<PAGE>

                                                                    EXHIBIT 10.5

                               OPERATING AGREEMENT

                                     BETWEEN

                        PACIFIC GAS AND ELECTRIC COMPANY

                                       AND

                        PACIFIC GAS TRANSMISSION COMPANY

                                      DATED

                                  July 9, 1996

<PAGE>

                                      INDEX

                                    PG&E/PGT
                               OPERATING AGREEMENT

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>      <C>                                                                                                   <C>
         RECITALS..........................................................................................      1
1.       DEFINITIONS.......................................................................................      2
2.       DELIVERY OF GAS...................................................................................      4
3.       GAS BALANCING.....................................................................................      5
4.       TERM..............................................................................................      8
5.       GAS QUALITY.......................................................................................      8
6.       MEASUREMENT AND TESTS.............................................................................     10
7.       REGULATORY........................................................................................     13
8.       REMEDIES..........................................................................................     14
9.       INDEMNIFICATION...................................................................................     14
10.      ASSIGNMENT........................................................................................     14
11.      INFORMATION.......................................................................................     15
12.      FORCE MAJEURE.....................................................................................     15
13.      DISPUTE RESOLUTION................................................................................     16
14.      NOTICE............................................................................................     18
15.      CONFIDENTIALITY...................................................................................     19
16.      ADDITIONAL PROVISIONS.............................................................................     20
         SIGNATURE(s)......................................................................................     22

</TABLE>

<PAGE>

                               OPERATING AGREEMENT

         THIS OPERATING AGREEMENT (Agreement) is made and entered into this 9th
day of July, 1996, by and between PACIFIC GAS TRANSMISSION COMPANY (PGT), a
California corporation, and PACIFIC GAS AND ELECTRIC COMPANY (PG&E), a
California corporation. PGT and PG&E shall also be hereinafter referred to
individually as a "Party" and jointly as the "Parties."

                                    RECITALS

         WHEREAS, PGT owns and operates an interstate natural Gas pipeline
transmission system which extends from a point of interconnection with the
pipeline facilities of Alberta Natural Gas Company Ltd. (ANG) at the
International Boundary near Kingsgate, British Columbia, through the states of
Idaho, Washington, and Oregon to a point of interconnection with PG&E's pipeline
system at the Oregon-California border near Malin, Oregon. PGT is regulated by
and operates subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC) and transports Gas to points along its pipeline
system; and

         WHEREAS, PG&E is a "local distribution company served by an interstate
pipeline" within the meaning of Sections 2(17) and 311 of the Natural Gas Policy
Act of 1978 and the Regulations of the FERC thereunder and is a "gas utility" as
defined in the Public Utilities Code of the State of California and subject to
the jurisdiction of the California Public Utilities Commission (CPUC) and

         WHEREAS, PG&E and PGT desire to enter into this Agreement to provide
for the terms and conditions under which Gas will be delivered by PGT and
accepted by PG&E, or delivered by PG&E and accepted by PGT, for the account of
Shipper(s) and/or their designees at the Interconnect Point.

                                       1
<PAGE>

         NOW, THEREFORE, in consideration of the premises and mutual benefits
and covenants herein contained, PG&E and PGT hereby agree as follows:

1.       DEFINITIONS

         Except in those instances where this Agreement expressly states another
meaning, the following capitalized terms, when used in this Agreement, shall
have the following meanings.

         1.0      Average Daily Delivery Pressure - The average delivery
pressure on any Day.

         1.1      Backhaul Service - The contractual delivery of Gas at the
Interconnect Point in the direction opposite to the physical movement of the
Gas.

         1.2      British Thermal Unit or Btu - The amount of energy required to
raise the temperature of one (1) pound of pure water one degree Fahrenheit
(1 degrees F) from fifty-nine degrees Fahrenheit (59 degrees F) to sixty degrees
Fahrenheit (60 degrees F) at a standard pressure of 14.73 psia.

         1.3      CPUC - The California Public Utilities Commission or any
successor regulatory body.

         1.4      Cubic Foot/Feet (Standard Cubic Foot/Feet) - The volume of Gas
which occupies one (1) cubic foot when such Gas is at a temperature of sixty
degrees Fahrenheit (60 degrees F) and at a pressure of 14.73 psia.

         1.5      Day and Daily - For Gas control purposes, a period of
twenty-four (24) consecutive hours beginning at 7:00 a.m. Pacific Standard Time
(PST) on any calendar day and ending at 7:00 a.m. (PST) on the calendar day
immediately following.

