Introduction:

Over the past several years, various parties have worked diligently to resolve differences surrounding issues of significant import to QF contract restructuring. Based on the comments recently filed in this proceeding, all parties agree on a voluntary, optional method to review proposed QF contract restructurings, called the Qualifying Facility Restructuring Reasonableness Letter ("QFRRL") process. If adopted by the Commission, the QFRRL process will result in a more efficient, streamlined procedure for review of restructured QF contracts. However, the parties were unable to reconcile their different views on the standard of reasonableness, the voluntary nature of restructurings, and the shareholder incentive.

Settlement

This document embodies a settlement agreement ("Settlement") among the California Cogeneration Council ("CCC"), Independent Energy Producers Association ("IEP"), Enron Capital & Trade Resources ("Enron"), NRG Energy Inc. ("NRG), Pacific Gas and Electric Company ("PG&E"), San Diego Gas & Electric Company ("SDG&E") and Southern California Edison Company ("Edison") (jointly, "Parties") that resolves past differences on the above issues. The Settlement constitutes a consensus "package," and therefore the Commission's failure to adopt all elements of the package will cause the Parties to withdraw their support for it. The Parties remain in agreement on the QFRRL and urge the CPUC to approve this process immediately, and also request the Commission to issue findings adopting the following settlement provisions in their entirety:

1. The Commission's standard of reasonableness for approving a QF contract restructuring should be based on a determination of ratepayer benefits under a range of reasonable economic and operating assumptions. A QF contract restructuring is reasonable and should be approved if it provides ratepayer benefits under a range of reasonable economic and operating assumptions and the benefits have been allocated through voluntary, arm's-length negotiations between utilities and QFs or their representatives.

1. QF contract restructuring negotiations are voluntary for both utilities and QFs and QF contracts may be modified only by the parties upon their mutual agreement. Although agreements to restructure QF contracts are subject to Commission review, utility restructuring decisions or actions that do not result in a restructuring agreement are not subject to reasonableness review.

1. Enron will withdraw Its "Motion of Enron Capital & Trade Resources (Enron) Requesting an Order to Show Cause Against Southern California Edison Company," dated July 22, 1997.

1. The Parties agree that the shareholder incentive should be 10% of the expected ratepayer benefits as approved in D. 96­12­077. The Commission should deny the "Office of Ratepayer Advocates' Petition For Modification Of Decision No. 96­12­077" dated February 14, 1997.

1. The Parties agree that the Commission's expeditious adoption of the QFRRL process and each of the foregoing provisions will resolve issues 1­4 listed on page 3 of the Joint Assigned Commissioner's and ALJ's February 6, 1998 Ruling ("ACR"), and the Commission may therefore proceed to issue its final decision addressing those issues.

1. At the appropriate time, either this or another Commission proceeding will address:

• Transitioning short run avoided cost energy payments to the clearing price paid by the Power Exchange as identified in Public Utilities Code Section 390;
• Other suggestions to achieve ratepayer benefits through QF contract restructurings including proposals to use securitized bonds to finance the buyout or buydown of QF contracts, divestiture of all or a portion of Edison's and PG&E's QF contract portfolios, or other such suggestions.

In said proceeding, for the period commencing upon the effective date of this Settlement and continuing through the earlier of, a final Commission decision rejecting this Settlement or one year from the effective date of this Settlement, the Parties agree to engage in a "participatory process" wherein any Party to this document (a "Requesting Party"), prior to initiating a process at the Commission, would first provide written notice to all Parties to this document and thereafter meet with all interested Parties to discuss, on a confidential basis, regulatory proposals addressing such issues. During this process, the Parties would examine the potential for possible joint action or filings. On or after the date that is 60-days after the date of the Requesting Party's written notice (but no earlier than such date), any Party to this document may continue to pursue development of a joint regulatory proposal or proceed with a separate filing addressing any of the issues raised in the Requesting Party's written notice. The restrictions on the making of certain filings during the 60-day period described herein shall not preclude any Party to this document from responding to any Commission order or responding to any filing made by any other party. The Parties agree to utilize this participatory process prior to the issuance of a final Commission decision on this Settlement and, during such interim period, to take no actions, either directly or indirectly, that are inconsistent with the intent of this Settlement. Nothing in this Settlement shall restrict rights of the Parties to pursue judicial remedies under or concerning any QF contract.

IN WITNESS WHEREOF, the Parties hereto have caused this Settlement to be executed by their duly authorized representatives. This Settlement may be signed in multiple counterparts which, when taken together, shall constitute a single document and shall be effective as of the date first set forth above when all Parties have executed this Settlement. A facsimile signature shall be deemed an original.

Pacific Gas and Electric NRG Energy, Inc.

By: By:

Junona A. Jonas Ronald J. Will

Vice President, Gas & Elec. Supply Vice President

Operations and Engineering

Southern California Edison Independent Energy Producers Association

By: By:

Bruce C. Foster Jan Smutny-Jones

Vice President Executive Director

San Diego Gas & Electric Company California Cogeneration Council

By: By:

William L. Reed Stacy Roscoe

Vice President, Regulatory & Chair

Governmental Affairs

Enron Capital & Trade Resources

By:

David J. Parquet

Vice President