Settlement Agreement

EX-99 3 exh99.htm SETTLEMENT AGREEMENT BETWEEN SCE AND CPUC Settlement Agreement

SETTLEMENT AGREEMENT

THIS SETTLEMENT AGREEMENT ("Agreement") is entered into by and among the undersigned Parties hereto on
this 2nd day of October 2001, with reference to the following:

RECITALS OF THE PARTIES

A. The Parties hereto are currently engaged in litigation in the case styled as Southern
California Edison Company, Plaintiff, vs. Loretta M. Lynch et. al., presently pending in the United States
District Court for the Central District of California, Case No. 00-12056-RSWL(Mcx) (the "Litigation").

B. In the Litigation, SCE has contended, inter alia, that Defendants have not permitted SCE to
recover in retail rates the full amount of SCE's costs, including its wholesale electric procurement costs, as
required by federal law. In the absence of this Agreement, SCE would have sought to recover these costs over a
shorter time period than provided for in this Agreement. Such a recovery could have resulted in substantial and
immediate retail rate increases materially in excess of electric retail rates currently in effect. Defendants
have denied that they have acted unlawfully, and have denied that the Court in which the Litigation is pending
has jurisdiction over the dispute or to grant the relief sought by SCE. The Court has overruled Defendants' Mo-

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tion to Dismiss on jurisdictional grounds and then stayed the Litigation at the parties' request.

C. SCE and the CPUC agree that certain wholesale electric procurement costs reflect wholesale
prices that may be unlawful. SCE and the CPUC, along with agencies of the State of California, are seeking
recovery and refunds of such unlawful costs through proceedings before the Federal Energy Regulatory Commission
("FERC") and may seek recovery and refunds through the courts (the "Refunds").

D. As a result of SCE's past inability to recover its wholesale electricity procurement costs,
SCE's ability to procure all of the electricity needed to serve its customers has been threatened, the State of
California and its taxpayers have assumed SCE's traditional function of procuring electric power for SCE's retail
customers, and SCE is in the midst of a severe liquidity crisis, having incurred procurement related liabilities
and indebtedness totaling approximately $6.355 billion. SCE cannot access credit in financial markets.
Continued uncertainty and instability threaten the reliability of SCE's electric service and create a likelihood
that the temporary role of state government in electricity procurement will be extended indefinitely. Before the
Litigation and the Refunds could be resolved through trial and appeal, SCE would likely be forced into bankruptcy.

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E. As a result of decisions of the CPUC adding a surcharge to retail rates, reductions in natural
gas prices, the imposition of wholesale price mitigation measures by FERC, and the current stability of
California's wholesale electricity markets resulting from the procurement activity of the State of California and
conservation by California consumers, SCE has been recently collecting, and may continue to collect, retail
revenues in excess of current costs. The continuation of current retail rates that produce revenues in excess of
SCE's current costs creates an opportunity for resolution of the Litigation and recovery of SCE's financial
capability and ability to procure all of the electricity needed by its customers without further retail rate
increases. The Parties wish to use this opportunity to settle the Litigation for the benefit of ratepayers, the
State of California and SCE and to enable SCE to procure all of the electricity needed by its customers.

F. The purposes of this Agreement are to (i) avoid instability and uncertainty for ratepayers, the
State of California and SCE, (ii) protect consumers from the potential impact of further volatility in
electricity prices, (iii) avoid further costly and wasteful litigation, and (iv) restore the investment grade
creditworthiness of SCE as rapidly as reasonably practical so that it will be able to provide reliable electric
service as a state regulated entity as it has in the past.

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G. In the exercise of its police and regulatory power, the CPUC is entering into this Agreement
and shall adopt such decisions and orders as it deems necessary to implement and carry out the provisions of this
Agreement.

H. The CPUC and SCE acknowledge that a reasonable and predictable regulatory framework for
procurement activities of, and recovery of procurement costs by, SCE is important to SCE's procuring all of the
electricity needed to serve its customers and the payment of its Procurement Related Liabilities.

I. This Agreement is a compromise believed by the Parties to be in the best interests of
ratepayers, the State of California and SCE. Nothing in this Agreement shall be construed or deemed to be an
admission of any liability or any material facts by any of the Parties hereto, it being agreed that any and all
obligations of the Parties related to the Litigation shall be solely as set forth in this Agreement and the
Stipulated Judgment. This Agreement is intended to be non-precedential in all particulars, and the
enforceability of this Agreement and the Stipulated Judgment herein will be of such limited duration as is
necessary to accomplish their purposes.

NOW, THEREFORE, in consideration of the foregoing, the agreements set forth herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to
be legally bound, hereby agree as follows:

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ARTICLE 1
DEFINITIONS

Section 1.1 Certain Defined Terms. When used in this Agreement, the following terms shall have the
following meanings:

(a) "AB 1890" means California Assembly Bill 1890 enacted into law in 1996, Chapter 854, as thereafter
amended.

(b) "Agreement" shall have the meaning given to such term in the introductory paragraph hereof.