         1.6      FERC - The Federal Energy Regulatory Commission or any
successor regulatory body.

                                       2
<PAGE>

         1.7      Heating Value - The amount of heat, measured in Btu's,
produced by the complete combustion of a dry Cubic Foot of Gas. The Heating
Value shall be the gross or higher amount of heat which is obtained when all of
the products of combustion are cooled to 60 degrees F.

         1.8      Interconnect Point - The point at which the PGT and PG&E
Facilities interconnect in Section 24, T41S, R12E, WM in Klamath County, Oregon,
at the California/Oregon border, more commonly known as Malin, Oregon.

         1.9      Mcf - One thousand (1,000) Cubic Feet.

         1.10     MMBtu - One million (1,000,000) Btu (or Decatherm).

         1.11     Natural Gas and Gas - Shall mean any mixture of hydrocarbons
or of hydrocarbons and non-combustible gases, in a gaseous state, consisting
essentially of methane. Such Gas is typically produced in its natural state from
wells, including casinghead and residue gas.

         1.12     Normal Operating Conditions - Shall mean that no force majeure
conditions (as defined in Paragraph 12.2 herein) exist and that the compressors,
pipelines and appurtenant facilities on the respective Parties' pipeline system
operate in such a manner to permit such pipeline to meet its firm Shippers'
Daily Scheduled Volumes up to such Shippers' maximum Daily contract quantities.

         1.13     PG&E Facilities - The piping, land rights, valving, flow
control, data acquisition and other appurtenant equipment installed, owned and
operated by PG&E at and downstream of the Interconnect Point.

         1.14     PGT Facilities - The piping, land rights, measurement,
odorizing equipment, valving, flow control, data acquisition and other
appurtenant equipment installed, owned and operated by PGT.

                                       3
<PAGE>

         1.15     Scheduled Volumes - The quantity of Gas for each Shipper of
Gas on PGT that is scheduled by PGT for delivery to PG&E, and in the case of
backhaul service, scheduled by PG&E for delivery to PGT.

         1.16     Shipper(s) - A third party for whose account Gas is delivered
on a firm or interruptible basis at the Interconnect Point from PGT to PG&E or
from PG&E to PGT in the case of Backhaul Service.

2.       DELIVERY OF GAS

         2.1      The Parties hereto mutually agree to permit deliveries of Gas
by physical delivery by PGT to PG&E, and in the case of Backhaul Service,
deliveries by PG&E to PGT.

         2.2      Each Party shall attempt to schedule maintenance of its
respective facilities, to the extent operationally feasible, to minimize any
interruption of nominated volumes on the other Party's pipeline.

         2.3      Unless excused by force majeure (as defined in Paragraph 12.2
hereof), PGT shall deliver Gas to PG&E at the Interconnect Point at a pressure
sufficient to effect delivery into PG&E's pipeline against the pressure
prevailing therein from time to time as mutually agreed to by the Parties up to
a maximum of 911 pounds per square inch gauge (psig) (Maximum Pressure) and not
below a minimum of 700 psig (Minimum Pressure). The Parties may agree on other
Maximum and Minimum Pressures from time to time to ensure efficient operation of
each Party's system at the Interconnect Point.

         2.4      Under Normal Operating Conditions, PGT will maintain an
Average Daily Delivery Pressure at the Interconnect Point of no less than 855
psig or as otherwise agreed to by the Parties. Under Normal Operating
Conditions, PG&E will operate its system so that PG&E will be able to receive
one hundred percent (100%) of the Scheduled Volumes from PGT at the Interconnect
Point at the Average Daily Delivery Pressure. The Parties agree to cooperate in
the day-to-day operation of both systems to ensure efficient and coordinated
operation(s) and maintenance.

                                       4
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         2.5      The Parties acknowledge the historical coordinated nature of
the design of their respective pipeline systems. The Parties also acknowledge
the changing nature of their respective Shippers' contractual obligations.
Accordingly, the Parties agree not to modify the facilities or operations, other
than for reasonable or necessary maintenance, on their respective systems during
the term of this Agreement in any manner that will permanently prevent the
delivery of Gas pursuant to any existing contractual obligations to their
respective firm Shippers, as exercised by such shippers, with a Malin primary
receipt or primary delivery point under Normal Operating Conditions.

