1. 1 Natural Gas Forecast

2. 2 Objectives of natural gas commodity model To produce a 20-year avoided cost forecast for gas delivered for core customers To produce a 20-year avoided cost forecast for gas delivered for electricity generation Natural gas T&D avoided costs estimated as part of T&D model

3. 3 E3 methodology for forecasting gas commodity cost at city gate 1. Use market data where available: NYMEX futures prices available for 72 months 2. Adjust for location using NYMEX OTC basis swap prices where available (up to 36 months), econometric analysis for subsequent period 3. Transition to CEC forecast for long term

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5. 5 NYMEX Natural Gas Futures Delivery Location: Henry Hub (Louisiana) Open Interest settled daily based on mark-to-market Trading stats from 9/15 session, Oct. delivery: Volume: 273 TBtu ($1.3 billion) Open Interest: 514 TBtu ($2.4 billion) Daily trading volumes drop off after 1 year out, Open Interest after ~3 years out

6. 6 Basis Difference Analysis 1996-2003 average, excluding crisis period (6/00-7/01): SoCal Gas: -6¢ PG&E: +2¢ Forward swap prices less than 20¢ & trending towards zero Econometric analysis finds no persistent basis differential Assume zero for out years

7. 7 Long-term natural gas commodity price forecast

8. 8 Local distribution system avoided cost adders For electric generators, add tariff rate for transportation across intrastate LDC systems For LDCs, add avoidable local distribution upgrade costs