I. BACKGROUND

On July 1, 2003, the Commission was asked to consider whether to adopt a proposed settlement agreement ("Settlement" or "PSA") entered into by Pacific Gas and Electric Company ("PG&E"), PG&E Corporation and Commission Staff. The PSA would allow PG&E to emerge from bankruptcy protection as a financially healthy and integrated utility. The PSA was structured to bring PG&E out of bankruptcy, to help PG&E achieve creditworthiness and to pay off all of its creditors. Creditworthiness required obtaining an investment grade credit rating, which would give PG&E access to the capital markets with low interest rates and enable the utility to continue providing safe, reliable and responsive service to ratepayers on a lowest cost basis. The PSA provided for rate reductions for ratepayers. Under the PSA, the utility's generation would continue to be subject to the Commission's jurisdiction. Parties to the proceeding were permitted to offer limited modifications to the PSA. On December 18, 2003, the Commission adopted D.03-12-035, which modified the PSA and approved this modified settlement agreement ("MSA").¹

Applications for rehearing were timely filed by: (1) City and County of San Francisco ("CCSF"); (2) City of Palo Alto ("Palo Alto"), (3) Aglet Consumer Alliance ("Aglet"), and (4) Office of Ratepayer Advocates, CCSF and Aglet (collectively, "Joint Applicants").

CCSF raises the following legal errors: (1) The decision's requirement for ratepayer contributions violates the "just and reasonable" standard set forth in the Public Utilities Code, as the settlement proponents have allegedly failed to meet their burden of proof that the settlement is fair and necessary, and the decision contains no, or legally inadequate, findings on important issues concerning whether the amount of money is necessary to make PG&E creditworthy, justifies the settlement of the outstanding litigation, or is needed to ensure that PG&E would remain subject to CPUC jurisdiction; (2) the Commission acted arbitrarily and capriciously in failing to detail the basis for the revenues provided to PG&E and errs in allowing PG&E to recover costs for which there was no legal basis; (3) the decision unlawfully requires ratepayers to contribute capital to PG&E and allows PG&E to earn a return on such contribution; (4) the Commission errs in approving provisions in the PSA that impermissibly bind subsequent Commissions; (5) the decision unlawfully affords the bankruptcy court control over key Commission responsibilities; (6) due process was denied with respect to issues involving the TURN/PG&E settlement, the rejection of CCSF's request to set aside submission and reopen the proceeding for the taking of additional evidence, and alleged role of Commissioner Peevey in the negotiation of the PSA. CCSF also makes a request for oral argument.

In its rehearing application, Palo Alto also challenges D.03-12-035 on the basis that the decision unlawfully binds future Commissions to the terms of the settlement. Palo Alto further asserts that the decision unlawfully impinges upon the Commission's ratemaking and regulatory authority, and the Commission has impermissibly abdicated its authority to the Bankruptcy Court.

Aglet raises several due process challenges to D.03-12-035 based on the procedure and schedule adopted for the proceeding. Aglet argues that the schedule was legally flawed in that it failed to provide a meaningful opportunity for discovery and analysis. It also alleges that the procedure unlawfully permitted the improper admission of previously excluded testimony on land use commitment that was not subject to cross-examination, and precluded the review and consideration of alternate plans presented by customer representatives such as Aglet. In addition, Aglet raises the following legal arguments: (1) The decision lacks sufficient record to justify why the MSA is just and reasonable, and the decision also fails to provide the required findings of fact and conclusions of law on the financial consequences of the MSA, in violation of Public Utilities Code Section 1705; (2) there is no legally adequate evidence to support the determination that "there is no question regarding the motives, independence, or profession competence" of the Commission Staff that negotiated the Proposed Settlement Agreement"; (3) the decision permits unjust and unreasonable rates, in terms of the approved regulatory asset, authorized returns on transition costs and authorized return on equity; and (4) there is no substantial evidence to support the funding of $30 million by ratepayers to provide wilderness experiences and urban parks, or for an additional $15 million for clean air technology. Like CCSF and Palo Alto, Aglet also argues that the Commission has no authority to bind future Commissions, and has unlawfully transferred its ratemaking jurisdiction to the Bankruptcy Court. In addition, Aglet alleges that the decision unlawfully "cedes Commission jurisdiction to commercial firms that plainly serve investor over ratepayer interests," and challenges the importance of the issuance of the investment grade ratings.

Joint Applicants claim that D.03-12-035: (1) unlawfully prevents this Commission and future ones from discharging their responsibility to set a reasonable and just return on equity; (2) unlawfully permits PG&E to recover from ratepayers costs incurred to benefit shareholders and costs imprudently incurred for ratepayers, and thus, results in unjust and unreasonable rates; (3) violates the Commission's responsibility to balance ratepayer and shareholder benefits and costs, and to achieve its goals at the minimum cost to ratepayers; (4) impermissibly fails to require PG&E to meet its burden of proving the reasonableness of costs to ratepayers; (5) indirectly prejudges as reasonable the Annual Transition Cost Proceeding costs without the benefit of hearings or brief; (6) is not support by a record to establish that ratepayer costs to return PG&E immediately to creditworthiness are reasonable; (7) fails to comply with Public Utilities Code Section 1705, in that the Commission failed to make findings concerning the relative effects on ratepayers and shareholders; (8) erroneously concludes that PG&E will only receive 60 cents on a dollar under the Settlement; and (9) violates the parties' rights to procedural due process and law, including how the TURN/PG&E settlement was addressed.

PG&E and the Official Committee of Unsecured Creditors ("Committee") filed responses to the applications for rehearing. Both respondents oppose the granting of the applications for rehearing.