3.       GAS BALANCING

         3.1      The Parties have entered or may enter into one or more
agreements with Shippers for the transportation of Gas to or from the
Interconnect Point on their respective systems. The Parties will transport such
Gas for each Shipper's account to or from the Interconnect Point subject to the
respective Party's receipt of a Scheduled Volume from the Shipper or its agent.
The quantity of Gas confirmed and scheduled to flow between the Parties each Day
may be greater or less than the quantity actually delivered at the Interconnect
Point, resulting in over- or under-deliveries relative to the gas confirmed and
scheduled to flow. The Parties agree to implement the following balancing
arrangement, which will facilitate more efficient operations, accounting, and
systems management at the Interconnect Point and on the Parties' respective
systems and to provide each Party's operating personnel flexibility to operate
and control Daily variations in nominated and allocated volumes:

         a.       All imbalances shall be recorded on an MMBtu basis.

         b.       For Gas accounting purposes, all Daily Scheduled Volumes as
                  scheduled on the flow day shall be deemed to be delivered form
                  each Party's pipeline system into the other Party's pipeline
                  system, regardless of the actual volume of Gas delivered.

                                       5
<PAGE>

         c.       When the net volume of Scheduled Volumes on a Day are greater
                  than the actual volume of Gas delivered on such Day, the
                  difference shall be identified on the delivering Party's
                  monthly statements as underdelivered or a negative imbalance
                  account volume.

         d.       When the net volume of Scheduled Volumes on a Day are less
                  than the actual volume of Gas delivered on such Day, the
                  difference shall be identified on the delivering Party's
                  monthly statements as overdelivered or a positive imbalance
                  account volume.

         e.       PGT and PG&E shall cooperate in order to minimize the Daily
                  over and under deliveries. In this regard, PGT's gas control
                  and transportation personnel and PG&E's gas control and
                  scheduling personnel shall be in contact each day, as needed,
                  to establish the rate at which Gas shall be delivered until
                  the end of the Day in order to balance daily delivered volumes
                  of Gas with Scheduled Volumes of Gas.

         f.       PGT shall provide PG&E, no later than the 12th day of each
                  month, a statement showing the total volume of Gas delivered
                  to PG&E at the Interconnect Point during the previous month.
                  PG&E shall verify such statement by the 28th day of the same
                  month. Neither the deliverance or such statement nor the
                  subsequent verification of such statement shall constitute a
                  waiver of either party's rights under Section 6.4.

         g.       Further, no later than the 12th day of each month, PGT shall
                  calculate the Daily underdelivered and/or overdeliviered
                  positions for each Day in the prior month to determine the
                  overall imbalance for the month (Monthly Imbalance). PGT shall
                  then provide PG&E with the Monthly Imbalance so determined,
                  together with sufficient documentation to enable PG&E to
                  verify the accuracy of the Monthly Imbalance calculation. PG&E
                  shall verify such statement by the 28th day of each month.
                  Neither the deliverance of such statement nor the subsequent
                  verification

                                       6
<PAGE>

                  of such statement shall constitute a waiver of either party's
                  rights under Section 6.4.

         h.       The Parties shall mutually agree on which Days the Monthly
                  Imbalance shall be adjusted, taking into consideration current
                  operation of each pipeline system. The Parties shall use their
                  best efforts to adjust any imbalance toward zero as soon as
                  practical but in no case later than thirty (30) Days after the
                  end of each calendar month in which the Parties determined the
                  imbalance existed, unless agreed to otherwise by the Parties.

         i.       PGT shall provide PG&E a Daily report of the Scheduled Volumes
                  of Gas, within two (2) hours after the end of each Day. The
                  Scheduled Volumes of Gas reported by PGT will be used in the
                  Monthly Imbalance calculation. Any revisions to this data must
                  be mutually agreed to by PG&E and PGT.

         j.       For the purpose of this Agreement, delivery of any Gas to
                  resolve a Monthly Imbalance is not subject to sales or
                  transportation charges by either Party.

         k.       Volumes delivered shall be nominated on a Daily basis but will
                  flow on an hourly basis. If curtailment of deliveries during
                  the Day is necessary, Scheduled Volumes shall be adjusted
                  according to the methodology prescribed in the constrained
                  pipeline's tariffs. In this situation, the adjusted Scheduled
                  Volume shall be deemed to have flowed to the receiving Party
                  in accordance with the procedures in paragraph 3.1.

         3.2      Risk of loss of all Gas shall pass at the Interconnect Point.
PG&E shall not be responsible to Shipper or third parties for any Gas losses or
delays (due to operating conditions or constraints, force majeure or otherwise)
or damages occurring on PGT's side of the Interconnect Point, and PGT shall not
be responsible to Shippers or third parties for Gas losses or delays (due to
operating conditions or constraints, force majeure or otherwise) or damages
occurring on PG&E's side of the Interconnect Point.