(d) "CDWR Charges" means retail charges for electricity that CDWR sells and has sold to retail customers in
SCE's service territory, including financing costs in connection therewith.

(e) "CPUC" means the California Public Utilities Commission and the Commissioners thereof in their official
capacities and their respective successors.

(f) "FERC" has the meaning set forth in the Recitals to this Agreement.

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(g) "Litigation" shall have the meaning given to such term in the Recitals to this Agreement.

(h) "Net Short Procurement Costs" means all costs, including imbalance energy costs, incurred by SCE for
energy, capacity and ancillary services and all other costs reasonably related thereto that are determined to be
reasonable, or otherwise meet standards of reasonableness as established, by the CPUC, excluding SCE's costs of
energy, capacity and ancillary services provided by (i) generating facilities that are owned by SCE as of the
date of this Agreement and (ii) bilateral and QF contracts to which SCE is a party as of the date of this
Agreement. For the sake of clarity, the Parties agree that CDWR Charges are not part of SCE's Net Short
Procurement Costs. Nothing in this Agreement is intended to prevent SCE from incurring Net Short Procurement
Costs.

(i) "Parties" means the CPUC and SCE.

(j) "Person" means an individual, partnership, joint venture, corporation, limited liability company, trust,
association or unincorporated organization, any governmental authority, or any other entity.

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(k) "Procurement Related Liabilities" shall mean the procurement related liabilities and
indebtedness listed on Schedule 1.1 attached hereto, totaling approximately $6.354 billion.

(l) "Procurement Related Obligations" shall mean the costs recorded in the Procurement Related Obligations
Account together with interest thereon as calculated in Section 2.1(c).

(m) "Procurement Related Obligations Account" or "PROACT" means the Account for Recovery of Procurement
Related Obligations established pursuant to Section 2.1(a) of this Agreement.

(n) "PX Billing Claim" means any claim, liability, demand, cause of action, chose in action, levy,
attachment, lien, encumbrance, or right of setoff, reimbursement, relief, injunction, contribution, indemnity or
similar right, whether in law or in equity or otherwise, that any Person has against SCE for SCE's failure, or
alleged failure, to pay timely any amounts due or claimed to be due to the California Power Exchange Corporation,
a not-for-profit public benefit corporation, or the California Independent System Operator Corporation, a
California not-for-profit public benefit corporation, to the extent such amounts due or claimed to be due are
reflected in the opening balance of the PROACT.

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(o) "QF" means a "qualifying facility" as defined in the Public Utility Regulatory Policy Act of
1978.

(p) "Rate Repayment Period" means the period commencing September 1, 2001 and ending on the earlier of the
date that SCE recovers all Procurement Related Obligations recorded in the PROACT or December 31, 2003.

(q) "Recovery Period" means the period commencing September 1, 2001 and ending on the earlier of the date
that SCE recovers all Procurement Related Obligations recorded in the PROACT or December 31, 2005. The Recovery
Period includes the Rate Repayment Period.

(r) "Recoverable Costs" means the amounts SCE is authorized by the CPUC to recover in retail electric rates,
but not including Procurement Related Obligations.

(s) "Refunds" has the meaning set forth in the Recitals to this Agreement.

(t) "SCE" means Southern California Edison Company, a California corporation, and its successors.

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(u) "Securitization" or "Securitize" means a financing or to engage in a financing, as the case
may be, like the Rate Reduction Bonds issued pursuant to AB 1890, which may be authorized by the California
legislature.

(v) "Seller Claims" means any claim, cause of action, right of setoff, right of refund or similar right
under state or federal law in favor of SCE that is related to or arises from the charging, either directly or
indirectly, of prices for electric energy, capacity or ancillary services or for natural gas that are reflected
in the opening balance of the PROACT, or conduct related thereto.

(w) "Settlement Rates" means gross electric retail rates (including surcharges) in effect on the date of
this Agreement as the same shall be hereafter increased or decreased to reflect (i) the combined effect on
Surplus, if any, of both SCE's Net Short Procurement Costs and CDWR Charges, as the same may exist from time to
time during the Rate Repayment Period, when compared to the impact on Surplus of Stabilized CDWR Charges, (ii)
Recoverable Costs directed to be incurred by the CPUC that are in excess of the Recoverable Costs referred to in
Section 2.1(d), and (iii) uninsured costs, if any, of recognized force majeure events, such as earthquake,
calamity, war and the like.

(x) "Shareholder Distribution" shall mean a distribution by SCE to its shareholders, as defined in Section
166 of the California Corporations Code, with

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respect to their holdings of Common Stock in SCE, that is subject to the provisions of Section 500 et. seq. of
the California Corporations Code. For example payments from SCE to Edison International or its affiliates in
consideration of goods, services or contractual obligations are not "Shareholder Distributions."

(y) "Stabilized CDWR Charges" means CDWR Charges for electrical power sold to retail customers in the
service territory of SCE that are first implemented by the CPUC after the date hereof.

(z) "Stipulated Judgment" means the Stipulated Judgment referred to in Section 4.1.

