To: Jim Price 11/1/96

From: Rich Swanson

Subject: Report to RWG

Jim, here is SDG&E's report on the status of certain topics that were to be discussed at the 10/24/96 RWG meeting which was canceled:

1. Generation PBR Proceeding

On October 22, a public workshop and a second prehearing conference were held in connection with the Generation PBR. The parties submitted a white paper to the ALJ on certain threshold issues that need to be addressed and resolved before the processing of the utilities' applications could proceed. The ALJ acknowledged the need to achieve resolution of these issues first, and set a briefing schedule which will lead to the issuance of a Proposed Decision addressing just these issues on 12/20/96. Another prehearing conference will be held on 1/09/97 to discuss a processing schedule for the remainder of the proceeding.

2. Updates on 11/15 Filings (effects of AB 1890)

AB 1890 requires the unbundling of 6/10/96 authorized rates by rate schedule into rate components for energy (priced at the market), transmission, distribution, public benefit programs, nuclear decommissioning, 10% rate reduction bonds (for residential and small commercial customers) and CTC. SDG&E's 11/15 filing will develop its authorized T&D (combined) revenue requirement; separate T&D (as required by D. 96-10-074 issued on 10/25/96) using a proxy transmission revenue requirement (which will later be replaced with the transmission revenue requirement SDG&E files with FERC on 2/28/97); use a proxy PX energy price (which will later be replaced with the actual market price once the PX is up and running); determine public benefit programs, nuclear decommissioning and 10% rate reduction bonds revenue requirements as per AB 1890; and present CTC as the residual amount.

3. Allocation of A&G Expenses

SDG&E is utilizing a methodology similar to that explained by SCE and PG&E at the last RWG meeting, which basically entails three steps in separating A&G expenses into functions: (1) Expenses are Directly Assigned if they are directly attributable to a functional area; (2) Causal (or Beneficiary) Factors are used when an expense supporting multiple areas is indirectly attributed to functional areas; and (3) Multi-Factor allocators are used for remaining expenses where no direct or causal relationship exists. The 11/15 Filing will use this approach in allocating total authorized A&G expenses to the T&D functional area.

4. Cost of Capital

In SDG&E's 11/15/96 Filing, the currently authorized bundled cost of capital is included in its authorized T&D revenue requirement, which is used to unbundle electric customer rates in accordance with the methodology described above. SDG&E believes this approach is appropriate for two reasons: (1) Unlike the others, SDG&E has not been ordered to divest itself and remains a vertically integrated utility as industry restructuring commences; and (2) "pure play" comparable companies (ie, those that include EITHER transmission OR distribution functions, but not both) do not exist, rendering any unbundled cost of capital estimates highly speculative at this point in time.

5. Rate Case Plan Proposals

In its 7/15/96 Preliminary Unbundling Filing and in a separate Motion to the CPUC, SDG&E proposed certain specific Rate Case Plan changes it deems necessary and, in fact, critical to successful implementation of Direct Access. In its 11/15/96 Filing, SDG&E is expanding these proposals for modifying the Commission's current Rate Case Plan to reflect (1) near-term changes required during the transition period until 12/31/2001, and (2) longer-range changes post-2001. Future RCP proceedings will need to address BCAP issues, electric tariff and rate changes, electric PBR issues and DSM rewards/penalties, among others.

Jim, please post on the RWG web site as we've discussed. If there are any questions on this material, parties should call me at (619) 696-4069 or contact me by e-mail.