                                       7
<PAGE>

         3.3      Either Party may pursue resolution of a dispute as to
imbalances owed hereunder in accordance with Section 13 herein, however, unless
the Parties mutually agree otherwise, delivery of the entire imbalance due as
identified in subparagraph 3.1.g., including any disputed imbalance, shall be
made to the respective Party notwithstanding such dispute resolution. Delivery
of the disputed imbalance(s) shall not be deemed to be a waiver of any rights to
recoup any imbalance amount in dispute.

4.       TERM

         This Agreement shall have an initial term commencing on the date of
execution of this Agreement and ending December 31, 2001. The Agreement shall
extend year-to-year thereafter unless terminated as of the end of the initial
term or at any time thereafter upon a minimum of one hundred and eighty (180)
calendar days prior written notice by either Party to the other.

5.       GAS QUALITY

         5.1      PGT agrees that the Gas delivered by PGT to PG&E at the
Interconnect Point shall meet or exceed PGT's Gas quality specifications as
listed in Paragraph 3 of the General Terms and Conditions of PGT's FERC Gas
Tariff, First Revised Volume 1-A as amended from time to time.

         5.2      Notwithstanding the quality specifications set forth in either
PG&E's Rule 21 or PGT's FERC gas tariff, the Gas delivered hereunder shall have
a minimum total heat value of Nine Hundred Ninety-Five (995) (Minimum Heat
Value) Btu's per Cubic Foot on a dry basis and a maximum total heat value of One
Thousand Eighty (1080) (Maximum Heat Value) Btu's per Cubic Foot on a dry basis.
If neither Party's system is jeopardized, the Parties may agree on other Maximum
and Minimum Heat Values from time to time.

         5.3      PGT shall annually, and at any time upon request by PG&E, test
the Gas that is delivered to PG&E to determine whether there are any
Polychlorinated biphenyls (PCBs) in the Gas or liquids associated with or
condensing from the Gas and provide such test results to PG&E. PGT shall provide
at its cost the annual test for PCBs. Payment for additional tests

                                       8
<PAGE>

requested by PG&E shall be in accordance with Paragraph 6.2 herein. The Parties
shall agree upon a sample point and procedures to be utilized in obtaining the
samples and sample results. Sample tests to determine the PCB concentration
shall be made in accordance with EPA Method 8080, as published in Test Methods
for Evaluating Solid Waste, 3rd ed., Environmental Protection Agency, 1992 (EPA
SWA-846), or other mutually agreeable method. Should the test results indicate
the presence of PCBs in the Gas or liquids associated with or condensing from
the Gas, the Parties agree that a technical advisory committee consisting of
representatives from each Party shall meet within 72 hours of the receipt of the
test results to establish mutually acceptable procedures to address the
discovery of any PCBs in any Gas delivered to PG&E on PGT's system.

         5.4      The Parties recognize that the Gas quality specifications in
effect for the pipeline systems of each Party are critical to each Party's
system integrity and public safety. Accordingly, the Parties agree that remedies
may be necessary and appropriate to maintain the safety and reliability of each
Party's system. Therefore, if, at any time, the Gas offered for delivery by PGT
should fail to conform to any of the quality specifications set forth in either
PG&E's Rule 21, PGT's gas FERC tariff, or the specifications set forth in
subparagraph 5.3 and should such deficiency jeopardize the public safety,
reliability, or merchantability of the Gas, PG&E will provide evidence of such
jeopardy to PGT for PGT's immediate consideration. Upon PGT's mutual agreement
that such jeopardy exists, which cannot be unreasonably withheld, the Parties
will move directly into discussions to determine a mutually acceptable remedy
which may include a temporary restriction in delivery of such Gas at the
Interconnect Point until such jeopardy is eliminated. Both Parties agree to use
commercially best efforts and actions to correct such jeopardy in a timely
manner. Notwithstanding any of the above, PG&E shall at all times retain the
right to take any such action necessary to protect the integrity of its Gas
pipeline system.

         5.5      All Gas delivered to PG&E at the Interconnect Point shall be
odorized by PGT with a commercially available odorant blend as specified by PG&E
with a concentration to be specified by PG&E. Unless the Parties agree to a
different concentration, the odorant concentration level will be no more than
one half (0.5) grain of odorant per one hundred (100)

                                       9
<PAGE>

standard Cubic Feet. The Parties recognize that such odorant service is provided
for the benefit of PG&E. Furthermore, the Parties recognize that the cost
recovery of odorization is currently imbedded in the rates set out in PGT's FERC
approved tariff and is subject to change n future rate cases. As such, future
cost allocation may change over time as approved by FERC.