(aa) "Surplus" means the difference, positive or negative, if any, of SCE's revenues from retail electric
rates (including surcharges) during the Recovery Period over SCE's Recoverable Costs for the same period.

(bb) "TCBA" means that balancing account of SCE commonly referred to as the "transition cost balancing
account" established by the CPUC.

(cc) "Utility Retained Generation" means generating plants owned by SCE as of the date of this Agreement,
including but not limited to all hydroelectric generation facilities, and SCE's ownership shares of the Mohave
Generating Station,

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the Four Corners Powerplant, the Palo Verde Nuclear Generating Station, and the San Onofre Nuclear Generating
Station.

Section 1.2 Certain Interpretive Matters. In this Agreement, unless the context otherwise requires, the
singular shall include the plural and vice versa. The terms "includes" or "including" shall mean "including
without limitation"; the terms "hereunder," "hereof," "hereto" and words of similar import are references to this
Agreement as a whole. References to a Section, Article, Exhibit or Schedule shall mean a Section, Article,
Exhibit or Schedule of this Agreement, and reference to a given agreement or instrument shall be a reference to
that agreement or instrument as modified, amended, supplemented and restated through the date as of which such
reference is made.

ARTICLE 2
RATE STABILIZATION AND COST RECOVERY

Section 2.1 Procurement Related Obligations Account (PROACT).

(a) The CPUC will establish the Procurement Related Obligations Account (PROACT) by order. The opening
balance thereof will be the excess of SCE's Procurement Related Liabilities as of August 31, 2001 over SCE's cash
and cash equivalents on hand as of such date, less the sum of $300 million. Such opening balance shall be
subject to equitable adjustment in the event that pending proceedings

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related to SCE's Utility Retained Generation result in amortization periods of less than ten (10) years (from
January 1, 2001) for the regulatory assets that represent SCE's ownership in nuclear power plants. The CPUC
shall verify the recorded balance as of August 31, 2001 of the Procurement Related Liabilities listed in Schedule
1.1 and the amount of cash and cash equivalents that SCE had on hand on such date within thirty (30) days from
the date of this Agreement. The Parties estimate that the balance of the PROACT as of the date hereof is
approximately $3.3 billion.

(b) SCE will apply all accrued Surplus to the PROACT on a monthly basis or such other periodic basis as may
be established by the CPUC, except as provided in Section 2.1(d). SCE may also apply the proceeds of any
Securitization related to the receipt of Surplus to the PROACT as provided by Section 2.2(c).

(c) Unrecovered Procurement Related Obligations in the PROACT shall accrue interest equal to the interest
from September 1, 2001 on SCE's outstanding Procurement Related Liabilities and any refinancings thereof net of
interest earned on SCE's cash position.

(d) During the Recovery Period from and after September 1, 2001, all Surplus shall be applied to the PROACT,
except that during each calendar year of the Rate Repayment Period commencing calendar year 2002, the CPUC,
without adjusting Settlement Rates under Section 1.1(w), shall have discretion to direct that up to

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$150 million of Surplus be applied to recover Recoverable Costs for any utility purpose, including investments in
infrastructure or increases in energy efficiency program funding. It is the intent of the foregoing to provide
flexibility needed by the CPUC to direct the utilization of utility revenues in the interest of ratepayers and,
at the same time, to limit the amounts that would otherwise be Surplus that are made available for other utility
purposes unless Settlement Rates are adjusted as contemplated by Section 1.1(w). It is understood that the
utilization of Surplus provided by this paragraph shall only affect the timing of SCE's recovery of Procurement
Related Obligations, the Parties agreeing that SCE shall recover the full amount of its Procurement Related
Obligations during the Recovery Period, as provided in Section 2.2.

Section 2.2 Recovery of Procurement Related Obligations. The Parties hereby agree that during the Recovery
Period SCE shall recover in retail electric rates its Procurement Related Obligations recorded in the PROACT.
The Parties acknowledge that they each currently project that the maintenance of Settlement Rates will likely
result in sufficient Surplus for SCE to recover substantially all of its unrecovered Procurement Related
Obligations prior to the end of 2003. SCE's recovery of its Procurement Related Obligations shall occur as
follows:

(a) The CPUC hereby agrees to maintain retail electric rates for retail customers in SCE's service territory
at no less than Settlement Rates during the Rate Repayment Period.

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(b) In the event that any Procurement Related Obligations remain unrecovered in the PROACT at the
conclusion of the Rate Repayment Period, then such amount will be amortized in retail rates ratably during all or
a portion of the remainder of the Recovery Period.

(c) If the CPUC concludes that it is desirable to Securitize any portion of unrecovered Procurement Related
Obligations at any time during the Recovery Period (together with the financing and transaction costs of
Securitization) in order to reduce the retail rate impact of their recovery, then the Parties will work
cooperatively together to achieve such Securitization, including obtaining appropriate legislation therefore. In
the event that such Securitization results in amortization of SCE's remaining Procurement Related Obligations, if
any, beyond the Recovery Period, then SCE's rates after the Recovery Period will reflect continuation of the
pertinent amortization schedule. Any such Securitization shall modify the recovery that is otherwise provided
for in this Section 2.2 of the Procurement Related Obligations that are included in such Securitization only from
and after the date that SCE actually receives the proceeds of such Securitization, and such proceeds shall be
credited to the PROACT only when they are actually received.

