4. Overview of the Amended Settlement Terms

The Amended Settlement which supercedes the November Settlement differs from it in only one respect: the Amended Settlement increases the amount of the immediate ratepayer rate reduction from $28.3 million to $44.1 million in light of the increase in the market prices for natural gas in the intervening time period. We describe this aspect of the Amended Settlement in greater detail below. In addition to SoCalGas, the signatories to the Amended Settlement (like the November Settlement) are ORA, TURN, Southern California Edison Company (Edison), and the Southern California Generation Coalition (SCGG). In disposing of all issues among these parties concerning the abandonment and sale of Montebello, the Amended Settlement focuses on three major issue areas: the process for salvage and sale; ratemaking treatment; and the removal of costs from authorized margin and rates. More specifically, the parties propose:

· SoCalGas will withdraw the approximately 3 Bcf of working gas and 23 Bcf of cushion gas stored at Montebello.² SoCalGas will include working gas in the portfolio of gas supplies sold to gas procurement customers at tariffed rates. SoCalGas will sell cushion gas to the open market at market prices.

· The cost of the working gas recovered will be reflected in the calculation of SoCalGas' tariffed gas procurement rate based on the "LIFO" (last in first out) methodology currently applied to working gas inventory for accounting and ratemaking purposes. SoCalGas' revenue requirement for working gas inventory will be adjusted using the same methodology. The working gas will not be included in the calculation of any shareholder reward/penalty under SoCalGas' Gas Cost Incentive Mechanism (GCIM).

· Following Commission approval of the Amended Settlement, SoCalGas will enter into one or more transactions (using futures contracts, swaps, financial derivatives, or similar transactions), to fix the price for up to 75% of the cushion gas estimated to be recoverable in the first two years. As long as they are consistent with industry practice, any fees, commissions, or similar costs incurred by SoCalGas to engage in such transactions will be treated in the same way as costs of salvage and will not be subject to subsequent reasonable review.

· SoCalGas will salvage remaining property (e.g. utility plant, any cushion gas remaining in storage; the Montebello real property) when the estimated value to be obtained from salvage outweighs the estimated value of continued withdrawal and sale of cushion gas. SoCalGas will not be required to file another §851 application prior to disposition of this remaining property but may recover utility plant for use in other utility operations and then sell all other property through a real estate broker.³

· Prior to sale of the Montebello real property, SoCalGas will determine the costs of remediating any environmental conditions prior to sale versus selling the property "as is" (with the purchaser to indemnify SoCalGas for the cost of any future environmental remediation). SoCalGas will pursue whichever option maximizes the net proceeds from the sale. Any environmental remediation by SoCalGas prior to sale will be recorded as a cost of salvage.

· The estimated $60.2 million net after-tax gain on sale and salvage of all SoCalGas property (except working gas), including any effect on income tax expense incurred by SoCalGas, will be allocated equally between shareholders and ratepayers (i.e. an estimated $30.1 million each before tax gross-up or $37.8 million for ratepayers after tax-gross up). The shareholders' allocation will not be subject to SoCalGas' base rate Performance Based Ratemaking (PBR) earnings sharing mechanism adopted in D.97-07-054. These estimates are taken from Appendix A, as revised in compliance with the April 25, 2001 ACR.

· Sixty days after Commission approval of the Amended Settlement, SoCalGas will reduce rates for one year by $30 million, which represents ratepayers' share of the estimated net gain on sale of the cushion gas.⁴

· This rate reduction will be subject to subsequent "true-up" to reflect the ratepayers' share of the actual, rather than estimated, net gain, as recorded in an interest bearing tracking account. All proceeds from salvage, including any revenues from oil produced in association with the recovery of gas (to the extent SoCalGas owns the rights at the time the oil is produced) will be recorded in the tracking account, as will all costs. ORA will audit tracking account entries on an on-going basis. At the discretion of the Commission, any rate adjustment warranted to true-up differences between estimated and recorded net gain will occur in 2004 or thereafter.

· The $30 million rate reduction, and any subsequent adjustments to true up differences between estimated and recorded net gain, will be allocated between customer classes on the basis of 70% to core customers and 30% to noncore customers. Allocation within these two customer classes shall be on an equal cents per therm basis, excluding noncore customers with fixed price contracts.

· Sixty days after Commission approval of the Amended Settlement, SoCalGas' authorized base margin will be reduced, permanently, by approximately $14.1 million to remove the cost of ownership and operation of Montebello from SoCalGas' authorized base margin.⁵

² Working gas, for the purposes of the Amended Settlement, is defined as all gas withdrawn up to the point that the amount of gas recovered exceeds the amount of working gas which SoCalGas' records show to be stored in the field; all subsequent withdrawals are defined as cushion gas. The Amended Settlement provides for gas withdrawal "as quickly as possible and economically reasonable". (Amended Settlement, p. 2.) SoCalGas anticipates recovery of the working gas over the first month with recovery of all economically recoverable gas continuing until about 2005. On a daily basis, production should average approximately 50 million cubic feet per day (MMcfd) for about 7 months and lesser amounts after that. ³ SoCalGas anticipates a period of perhaps two years will be necessary to complete abandonment and sale of Montebello after gas withdrawal ceases. ⁴ If the Commission has not approved the Amended Settlement by July 12, 2001, under its terms the parties shall meet and confer in an attempt to agree on whether, and if so, how, to modify this $30 million figure to reflect then-current forecasts of gas prices. Should the parties fail to reach unanimous agreement, the $30 million will revert to $14.2 million, the figure agreed upon in the November Settlement. ⁵ As shown in Appendix B of the Amended Settlement, the precise amount depends upon the year in which the adjustment occurs. If sixty days after approval is a date in 2001, the adjustment will be $14,103,000.