SSJID Offer To Purchase PG&E Electric System 

August 24, 2006

Mr. Thomas B. King

President & CEO

Pacific Gas and Electric Company

77 Beale Street

San Francisco ,  CA   94177

Subject: Offer to purchase specific electric distribution assets of PG&E Company

Dear Mr. King;

 Attached you will find a Purchase Offer and supporting documents extended as a good faith offer to acquire specific electric distribution facilities operated under a franchise held by PG&E Company. The facilities in question currently serve approximately 35,000 retail electric customers in the southern most unincorporated area of San Joaquin County , as well as facilities in the cities of Escalon, Manteca and Ripon. This offer is made by the Board of Director’s of South San Joaquin Irrigation District (SSJID) in the interest of resolving our current dispute regarding electric service in this area in a manner that ensures the greatest benefit to all concerned, including PG&E and its ratepayers as well as the citizens and businesses we intend to serve.  

 SSJID’s evaluation of the feasibility of providing retail electric service to these communities has clearly demonstrated that it could provide significant benefits, including lower rates to the customers it intends to serve, while potentially benefiting PG&E and its remaining ratepayers as well.  SSJID’s efforts to date to acquire the facilities necessary to provide such service have, however, been vigorously opposed by PG&E and your representatives.  

This dispute has already cost PG&E and SSJID a significant amount of time and money and may cost both of us considerably more before it is resolved,  As a representative of PG&E stated at our last Board meeting, these efforts are costing the shareholders of PG&E a great deal of money. In deed, the time and money, as well as the generally negative tone of the public debate, is not in the best interest of any of the parties involved.  For these reasons, SSJID is willing to extend, in good faith, a fair and substantial offer to resolve this dispute on mutually beneficial terms as detailed in the attachments hereto.  

The terms of this offer afford a gain on sale (value above book) in the area $35 million, which SSJID will advocate to be shared between the remaining ratepayers and shareholders of PG&E. The terms represent a $25 million premium above fair market value as identified by an independent certified utility appraiser hired by SSJID.

 Because the District currently owns more than 70 MW of hydroelectric generation, has a substantial credit position backed by significant reserves, has no long-term debt and has statutory authority to provide retail electric service, we find this transaction does not represent a precedent that other entities might emulate.

 This offer represents approximately 100% margin above the current value of these assets as recorded by the CPUC.

 I hope you will give serious consideration to the benefit that this offer represents to your Company and its shareholders, as well as the interests of the ratepayers.  Protracted litigation and negative press for the Company and the shareholders that pay for this activity is something we genuinely hope to eliminate.

 We look forward to a productive and fruitful dialogue with you regarding this transaction.

 Thank you for your consideration and prompt response.

Sincerely,

 Dale Kuil

Vice President

SSJID Board of Directors

Cc: Peter A. Darbee, Chairman of the Board & CEO, PG&E Corp.

PURCHASE OFFER

The following is an offer to purchase (“Offer”) specific electric distribution assets regulated by the California Public Utilities Commission on behalf of the affected ratepayers and operated under franchise granted to PG&E Corporation within the Cities of Escalon, Ripon, Manteca and the unincorporated territory of San Joaquin County within the service territory of South San Joaquin Irrigation District.

This Offer is made by the South San Joaquin Irrigation District “SSJID” (District) on behalf of the electricity consumers that reside and/or conduct business in the territory served by SSJID.

The Offer is presented to PG&E Corporation and its shareholders, as well as for consideration by the California Public Utilities Commission (CPUC) on behalf of PG&E’s remaining customers.

The intent of this Offer is to assure a fair and mutually beneficial transfer of public utility facilities necessary for providing the essential public service of electric distribution in the SSJID service area. To that end, SSJID recognizes and respects the interests of PG&E Corporation shareholders, the remaining PG&E ratepayers, as well as the consumers in the SSJID service area.

This Offer addresses: 1) the “Fair Market Value” of the electrical distribution facilities to be acquired from PG&E, 2) severance damages due PG&E resulting from the separation of the electrical distribution facilities, 3) compensation for the value of remaining PG&E substation facilities that may be impaired due to the transfer of loads to the District, and 4) a shareholder/ratepayer premium.

This Offer is made as a good faith effort to avoid unnecessary and inefficient expense and delay, and to facilitate a mutually beneficial transfer of these essential public facilities. The Offer considers the three generally accepted standard forms of appraisal of utility asset values:  income approach, market approach and cost approach.

TERMS AND CONDITIONS

1. SSJID shall pay to PG&E the sum of $48,925,000, which is the appraised value of the electric system determined by R.W. Beck in the attached summary appraisal. 

2. SSJID shall pay to PG&E the actual costs, assuming prudent utility practice, for severance damages, estimated to be $1,444,000, for PG&E’s costs associated with physically separating the system from the facilities that SSSJID will purchase. SSJID will be responsible for its own costs to reconnect and construct new facilities to separate the two systems.
3. SSJID shall pay to PG&E a substation impairment fee in the amount of $1,592,000 for the resulting excess capacity PG&E may recognize at the Vierra, Avena and Riverbank substations.

4. SSJID shall pay to PG&E the amount of $2,661,000 as the value of land, rights-of-way and easements associated with the specific facilities that SSJID is purchasing.

5. SSJID shall pay to PG&E a premium of $25 million to be divided equally between the remaining PG&E ratepayers and PG&E shareholders.

The above described Offer results in a purchase price somewhat in excess of 2 times net book value. This ratio compares favorably to eight recent utility transactions, which ranged between 1.13 times book value and 1.74 times book value, the latter being the “Patterson Service Area Agreement” between PG&E and Turlock Irrigation District (TID).

In addition to the above terms and conditions, SSJID fully expects to pay all legally required non-bypassable charges (exit fees) as established and approved by the CPUC relative to the assets being purchased.

As per the previous agreement between the parties, SSJID will acquire the assets through a “friendly condemnation” on terms consistent with this Offer, except as the Parties otherwise agree in writing. 
           

This offer is conditioned on the resolution of any issues regarding the District’s authority to offer retail electric service, reconciliation of inventories and completion of due diligence customary for transactions of this type, and good-faith negotiation of all other issues required to complete a mutually-acceptable purchase agreement on terms consistent with the offer.

South San Joaquin Irrigation District, 11011 E. Highway 120, Manteca, CA, 95336. ~ Tel: 209.249.4600 ~ Fax: 209.249.4640

Copyright 2005, South San Joaquin Irrigation District.  All rights reserved.