Section 2.3 Capital Structure. During the Recovery Period, no penalty shall be imposed upon SCE for its
noncompliance, if any, with CPUC mandated capital

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structure requirements, and changes in authorized capital structure, if any, shall be implemented in a
manner so as not to affect the extent of SCE's receipt of Surplus.

Section 2.4 Hedging. In order to facilitate SCE's restoration to investment grade creditworthiness by
making the rate at which Procurement Related Obligations are recovered more predictable, SCE intends to apply to
the CPUC for its approval of SCE incurring up to $250 million in Recoverable Costs during the Rate Repayment
Period to acquire financial instruments and engage in other transactions intended to hedge fuel cost risks
associated with SCE's Utility Retained Generation and QF and interutility contracts. The CPUC has indicated that
it will reasonably promptly schedule proceedings and consider such request on an expedited basis. Pending such
determination by the CPUC, SCE shall record such costs in a tracking account.

Section 2.5 Dividend Suspension. In order to expedite payment of its creditors, SCE will not declare or
pay a Shareholder Distribution on its Common Stock prior to (a) the end of the Rate Repayment Period, or (b) if
SCE does not recover all of its Procurement Related Obligations as of or prior to the end of the Rate Repayment
Period, prior to the earlier of January 1, 2005 or the end of the Recovery Period. It is the intent of the
foregoing that cash generated from Surplus be used to reduce Procurement Related Liabilities. SCE and the CPUC
recognize that resumption of Common Stock dividend payments will improve the ability of SCE to attract capital on
reasonable terms for investment in safe and reliable utility service. Accordingly,

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in the event the dividend restriction in this Section continues after the end of the Rate Repayment Period, SCE
may apply to the CPUC for consent to a resumption of its Common Stock dividend after the Rate Repayment Period,
and the CPUC's consent will not be unreasonably withheld.

Section 2.6 Capital Additions. In order to assure the ability of SCE to continue to provide adequate
service prior to the effectiveness of new retail rates established by SCE's next General Rate Case, SCE shall be
entitled to make capital expenditures above the level contained in current rates. To the extent such expenditures
do not exceed $900 million in a calendar year, then the revenue requirement until the effectiveness of retail
rates established by SCE's next General Rate Case that is associated with capital expenditures above the level
contained in current rates shall be Recoverable Costs.

Section 2.7 Representation and Warranty Regarding Financial Condition of Edison International and SCE
Affiliates. SCE represents and warrants that, to the best of its knowledge and belief, the consolidated
financial statements of Edison International and Edison Mission Energy for the quarterly period ended June 30,
2001 do not contain misrepresentations of material facts and do not omit material facts necessary to make the
statements made in such financial statements, under the circumstances in which they were made, not misleading.
SCE further represents and warrants that Edison International and its affiliates Edison Capital and Mission
Energy Holding Com-

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pany do not have investment grade ratings for their senior unsecured debt, and that its affiliate Edison Mission
Energy has an investment grade rating below BBB for its senior unsecured debt.

Section 2.8 Disposition of TCBA. Balances in SCE's TCBA as of August 31, 2001 shall have no further impact
on SCE's retail electric rates, Surplus or Recoverable Costs, except to the extent the CPUC authorizes the
recovery after such date of costs previously recorded in the TCBA (e.g., accelerated amortization of SCE's
investment in nuclear plants). Recoverable Costs incurred after August 31, 2001, which would otherwise have been
recorded in the TCBA, shall be recovered in rates in accordance with further orders of the CPUC, whether or not
the CPUC chooses to continue to have such costs recorded in the TCBA.

Section 2.9 Intended Effects. The CPUC shall adopt such decisions or orders as it deems necessary to
implement and carry out the provisions of this Agreement, it being understood that this Agreement and the
Stipulated Judgment contemplated hereby shall be binding and irrevocable upon the Parties, notwithstanding such
future decisions and orders of the CPUC. It is the intent of the Parties that SCE actually recover Procurement
Related Obligations recorded in the PROACT, without offset, as rapidly as possible during the Rate Repayment
Period consistent with the terms hereof, and in any event during the Recovery Period.