6.       MEASUREMENT AND TESTS

         6.1      PGT shall perform the actual measurements each month during
the term hereof in accordance with the provisions set forth in Paragraphs 4 and
5 of the General Terms and Conditions of PGT's FERC Gas Tariff, First Revised
Volume 1-A as may be revised from time to time. For the purposes of this
Agreement, PGT shall perform such measurement and tests as follows:

         a.       The volume of Gas delivered under this Agreement shall be
                  measured by orifice meters, or by other industry accepted
                  meters installed, maintained and operated by PGT or its
                  designee as mutually agreed to by the Parties.

         b.       The unit of volume for purposes of measurement shall be one
                  (1) Cubic Foot of Gas at a temperature base of sixty degrees
                  Fahrenheit (60 degrees F) and at a pressure base of fourteen
                  and seventy-three hundredths (14.73) pounds per square inch
                  absolute (psia).

         c.       Relative density, carbon dioxide, nitrogen and Heating Value,
                  shall be continuously measured and recorded using Gas
                  chromatographs, calorimeters, densitometers, or other means
                  acceptable in the Gas industry or as mutually agreed to by the
                  Parties. Determination of Heating Value and relative density
                  by compositional analysis shall comply with the methods
                  specified in the American Society for Testing and Materials,
                  ASTM D 3588, as may be revised from time to time. The physical
                  properties of the constituent Gases used to calculate Heating
                  Value and relative density shall be taken from the Gas
                  Processors Association Bulletin GPA 2145, as may be revised
                  from time to time.

                                       10
<PAGE>

         d.       Gas compressibility shall be calculated at the flowing
                  pressure and temperature under which Gas is delivered to PG&E
                  in accordance with the recommendations contained in the
                  American Society for Testing and Materials, ASTM 3588, as may
                  be revised from time to time.

         e.       The average atmospheric (barometric) pressure shall be assumed
                  to be 12.67 psia at measurement point. Corrections for other
                  elevations shall be determined by using an industry acceptable
                  equation or by making measurements at the applicable point.

         6.2      Routine tests for gas quality will be conducted in accordance
with Paragraph 3.2c of the General Terms and Conditions of PGT's FERC Gas
Tariff, First Revised Volume No. 1-A as may be revised from time to time.
Additional tests for total sulfur, PCBs, and hydrogen sulfide content of the Gas
delivered hereunder shall be performed at the request of either Party from time
to time but shall be limited to no more than one (1) request every thirty (30)
Days. The methods of testing shall be agreed upon by the Parties. PGT shall
perform routine tests for gas quality at its expense. Any additional tests for
gas quality requested by PG&E shall be performed at PG&E's expense.

         6.3      PG&E may witness all tests made hereunder, provided, however
that PG&E may not alter or in any manner operate, disturb, manipulate, or tamper
with any PGT's equipment or the equipment of a third party vendor. Upon request,
PGT shall test its measurement equipment to verify the accuracy of such
equipment. PG&E may request a test at any time but shall be limited to no more
than one (1) request every thirty (30) Days. At the time of such a request, PGT
will schedule with PG&E a mutually convenient time for the test to take place
but no later than fifteen (15) Days following the request. Payment for such
accuracy tests shall be made in accordance with Paragraph 4 of the General Terms
and Conditions of PGT's FERC Gas Tariff, First Revised Volume No. 1-A as may be
revised from time to time.

                                       11
<PAGE>

         6.4      Notwithstanding Paragraph 4.3 of PGT's FERC Gas Tariff, the
following action will be taken for volume correction or determination, if
measurement inaccuracy (Inaccuracy) is discovered:

         a.       When the Inaccuracy is a result of using incorrect constant
                  values in the orifice meter equation, the quantity of
                  delivered Gas shall be recalculated. If the duration of the
                  Inaccuracy cannot be determined or agreed upon, the period of
                  the Inaccuracy shall be deemed to be one half of the time
                  elapsed since the last meter and instrument inspection.
                  Examples of using incorrect constant values include, but are
                  not limited to, basing calculations on the incorrect orifice
                  plate size, orifice tube size, differential pressure range,
                  static pressure range, Heating Value constants of Gas
                  constituents, or relative density constants of Gas
                  constituents.

         b.       When the Inaccuracy is a result of errors in the calibration
                  or operation of flow computers, transducers, recorders, or
                  measuring devices for relative density or Heating Value, that
                  result in an error greater than one percent (1%) of the
                  measured volume at a reading corresponding to the average
                  reading for the period since the preceding test of the device
                  or devices found to be in error, the quantity of Gas which has
                  been delivered shall be recalculated. If the percentage of
                  error is not ascertainable by calibration, test, or
                  mathematical calculation, the correction shall be made by
                  estimating the quantity or quality of Gas delivered based upon
                  deliveries under similar conditions during a period when the
                  equipment was registering accurately. Where the duration of
                  the Inaccuracy is not known or agreed upon, the period of the
                  Inaccuracy shall be deemed to be one-half of the time elapsed
                  since the date of the last test.

         c.       Adjustments for Inaccuracies in accordance with 6.4a and 6.4b
                  shall be made provided that the chain therefor shall have been
                  made within twelve (12) months from the date of the disclosure
                  of the error.

