practices between September 1, 2000 through February 7, 2001. For the entire period, ORA and its experts conducted extensive inquiry concerning SDG&E's activities and policies. ORA propounded to SDG&E numerous questions and requests for information and documentary support. ORA is the only party that conducted discovery relative to SDG&E's electric procurement practices and is the only intervenor that filed testimony in this proceeding.

D. SETTLEMENT NEGOTIATION PROCESS

After the service of ORA's Report in A.00-10-008, two days of hearings were held before Administrative Law Judge (ALJ) Barnett on March 26 and 27, 2001. During these hearings SDG&E's witnesses presented SDG&E's direct testimony and responded to cross-examination. Hearings on ORA's testimony and rebuttal were set for late April, 2001. In mid-April, 2001 SDG&E took the depositions of each of ORA's witnesses, except for Doug Smith who responded to detailed data requests.

Following the initial hearings and SDG&E's depositions of ORA's witnesses, settlement discussions commenced regarding a resolution of ORA's recommended disallowances and penalties. These discussions expanded to include other issues pertaining to the electric crisis in California, such as the undercollection incurred by SDG&E in its Energy Rate Ceiling Revenue Shortfall Account ("ERCRSA") as a result of AB 265. In negotiations with SDG&E, ORA agreed that expanding the scope of its review and recommendations through February 7, 2001 was appropriate given ORA's analysis of these activities and SDG&E's discontinuance of its non-URG electric procurement activities as of that date.