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ARTICLE 3
COMPROMISE OF PROCUREMENT RELATED OBLIGATIONS AND RELATED ADJUSTMENTS

Section 3.1 Pursuit of Seller Claims and Defense of PX Billing Claims. Subject to its not being required
to waive any applicable privileges, SCE will cooperate in good faith with the CPUC and the California Attorney
General in order to coordinate the pursuit and resolution of SCE's Seller Claims and its defenses against PX
Billing Claims along with claims involving the same adverse parties that the State of California or its agencies
may have or assert directly or in their representative capacity or in coordination with third parties and that
arise from power purchases. In this regard, SCE will:

(a) Regularly consult with the General Counsel of the CPUC and the California Attorney General regarding the
coordination of litigation strategies and consider in good faith their views with respect to litigation and
potential litigation in respect of Seller Claims and PX Billing Claims;

(b) Execute reasonable and customary joint defense, common interest or similar agreements to facilitate the
coordination of claims and defenses without waiver of privileges; and

(c) Seek and consider in good faith the General Counsel of the CPUC's and the Attorney General's input,
advice and proposed modifications with

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respect to any material brief, memorandum, pleading and argument prior to the filing or making thereof.

Section 3.2 Resolution of Claims; Compromises.

(a) Subject to the further provisions of this Section 3.2, nothing herein or otherwise shall prevent or
limit SCE's right to litigate any Seller Claim, PX Billing Claim or Procurement Related Liability or to appeal
any order, judgment or other disposition thereof.

(b) Subject to Section 3.2(c) below, nothing herein or otherwise shall prevent or limit SCE's right to pay,
restructure, settle, compromise, waive, resolve, dismiss or otherwise dispose of any Seller Claim, PX Billing
Claim or Procurement Related Liability in any manner and whenever SCE determines, in the exercise of its business
judgment. SCE shall promptly notify the CPUC of any such payment, settlement, compromise, waiver, resolution,
dismissal or other disposition in a manner that preserves the confidentiality thereof insofar as is reasonably
necessary to further SCE's flexibility to pay, settle, compromise, waive, resolve, dismiss or otherwise dispose
of any other SCE Seller Claim, PX Billing Claim or Procurement Related Liability.

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(c) Notwithstanding Section 3.2(b), in the event that SCE wishes to compromise, waive or settle any Seller
Claim or PX Billing Claim on or after March 1, 2002 (subject to extension by mutual agreement), it shall first
obtain the CPUC's permission to do so. In the event the CPUC grants such permission, then SCE may effect such
compromise, waiver or settlement. In the event the CPUC does not grant such permission, then SCE shall continue
to pursue the claim or defense in question, and any compromise, waiver or settlement thereof shall continue to be
subject to CPUC review.

Section 3.3 Credits To PROACT.

(a) One hundred percent (100%) of the liquidated value of any and all Refunds actually realized by SCE
during the Recovery Period in respect of Procurement Related Liabilities, including PX Billing claims and SCE's
Seller Claims, shall be applied to the PROACT. Ninety percent (90%) of the liquidated value of any and all net
Refunds actually realized by SCE after the Recovery Period in respect of Procurement Related Liabilities,
including PX Billing Claims and Seller Claims, shall be refunded to ratepayers as directed by the CPUC.

(b) All such Refunds shall be calculated net of (i) any and all refunds, recoveries or payments that SCE is
required to make or provide in connection with its sales of power through, or its participation in, the
California Power Exchange

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Corporation, a not-for-profit public benefit corporation, and (ii) associated costs of
recovery, including any related litigation, professional and other similar costs. Any portion of Refunds not
applied to the PROACT or refunded to ratepayers, as the case may be, pursuant to the foregoing provisions may be
retained by SCE without offset.

ARTICLE 4
LITIGATION

Section 4.1 Stipulated Judgment. As soon as reasonably possible after the execution of this Agreement, and
in no event later than four (4) business days following such execution, the Parties shall submit to the Court a
proposed Stipulated Judgment in the Litigation (substantially in the form attached as Exhibit A hereto) that
shall incorporate this Agreement by reference and order the terms of this Agreement to be entered as the Judgment
of the Court. The Parties shall undertake their best efforts to seek entry by the Court of the Stipulated
Judgment within thirty (30) days after the date hereof. If such Stipulated Judgment is not entered by the Court
within such period, then either Party may terminate this Agreement upon written notice to the other given any
time prior to entry of a Stipulated Judgment.

Section 4.2 Enforcement of Stipulated Judgment. The Parties agree that the Court shall retain jurisdiction
over the Litigation for the purpose of enforcing the Stipulated Judgment and ensuring that the Parties carry out
the terms of this Agreement.

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Section 4.3 Validity and Binding Effect. The Parties and their respective successors and assigns agree not
to contest the validity and enforceability of this Agreement or the Stipulated Judgment as agreed to by the
Parties and entered by the Court. This Agreement and the Stipulated Judgment are intended to be enforceable
under federal law, notwithstanding any contrary state law.