                                       12
<PAGE>

7.       REGULATORY

         7.1      This Agreement is subject to all valid applicable local, state
and federal laws, orders, rules, and regulations of any governmental body,
agency, or official having jurisdiction.

         7.2      PG&E shall not be required to take any action hereunder,
including but not limited to entering into any contracts with Shippers or other
parties transporting Gas on PGT's Facilities to the Interconnect Point, which,
in the good-faith and reasonable exercise of PG&E's judgment, may jeopardize
PG&E's retention of its "Hinshaw Exemption."

         7.3      PGT shall not be required to take any action hereunder,
including, but not limited to, entering into contracts with Shippers or other
parties transporting Gas on PG&E's facilities, which, in the good-faith and
reasonable exercise of PGT's judgment, may cause PGT to be subject to the
jurisdiction of the CPUC.

         7.4      Notwithstanding the other provisions of this Agreement, if at
any time during the term hereof, any governmental authority having jurisdiction
shall take any action whereby either Party's delivery, receipt, and/or use of
Gas hereunder shall be proscribed or subjected to terms, conditions,
regulations, restraints, or limits that in the reasonable judgment of the Party
prevents that party from acting in a commercially reasonable manner to fulfill
the terms of this Agreement, such Party shall have the unilateral right to
terminate this Agreement at any time upon thirty (30) days written notice to the
other Party, without further liability hereunder, except as to redelivery of any
outstanding Gas imbalances. Nothing herein shall prevent the Parties through
mutual agreement from modifying this Agreement in lieu of termination.

         7.5      Nothing in this Agreement shall be interpreted to require
either Party to take any action that would be inconsistent with their applicable
tariffs or violate any governmental regulation or authority.

         7.6      Nothing herein shall be construed as a dedication by either
party of its respective facilities to the other Party. Both PG&E and PGT may
each construct facilities on its respective system as it may deem necessary or
appropriate in its sole discretion. Nothing herein obligates

                                       13
<PAGE>

either Party to construct any additional facilities (including measuring
facilities) or to modify any existing facilities to provide for the receipt or
delivery of Gas. PGT shall have a separate agreement(s) covering any new
facilities or necessary modifications for either receipt or delivery of Gas at
the Interconnect Point.

8.       REMEDIES

         Each Party agrees that its sole remedy for nonperformance by the other
Party or other default by the other Party in the performance of its obligations
under this Agreement shall be as specified in the Agreement. Both Parties agree
to use commercially best efforts and actions to correct such nonperformance on
their respective systems in a timely manner.

9.       INDEMNIFICATION

         Notwithstanding Paragraph 8 above, each Party shall indemnify the other
Party including the agents, contractors, and employees of the Party, against all
loss, damage, cost and expense (including attorneys' fees), judgment on other
obligation or liability, resulting from physical injury to property or person,
caused by the indemnifying Party's performance of its obligations under this
Agreement; provided, however, that neither Party shall be obligated to indemnify
the other Party against any loss, damage, cost, expense, liability, or cause of
action which arises in whole or in part out of the sole negligence or willful
misconduct of the other Party.

10.      ASSIGNMENT

         This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors and assigns; provided, however, that no
Party shall assign or transfer this Agreement or any part thereof, or any right
or obligation hereunder, without the written consent of the other Party, which
may not be unreasonably withheld. Any such assignment which requires written
consent hereunder, but which is made without such written consent, shall be null
and void. Notwithstanding the above, assignment of the entire interest and
obligations of the assigning Party may be made to a parent or affiliate of such
assigning Party, or to an entity succeeding to all or substantially all of the
business properties and assets of the assigning Party, following written notice
to the other Party.

