B. Background

In June 2001, Sierra Pacific Power Company (Sierra) sought a $10.2 million, interim 2-cent-per-kWh rate increase for all of Sierra's retail customers in California, based on a projected negative rate of return of 3.42% (Phase 1). Sierra requested that the interim rate increase be implemented subject to refund, pending a final decision on Sierra's Rate Stabilization Plan. In its filing Sierra asserted that it was preparing a detailed Rate Stabilization Plan to be filed in April 2002 (Phase 2), to include a complete general rate case (GRC), a proposal to reinstitute the energy cost adjustment clause (ECAC), a proposal pertaining to the termination of the 10% rate reduction mandated by Assembly Bill (AB) 1890 (Stats. 1996, Ch. 854), disposition of the Transition Cost Balancing Account (TCBA) and implementation cost recovery, a proposal to reinstitute the California Alternative Rates for Energy (CARE) balancing account in 2002, and a modification of the distribution performance ratemaking mechanism (PBR).

On July 17, 2002, in Phase 1, the Commission issued Decision (D.) 02-07-031 which granted Sierra's request for an interim rate increase of $10.2 million ($0.02/kWh) applied to all customer classes except those eligible for CARE and medical baseline, subject to refund.

Sierra filed Phase 2 on April 1, 2002 seeking a GRC increase that would raise its authorized revenue requirement by $8.9 million or 17.1% based on test year 2003. On December 18, 2002, Sierra filed an amendment to its Phase 2 application that reflected the impact of D.02-07-031 and agreements with Office of Ratepayer Advocates (ORA) on various issues. The effect of the amended application was a lowering of Sierra's requested revenue requirement increase to $4.8 million or 9.2%. ORA filed it report on Sierra's test year 2003 application recommending an increase of approximately $1.6 million or 3.3%. The California Ski Areas Association (CSAA) protested the proposed rate allocation.

Sierra, headquartered in Reno, Nevada, provides retail electric service to approximately 310,000 customers, of whom 44,500 are located in eastern California. All of Sierra's remaining customers are in northern Nevada. Sierra's California service territory extends from Portola in the north to Markleeville in the south, with most customers located in and around the Lake Tahoe Basin. Sierra's northern Nevada control area includes its California service territory and is not under the operational control of the California Independent System Operator (ISO). Virtually all of Sierra's generation assets are located in northern Nevada and none of those assets have been sold.

Public hearing was held and the matter was submitted. At the conclusion of the hearing, the presiding Administrative Law Judge (ALJ) directed the parties to submit a result of operations table on April 30, 2003. During the preparation of this exhibit, the parties commenced settlement discussions which resulted in an agreement that Sierra's revenue requirement should be increased to $3.02 million or 5.8%. A settlement agreement explaining how the parties arrived at this amount was filed on June 6, 2003. Because of the settlement agreement, no issues pertaining to Sierra's revenue requirement remain in contention. The parties continue to disagree on the methodology for calculating marginal customer costs, revenue allocation, and rate design.