Section 4.4 Releases of Specified Claims. Promptly upon entry of the Stipulated Judgment, SCE shall deliver
to the CPUC executed releases substantially in the form of Exhibit B hereto specifically releasing any and all
claims and causes of action that SCE has or may have against the State of California and the CPUC that arise
from:

(a) The facts alleged by SCE in the Litigation, including without limitation claims and causes of action
based upon the filed rate doctrine, takings, due process and commerce clause violations, except for claims and
causes of action based upon this Agreement or as provided in the Stipulated Judgment;

(b) The CPUC's implementation prior to the date of this Agreement of Assembly Bill 1 of the 2001-02 First
Extraordinary Session (Ch. 4, Stats. 2001-02 1st Ex. Sess.) and Assembly Bill 6 of the 2001-02 First
Extraordinary Session (Ch. 2, Stats. 2001-02 1st Ex. Sess.), including CPUC Decision Nos. 01-03-081 and
01-04-005; and

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Section 4.5 Termination. This Agreement and the Stipulated Judgment shall terminate at the end of the
Recovery Period but in no event later than December 31, 2005, provided that all rights of the Parties under this
Agreement and the Stipulated Judgment that vest on or prior to such termination, including any rights arising
from default under this Agreement or the terms of the Stipulated Judgment, shall survive any such termination for
the purpose of enforcing such vested rights.

Article 5
GENERAL PROVISIONS

Section 5.1 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the same instrument.

Section 5.2 Captions and Paragraph Headings. Captions and paragraph headings used herein are for
convenience only and are not a part of this Agreement and shall not be used in construing it.

Section 5.3 Entire Agreement. This Agreement contains the entire understanding of the Parties concerning
the subject matter of this Agreement and, except as expressly provided for herein, supersedes all prior
understandings and agreements,

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whether oral or written, among them with respect to the subject matter hereof and thereof. There are no
representations, warranties, agreements, arrangements or understandings, oral or written, between the Parties
hereto relating to the subject matter of this Agreement and such other documents and instruments which are not
fully expressed herein or therein. This Agreement may be amended or modified only by an agreement in writing
signed by each of the Parties hereto which is filed with the Court in which the Stipulated Judgment is filed.

Section 5.4 Time Of Essence. Time is hereby expressly made of the essence with respect to each and every
term and provision of this Agreement. The Parties acknowledge that each will be relying upon the timely
performance by the other of its obligations hereunder as a material inducement to each Party's execution of this
Agreement.

Section 5.5 No Third Party Beneficiaries. Except as may be specifically set forth in this Agreement,
nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any Persons other than the Parties and their respective permitted successors and
assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any
third Persons to any Party, nor give any third Persons any right of subrogation or action against any Party.

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Section 5.6 Authority; Enforceability. Each Party represents and warrants to the other that this Agreement
and the Stipulated Judgment have been duly authorized by all action required of such Party to be bound thereby,
and that this Agreement and the Stipulated Judgment are valid, binding and enforceable obligations of such Party.

Section 5.7 Waiver of Compliance. To the extent permitted by applicable law, any failure of any of the
Parties to comply with any obligation, covenant, agreement or condition set forth herein may be waived by the
Party entitled to the benefit thereof only by a written instrument signed by such Party, but any such waiver
shall not operate as a waiver of, or estoppel with respect to, any prior or subsequent failure to comply
therewith. The failure of a Party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written.

SOUTHERN CALIFORNIA EDISON COMPANY

By: Stephen E. Frank
---------------------------------
Stephen E. Frank
Title: Chairman, President and
Chief Executive Officer

CALIFORNIA PUBLIC UTILITIES COMMISSION

By: Wesley M. Franklin
----------------------------------
Wesley M. Franklin

Title: Executive Director

COMMISSIONERS IN THEIR OFFICIAL CAPACITY

Loretta M. Lynch
-----------------------------------
Loretta M. Lynch

Richard A. Bilas
-----------------------------------
Richard A. Bilas

Henry M. Duque
------------------------------------
Henry M. Duque

Carl W. Wood
------------------------------------
Carl W. Wood

Geoffrey F. Brown
------------------------------------
Geoffrey F. Brown

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Schedule 1.1

Procurement Related Liabilities

Amount Description Date Due
$1.179 QFs (1) Now
$0.920 PX/ISO Now
$0.243 ESPs Now
$0.347 CDWR Imbalance Energy Now
$0.030 Other - Now
---------------------------------------------------------------------------------
$2.720 Total Past Due Bills

$0.208 Bank Loan -- 364-Day Line 10/19/2001
$0.415 Bank Loan -- Bilateral Lines 10/19/2001
$1.090 Bank Loan -- 5-Year Line 10/19/2001
$0.010 Extendable Commercial Notes (ECN) 10/22/2001
$0.313 Floating Rate Notes 05/01/2002
$1.047 Variable Rate Notes 11/03/2003
---------------------------------------------------------------------------------
$3.083 Total Non-defaulted Indebtedness

$0.552 Defaulted Commercial Paper Now
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$6.355 Total

(1) Net of offsets of $44.5 million due SCE from QFs.

Exhibit A

Form of Stipulated Judgment

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION

SOUTHERN CALIFORNIA EDISON COMPANY, ) CASE NO. 00-12056-RSWL(Mcx)
)
Plaintiff, )

vs.