                                       14
<PAGE>

11.      INFORMATION

         Each Party shall have the right to request that the other Party provide
information that is sufficient to verify the accuracy of any computation
contemplated under this Agreement. All reasonable efforts shall be made by the
Parties to resolve any disputed computations. Unresolved disputed computations
may be submitted by either Party for resolution as described in Paragraph 13 of
this Agreement. Notwithstanding the above, neither Party shall be required to
provide the other Party with information that is confidential, proprietary, or
in violation of the rules and regulations of either the FERC or CPUC.

12.      FORCE MAJEURE

         12.1     In the event either Party is rendered unable, wholly or in
part, by force majeure (as defined in Paragraph 12.2) to carry out its
respective obligations under this Agreement, it is agreed that, upon such Party
giving notice and reasonably full particulars of such force majeure in writing
or by telecopy or by telephone (and confirmed in writing within seventy-two [72]
hours), to the other Party within a reasonable time after the occurrence of the
cause relied on, then the obligations of the Party giving such notice, so far as
they are affected by such force majeure, shall be suspended during the
continuance of the effects of the cause, and the Party subject to such cause
shall remedy it so far as possible with all reasonable dispatch.

         12.2     The term "force majeure," as employed herein, shall mean an
event or events beyond the reasonable control of a Party and shall include, but
not be limited to, acts of God, strikes, lockouts or other industrial
disturbances, acts of the public enemy, wars, blockades, insurrections, riots,
epidemics, landslides, lightning, earthquakes, fires, storms, floods, high
water, washouts, arrests and restraints of governments and people, civil
disturbances, explosions, breakage or accident to machinery or lines of pipe,
freezing lines of pipe, acts of civil or military authority (including, but not
limited to, courts, or administrative or regulatory agencies). Such term shall
likewise include (i) in those instances where any Party hereto is required to
obtain servitudes, rights-of-way, grants, permits or licenses to enable such
Party to fulfill its obligations hereunder, and such Party is unable to so
acquire, is delayed in acquiring at reasonable costs and after the exercise of
reasonable diligence, such servitudes, rights-of-way, grants, permits,
certificates or licenses; and (ii) those instances where any Party hereto is
required to furnish

                                       15
<PAGE>

materials and supplies for the purpose of constructing or maintaining facilities
or is required to secure permits, or certificates of permission from any
governmental agency to enable such Party to fulfill its obligations hereunder,
and such Party is unable to so acquire, or is delayed in acquiring, at
reasonable costs and after the exercise of reasonable diligence, such materials
and supplies, permits and permissions. Failure of an administrative agency to
authorize recovery of costs shall not constitute force majeure. It is understood
and agreed that the settlement of strikes or lockouts shall be entirely within
the discretion of the Party having the difficulty, and the above requirement
that any force majeure shall be remedied with all reasonable dispatch shall not
require the settlement of strikes or lockouts by acceding to the demands of the
opposing Party when such course is inadvisable in the discretion of the Party
having the difficulty.

13.      DISPUTE RESOLUTION

         13.1     Within thirty (30) days of written notice from either Party to
the other that there is a dispute, claim, or need for interpretation arising out
of or relating to this Agreement, the Parties shall meet and attempt to reach an
amicable settlement by negotiation. If the matter is not resolved within thirty
(30) days of such meeting, the matter shall be resolved in the manner set forth
in Paragraph 13.2 and 13.3, which shall be in lieu of litigation before any
regulatory agency or in any state or federal courts.

         13.2     At either Party's request, the Parties shall attempt to
resolve their dispute through non-binding mediation in accordance with the
Commercial Mediation Rules of the American Arbitration Association (AAA). The
Parties shall establish specific ground rules for the mediation at least
fourteen (14) days in advance of the mediation meeting. The mediation shall be
held in Portland, Oregon, and shall commence within thirty (30) days of a
Party's request for mediation. Each Party shall bear its own mediation costs.
The costs and expenses of the mediator shall be divided equally between the
Parties.

         13.3     If no amicable settlement is reached as a result of the
procedures prescribed in Paragraph 13.2, the matter shall be submitted to
binding arbitration pursuant to the Commercial Arbitration Rules of the AAA
(including any rules for expedition of the hearing process); provided, however,
such rules shall be modified as necessary to reflect the following:

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<PAGE>

         a.       Unless the Parties otherwise agree, the arbitration panel
                  shall be composed of three persons. Each Party shall nominate
                  one arbitrator, and the two arbitrators so appointed shall
                  appoint a third, who shall act as the presiding arbitrator or
                  chair of the panel. If either Party fails to nominate an
                  arbitrator within thirty (30) days of receiving notice of the
                  nomination of an arbitrator by the other Party, such (second)
                  arbitrator shall be appointed by the AAA at the request of the
                  first Party. If the two arbitrators so selected fail to select
                  a third presiding arbitrator, the third arbitrator shall be
                  appointed by the AAA. Should a vacancy occur on the panel, it
                  shall be filled by the method by which that arbitrator was
                  originally selected.

