This looks great!  I would like to have a call with you, Mike, Mike  and Jeff 
Monday morning.  I am wide open.  Pls set up with Mollie.

Chris




Laird Dyer
08/18/2000 08:58 AM
To: Christopher F Calger/PDX/ECT@ECT
cc: Michael McDonald/SF/ECT@ECT, Michael Wong/SF/ECT@ECT, Jeff 
Dasovich/SFO/EES@EES 
Subject: PG&E & Sempra Energy (SoCalGas & SDG&E) Gas Related Opportunities

Chris,

Attached are excel files summarizing data related to PG&E's and Sempra's core 
procurement operations.  Mike Wong did an excellent job in obtaining this 
data in a very short timeframe.  The data related to Sempra's awards under 
their procurement incentive mechanisms (GCIM for SoCalGas; PBRM for SDG&E) 
was obtained under strictest confidence by Mike; consequently, we have been 
asked to not distribute it.



Basically, this is the story.  Sempra operates under 2 incentive mechanisms:  
core procurement and productivity.  PG&E operates under only 1 - core 
procurement.  Sempra is a more attractive candidate for an outsourcing given 
its structure and incentives.

Sempra - Core Procurement Mechanism

The core procurement mechanism, although including some transport and storage 
elements, is driven by Sempra's ability to buy gas below the 1st of month 
index at the southern California border.  There is a tolerance around the 
index between which all costs or benefits accrue to rate-payers.  If the cost 
of gas is above or below the tolerance band, Sempra shares 50% of the cost / 
benefit.  In most years, per the data summary, Sempra has realized a 
benefit.  The benefit has ranged, on a combined basis, from $1 MM to $15 MM 
annually.

Further, Sempra indicates a brokerage fee of $0.0201/MMBtu which reflects its 
short run avoided cost of procuring gas for core load.  Effectively, this is 
the credit extended to core load taking service from an alternate provider.  
This is also an indication of Sempra's short run variable cost of operation 
and imputes an annual cost of $7.5 MM for procurement related activities (372 
Bcf/yr * $0.0201/MMBtu).  In fact, this understates Sempra's procurement 
costs which are better defined by a long term avoided cost.  A long term 
avoided cost of procurement would reflect savings from staff reductions and 
reductions in associated overhead and would at least double the indicated 
$7.5 MM number.  Thus, we expect that Sempra would realize about $15 MM in 
savings from outsourcing its core procurement function; and, they would 
retain a substantial portion, if not all, of this saving under their 
productivity mechanism.

Sempra - Productivity Mechanism

Sempra also operates under a productivity mechanism which is based upon a 
revenue requirement in a base year (say 1998).  That revenue requirement 
increases at inflation less a productivity factor determined at the outset.  
The productivity factor ("X") has been in the range of 1 - 1.5% under various 
applications to the CPUC by SoCalGas, SDG&E and SCE.  There is also a 
mechanism, where cost savings relative to the revenue requirement all accrue 
to ratepayers, but the utility is rewarded by a higher rate of return.  
Either way, there is a direct correlation of savings to shareholder value 
under these mechanisms.  

PG&E

PG&E has yet to receive approval for a productivity mechanism.  It operates 
only under a core procurement incentive mechanism ("CPIM") and has realized 
very little shareholder value - about $2 MM since its effective date of 
operation in June 1994.  PG&E's core load is about 300 Bcf/year.  PG&E's 
brokerage fee is 2.4 cents/MMBtu, imputing $7.2 MM per year in short run 
procurement costs.  Much like Sempra, PG&E's long run cost of procurement 
likely exceeds $15MM per year.  However, without a productivity mechanism, 
most, if not all, savings from outsourcing this function would accrue to 
ratepayers.

Conclusions

Sempra

There is a substantial opportunity with Sempra as its shareholders largely 
benefit from an outsourcing.  If we were to propose to take on a full 
requirement delivery obligation we would probably have to offer a 5 cent per 
MMBtu discount to the index - $18.6 MM/year.  However, we would have access 
to 70 Bcf of storage and 1.1 Bcfd of interstate transmission in order to 
serve 372 Bcf/year of load.  Under a scenario where Sempra outsources its 
procurement function, paying Enron, say, $5 MM per year, but retains its 
procurement obligation, shareholder benefit is about $10 MM per year.  If 
Enron also assumed the procurement obligation at Index - 5, Sempra's 
shareholders would lock-in procurement incentive benefits of $10 MM per 
year.  I think both scenarios are compelling for Sempra.

PG&E

Without a productivity mechanism, procurement outsourcing savings would 
largely accrue to ratepayers.  PG&E has not realized significant benefit 
under its CPIM except that it is no longer subject to disallowance for its 
procurement decisions which have been costly to shareholders in the past 
(specifically the A&S contracts in Alberta).  Without taking on the 
procurement obligation and offering gas at city-gate at a discount to index, 
there is little or no incentive to PG&E to oursource at this time.

Final Comments

Mike McDonald met with Bob Glynn of PG&E yesterday and was directed to the 
president of the utility, Gordon Smith.  Mike will be speaking to his 
high-placed contact at Sempra early next week.

We are working to better define all the parameters under these mechanisms but 
feel that it is important to get you an early, notional indication of the 
issues at play among California's gas related IOU's.

Laird