LORETTA M. LYNCH, HENRY M. DUQUE, RICHARD A. BILAS,)
CARL W. WOOD, and GEOFFREY F. BROWN, in their)
official capacities as Commissioners of the)
California Public Utilities Commission, )

Defendants.
----------------------------------------------------)

STIPULATED JUDGMENT

Page 1

I. GENERAL PROVISIONS

A. Basis for resolution

1. Plaintiff, Southern California Edison Company ("SCE"), and Defendants, the Commissioners of the
California Public Utilities Commission ("Commission", referred to collectively with the Defendants as "CPUC"),
agree to the terms of this stipulated judgment to resolve this action. This stipulated judgment reflects a
compromise of disputed issues in pending litigation, and is not to be taken as an admission of liability or
material facts beyond the terms of the judgment. The purpose of this stipulated judgment is to stabilize the
costs and enhance the reliability of producing and distributing electricity for the benefit of SCE's ratepayers
and the State of California within the context of a Settlement Agreement ("Agreement"). The terms of the
Agreement are set forth in Exhibit A hereto.

2. SCE and the CPUC share a common interest in implementing the provisions of this judgment, to enable SCE
to recover its past costs as defined in the Agreement, to restore SCE to creditworthiness, to protect consumers
from the potential impact of further volatility in electricity prices and unreliable service, and to avoid the
risks and costs of further litigation. Implementation of the Agreement is intended to enable SCE to fulfill its
historic obligation to provide reliable electric service at just and reasonable rates to its retail customers,
and is therefore in the public interest.

B. Jurisdiction of the Court

1. SCE's Complaint alleges that defendants' past decisions are unlawful because they prevent SCE from
recovering fully its costs, in particular, its costs of procuring electricity and its costs of interstate
transmission. SCE's Complaint states causes of action based upon (a) preemption, including preemption under the
filed rate doctrine, (b) facial takings, (c) due process, (d) as-applied takings, and (e) commerce clause.

2. The Court has previously determined that it has jurisdiction over this action pursuant to 28 U.S.C.ss.ss.
1331, 1337 and 1343. Venue is proper in the Central District of California pursuant to 28 U.S.C.ss.1391.
Defendants agree not to take any appeal from the Court's determination that it has jurisdiction and to waive any
defense they may have to the Court's jurisdiction based upon the Eleventh Amendment for purposes of this case
only.

3. As a Party to the Agreement, the Commission (as distinct from the individual Defendants) joins in and
agrees to be bound by all of the terms of this stipulated judgment. The CPUC agrees to waive any defense it may
have to the Court's jurisdiction based upon the Eleventh Amendment, or other defense, for purposes of this case
only.

C. Issues Previously Determined By The Court

1. The Court has denied defendants' motion to dismiss.

Page 2

2. SCE alleges that federal law preempts California from preventing SCE from fully recovering in retail
rates its wholesale procurement costs, which are subject to the exclusive jurisdiction of the Federal Energy
Regulatory Commission ("FERC").

3. SCE has paid wholesale procurement costs established pursuant to tariffs filed by the Independent System
Operator and the Power Exchange with FERC, and has been charged additional amounts pursuant to such tariffs that
it has not yet paid. SCE has made the following assertions: The filed rate doctrine "holds that interstate power
rates filed with FERC or fixed by FERC must be given binding effect by state utility commissions determining
intrastate rates." Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 962, 106 S. Ct. 2349, 90 L. Ed. 2d
943 (1986). Accordingly, "a State may not conclude in setting retail rates that the FERC-approved wholesale
rates are unreasonable. A State must rather give effect to Congress' desire to give FERC plenary authority over
interstate wholesale rates, and to ensure that the States do not interfere with this authority." Id. at 966.
"When FERC sets a rate between a seller of power and a wholesaler-as-buyer, a State may not exercise its undoubted
jurisdiction over retail sales to prevent the wholesaler-as-seller from recovering the costs of paying the
FERC-approved rate." Id. at 970. As the Supreme Court stated in a subsequent case, States "may not bar
regulated utilities from passing through to retail consumers FERC-mandated wholesale rates." Mississippi Power &
Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 372, 108 S. Ct. 2428, 101 L. Ed. 2d 322 (1988).

4. The Court has rejected defendants' claim that SCE is equitably estopped from invoking the filed rate
doctrine. The Court has ruled that SCE may challenge defendants' implementation of state law, even though SCE
lobbied for the passage of Assembly Bill 1890.

D. Issues Not Resolved

1. A number of issues are unresolved in this case and remain in dispute. This stipulated judgment
reflects a compromise of those issues.

2. The Court has stated that the filed rate doctrine is subject to an exception under Pike County Light &
Power Co. v. Pennsylvania Pub. Util. Comm'n, 465 A.2d 735 (Pa. Commw. Ct. 1983), if the state regulatory
commission finds that the utility acted imprudently in failing to purchase power at wholesale from available,
less costly sources. SCE contends that the Pike County exception does not apply to SCE, because the CPUC deemed
all of SCE's purchases from the Power Exchange and Independent System Operator per se prudent. The CPUC has
disputed SCE's contention.

