Terms of the Settlement Agreement

The Settlement Agreement resolves all issues related to Sierra's 2006 GRC. Its primary provisions are summarized below:

A. Revenue Requirement

The amounts listed below are reductions from Sierra's requested expenses and plant amounts for 2006 as a result of the Settlement Agreement. Reductions in revenue requirement as a result of these expense and plant reductions are shown in parentheses.

· A reduction to depreciation expense to reflect a Public Service Commission of Nevada depreciation study ($1,685,000);

· A reduction reflecting potential savings as a result of corporate reorganization ($164,000);

· A reduction to fuel related materials and supplies ($123,000);

· A reduction for Operations and Maintenance expenses ($650,000);

· A reduction in the costs of implementation and education related to electric restructuring ($330,000); and

Significant adjustments to plant amounts include:

· A reduction to forecasted distribution plant ($262,000);

· Reduction in allowed costs for the Pinon Pine Power Plant ($297,000);

· Removal of the unamortized balance of generation divestiture costs ($84,000);

· A reduction to forecasted transmission plant ($100,000); and

· A reduction in rate base to reflect customer deposits ($25,000).

In addition, the Settlement Agreement reflects a reduction in rate of return as a result of a reduced return on equity from Sierra's requested 10.9% to 9.92%. The revenue requirement impact of this reduction is $580,000.

B. Marginal Costs, Revenue Allocation, and Rate Design

Significant principles adopted in the Settlement Agreement for unbundling costs, determining marginal costs, and designing rates include:

· All demand side management costs are unbundled to the distribution function;

· Franchise taxes are allocated on a property-related allocation factor;

· Certain charges are allocated to the distribution function; the balance of other operating revenues are allocated on a sales revenue basis;

· Sierra's marginal cost study is used for purposes of designing rates, however, Sierra will re-evaluate the method of determining class marginal transmission and demand costs in its next GRC;

· Revenue is allocated based on the Equal Percentage of Marginal Cost methodology with a "cap"¹² of 3.2%;

· The residential customer charge is increased from $4.50 per month to $6.00 per month, and the differential between residential tiers is set at 17.5%;

· The master meter credit is calculated and implemented in a manner similar to the calculation proposed by Sierra. A submetering credit includes an adjustment for common area usage of 5%; and

· Sierra will offer an internet-based bill calculation tool for master metered customers, but will not include costs of this service in the DS-1 rate schedule.

¹² The cap defines the maximum increase to any class above the overall percentage increase.