1. 1 City of Stockton Electricity Options Briefing Stockton City Council March 11, 2008

2. 2 City of Stockton Electricity Options The California Constitution, Article XI, section 9 authorizes all California municipal corporations to purchase and operate electric utilities. Publicly-owned electric utilities serve about 27.5% of all California end users. –rates set locally, not by FERC or CPUC –typically have lower rates, less outage and higher customer satisfaction than PG&E Stockton City Council March 11, 2008

3. 3 Stockton City Council March 11, 2008

4. 4 Stockton City Council March 11, 2008

5. 5 Stockton City Council March 11, 2008

6. 6 Why a City Owns an Electric System Essential public service at a reasonable price Less outages by local focus Better service – more responsive to customers Local control of rates Rates designed to achieve local objectives such as economic development, job creation, etc. Public goods charges, mandated by state law, spent locally on installing energy conservation, etc. Local control over generating sources Contribution to general fund Stockton City Council March 11, 2008

7. 7 Structure of Study Considered 3 Options –Community Choice Aggregation –Greenfield –Integrated Electric Utility High Level, using Data from Public Records Designed to Test Key Assumptions and Variables Stockton City Council March 11, 2008

8. 8 Strategic Conclusions City’s “Right to Purchase” confers significant value Using Base Case assumptions, Integrated Electric Utility is the most attractive of 3 options and could yield NPV of $83 million Stockton City Council March 11, 2008

9. 9 City’s Right to Purchase City does hereby reserve the right to purchase upon six (6) months notice to grantee, the property of grantee used and useful in exercising the same, at a price to be determined by the Public Utilities Commission of the State of California or its successor, or on failure or refusal of such Commission or its successor to act, then by three (3) appraisers, one appointed by grantee, one by the City Council, and the third by the two so appointed. The cost of such appraisal shall be borne equally by city and grantee. The price of the properties shall be fixed in accordance with the then existing rules of the Public Utilities Commission of the State of California, or its successors, but in no event shall the value of the franchise itself be included in said price, nor shall the value of any other franchise of grantee for the use of public roads and ways in jurisdictions outside of City be given any value for the purpose of determining the price of said remaining properties of grantee as the result of the purchase of the properties within City as herein provided. Stockton City Council March 11, 2008

10. 10 City’s Right to Purchase Six months notice to PG&E Price set by CPUC or, if CPUC refuses to act, by three appraisers Price based on CPUC’s rules Price shall not include value of Stockton franchise or any other franchise The City’s Right to Purchase is a valuable and virtually unique among California cities

11. 11 1954 Franchise Discussions The Right to Purchase was essential to PG&E obtaining the 1954 Franchise –PG&E sought an indeterminate franchise to support its borrowing and reduce its debt costs –The Right to Purchase was an essential element of the City’s agreement to grant an indeterminate franchise –PG&E promised that the “right is reserved to the city to go into the public utility business or to purchase” PG&E’s facilities “at a reasonable price at any time that the city shall see fit” Stockton City Council March 11, 2008

12. 12 PG&E’s Legal Obligations to Cooperate PG&E has an obligation of “good faith and fair dealing” to implement the City’s Right to Purchase PG&E has a duty under the Public Utilities Code to “faithfully observe and perform” all provisions of the Franchise Agreement The Public Utilities Code imposes penalties for willful violations Stockton City Council March 11, 2008

13. 13 Critical Study Factors PG&E Comparable Rates Cost of Power Supply Exit Fees Cost of Acquiring PG&E Facilities Severance Costs Stockton City Council March 11, 2008

14. 14 PG&E Comparable Rates The higher the projection for PG&E rates, the greater the economic benefits. PG&E has low cost hydro and nuclear supplies that insulate it somewhat from future energy markets; nuclear power plants have special risks of regulatory shutdown Study Base Case assumed that PG&E rates to increase at less than inflation Stockton City Council March 11, 2008

15. 15 Cost of Power Supply Energy prices are projected to increase in real terms The higher the projected cost, the lower the potential for economic benefits. Study Base Case assumed 6.3¢/kwh. Stockton City Council March 11, 2008

16. 16 Exit Fees Exit fees are uncertain and projected to decrease substantially by 2012. The higher the exit fees, the lower the economic benefits. Exit fee reduction options should be investigated Study assumed full exit fees Stockton City Council March 11, 2008

17. 17 Cost of Acquisition No condemnation Expect value to be hotly contested –Original Cost Less Depreciation (OCLD or “Book Value”) –Replacement Cost Less Depreciation (RCNLD) –RCNLD plus PG&E proposed adders Value set by CPUC or 3 appraisers The higher the cost, the lower the economic benefits Study Base Case assumed RCNLD Stockton City Council March 11, 2008

18. 18 Severance Used to identify cost of separation in some cases City has complex boundaries The higher the severance cost, the lower the economic benefits Severance payment might not apply to contractual “Right to Purchase” Study Base Case assumed severance costs Stockton City Council March 11, 2008

19. 19 Study Base Case Makes Conservative Assumptions Assumed PG&E rate increases at less than inflation Assumed power purchase costs higher than some recent actual market indicators Assumed full exit fees Assumed purchase price at Replacement Cost Less Depreciation Assumed severance payment Stockton City Council March 11, 2008

20. 20 Summary of Results Integrated Electric Utility – 3 Cases Stockton City Council March 11, 2008

21. 21 Integrated Electric Utility Sensitivity Analyses - Results Stockton City Council March 11, 2008

22. 22 The Port of Stockton Electrical System “The primary mission of the Port is to foster the diversified economic growth of the Stockton metropolitan area and the San Joaquin valley.” Port of Stockton Electric has been recognized by both the Federal Energy Regulatory Commission Letter Order accepting Wholesale Distribution Tariff, July 23, 2003, Docket ER 03-947 and the California Public Utilities Commission Ruling Granting Additional Motions for Exemption Eligibility, July 19, 2006, Docket RM 02-01- 011 as an independent and established electric system. Port has capability to tailor rates to needs of prospective tenants, acting as a magnet for economic development. Port and its customers exempt from most exit fees. Port has had significant growth in electric sales which it expects to continue. Port is interested in joint action with City to benefit area. Stockton City Council March 11, 2008

23. 23 Next Steps Agendize, for Council discussion, joint powers agreement with Port to conduct in- depth analysis and to maximize value to City, its residents and businesses. 10932760.4 Stockton City Council March 11, 2008