Page 3

3. The CPUC argues that SCE has recovered all of its wholesale procurement costs, because under AB 1890 it
was required to recover those costs ahead of any so-called stranded costs. The CPUC argues, therefore, that
there is no preemption claim in this case, and that therefore the Johnson Act does bar this case. On March 27,
2001, the CPUC issued Decision No. 01-03-082, which modified certain CPUC accounting rules. The CPUC contends
that, as a result of this change, the CPUC has provided for the recovery of wholesale procurement costs. SCE
disputes the CPUC's contention, and claims that the accounting change does not provide an adequate and
independent state ground for avoidance of the application of the federal filed rate doctrine.

4. SCE contends that the CPUC's actions constitute a taking of property without just compensation and a
violation of due process, insofar as the net effect of the State's regulatory program has been and continues to
be to impair SCE's financial integrity and to prevent SCE from attracting capital and paying a return to
investors. The CPUC has disputed SCE's contention, and claims that SCE has been provided with a reasonable
opportunity to recover its stranded costs, and its inability to do so was caused by economic circumstances not
within the control of the CPUC.

5. SCE contends that the CPUC's actions violate the Commerce Clause. The CPUC has disputed SCE's
contention.

6. SCE and the CPUC recognize that SCE has presented substantial federal claims and that the ultimate
judicial resolution of these issues is uncertain. SCE and the CPUC agree that the resolution of the case in
accordance with this stipulated judgment is desirable to eliminate this uncertainty and to provide an outcome
that is in the public interest.

E. Future Effect

1. The Agreement that is incorporated herein provides for SCE to recover certain costs in retail rates over
time. An essential element of this stipulated judgment is to provide certainty that SCE will be able to recover
such costs in accordance with the Agreement. SCE and the CPUC contemplate that third parties will rely on such
certainty in extending credit to SCE. Accordingly, enforcement of this stipulated judgment and the Agreement are
essential in order to restore SCE's creditworthiness, which is in the interests both of SCE and of the CPUC.

2. The parties and their respective successors and assigns agree to be bound by the terms of this
stipulated judgment and agree not to contest its validity in any subsequent proceeding. Defendants recognize
that market prices may fluctuate, that state or federal law may be modified, and that other circumstances may
change, and nevertheless intend that this stipulated judgment be binding and enforceable in the future in
accordance with its terms.

3. The Court enters this stipulated judgment and Agreement as its judgment, and retains jurisdiction to
enforce the judgment in the future, as may be necessary.

Page 4

Exhibit B

Form of Release

Release

This Release is being delivered as of October 2, 2001 by Southern California Edison Company ("SCE") to
the California Public Utilities Commission ("CPUC"), pursuant to section 4.4 of the Settlement Agreement by and
among SCE, the CPUC and the Commissioners of the CPUC, dated October 2, 2001 ("Agreement") and is subject to the
provisions thereof. All capitalized terms not otherwise defined herein have the same meaning as is given to them
in the Agreement.

A. Except as provided in the Agreement and in the Stipulated Judgment, SCE hereby does forever
release and discharge the CPUC, the State of California, and their respective agencies, departments, successors,
officials, agents, representatives, and employees, and each of them from any and all claims, debts, liabilities,
demands, obligations, promises, acts, agreements, costs, expenses (including but not limited to attorneys' fees),
damages, actions, causes of action and claims for relief of whatever kind or nature, under any theory, whether
legal, equitable or other, under the law, either common, constitutional, statutory, regulatory, or other, of any
jurisdiction, foreign or domestic ("Claims"), that arise from:

1. The facts pled, or that could have been pled, in Southern California Edison Company,
Plaintiff, vs. Loretta M. Lynch et. al., presently pending in the United States District Court for the Central
District of California, Case No. 00-12056-RSWL(Mcx), including without limitation claims and causes of action
based upon the filed rate doctrine, takings, due process and commerce clause violations;

2. The CPUC's implementation, prior to the date of the Agreement, of Assembly Bill 1 of
the 2001-02 First Extraordinary Session (Ch. 4, Stats. 2001-02 1st Ex. Sess.) and Assembly Bill 6 of the 2001-02
First Extraordinary Session (Ch. 2, Stats. 2001-02 1st Ex. Sess.), including CPUC Decision Nos. 01-03-081 and
01-04-005; and

3. CPUC Decision No. 01-03-082 (the TURN Accounting Decision).

Page 1

B. With respect to the Claims that are the subject of release hereunder, SCE specifically waives
all rights and benefits afforded by California Civil Code Section 1542 and does so understanding and
acknowledging the significance of such specific waiver of such statutory protection, which provides as follows:

"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."

C. Except as may be specifically set forth in this Release, nothing in this Release, whether
express or implied, is intended to confer any rights or remedies under or by reason of this release on any
Persons other than the Parties and their respective permitted successors and assigns, nor is anything in this
Release intended to relieve or discharge the obligation or liability of any third Persons to any Party, nor give
any third Persons any right of subrogation or action against any Party.

IN WITNESS WHEREOF, SCE has executed and delivered this Release as of the day and year first above
written.

--------------------------------------