         b.       The arbitration shall be held at a location to be agreed by
                  the Parties, or, failing such an agreement, at San Francisco,
                  California.

         c.       The arbitrators shall hold a preliminary meeting with the
                  Parties within thirty (30) days of the appointment of the
                  third or presiding arbitrator for the purpose of determining
                  or clarifying the issues to be decided in the arbitration, the
                  specified procedures to be followed, and the schedule for
                  briefing and/or hearings. The arbitrators shall hold a hearing
                  and, within one hundred and twenty (120) days of the
                  preliminary meeting (except in extraordinary cases) shall
                  issue a written decision and include findings of fact and
                  conclusions of law.

         d.       Such decision shall thereafter be deemed to be part of this
                  Agreement and incorporated by reference herein.

         e.       Pending such decision, the Parties shall continue to operate
                  under the Agreement; however, the decision by the panel should
                  consider specifically the appropriateness of retroactive
                  adjustments to the date the dispute first arose.

         f.       The United States District Court for the Northern District of
                  California or a Superior Court of the State of California may
                  enter judgment upon the panel's

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<PAGE>

                  decision, either by confirming the decision or by vacating,
                  modifying, or correcting the decision. The Court may vacate,
                  modify, or correct any such decision only: (i) if there exists
                  any of the grounds referred to in the United States
                  Arbitration Act, or (ii) to the extent that the panel's
                  conclusions of law are erroneous.

         g.       The allocation of costs of arbitration shall be considered and
                  determined by the panel in connection with its decision, and,
                  for example, the entire costs of such proceeding, including
                  reasonable attorneys fees (for in-house and outside counsel)
                  may be awarded to the prevailing Party.

         h.       Neither Party shall be assessed any punitive damages.

         i.       In the event it is necessary to enforce an arbitration award,
                  all costs of enforcement, including reasonable attorney fees
                  (for in-house and outside counsel), shall be payable to the
                  prevailing Party.

         13.4     The resolution of disputes subject to this Section 13 shall be
governed by, and the arbitrators shall render their decision in accordance with,
the substantive laws of the State of California, without regard to its choice of
law rules.

14.      NOTICE

         14.1     Any notice, request, demand, or statement provided for in this
Agreement shall be in writing and deemed given when deposited in the United
States mail, postage prepaid, directed to the post office address of the Parties
as follows:

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<PAGE>

AGREEMENT NOTICES AND OTHER CORRESPONDENCE

Pacific Gas Transmission Company         Pacific Gas and Electric Company
2100 S.W. River Parkway                  245 Market Street, Room 1503, N15A
Portland, OR  97201                      P.O. Box 770000
Telephone:  (503) 833-4000               San Francisco, CA  94177
Telecopier:  (503) 833-4332              Telephone:  (415) 973-2908
Attn. Manager of Transportation          Telecopier:  (415) 973-9247
                                         Attn. Business Projects

DISPATCHING AND NOMINATIONS

Pacific Gas Transmission Company         Pacific Gas and Electric Company
2100 S.W. River Parkway                  77 Beale Street, Room 1643, B16A
Portland, OR  97201                      P.O. Box 770000
Dispatch Telephone:  (503) 833-4200      San Francisco, CA  94177
Telecopier:  (503) 833-4395              Dispatch Telephone:  (415) 973-3214
Nominations:  (503) 833-4300             Nominations:  (415) 973-3220
                                         Telecopier:  (415) 973-0649

         14.2     Either Party may from time-to-time change or designate another
address for such purposes upon thirty (30) calendar days prior written notice by
the Party requesting such change.

         14.3     Notices, requests, and demands may also be given by facsimile
or other electronic transmittal provided that such facsimile or electronically
conveyed notice, request or demand is confirmed in writing delivered as
aforesaid within three (3) business Days of receipt of facsimile or other
electronic notice. Notice regarding routine operations may be exclusively
communicated by facsimile or other electronic means. All nominations and such
confirmations must be made via electronic data exchange when such systems are
operational.

15.      CONFIDENTIALITY

         Each Party agrees that it will maintain this Agreement, and all parts
and contents thereof in strict confidence, and that it will not cause or permit
disclosure of same to any third party without the express written consent of the
other Party; provided however, that disclosure by a Party is permitted in the
event and to the extent (i) such disclosure is required by a court or agency
exercising jurisdiction over the subject matter hereof, by order or by
regulation (provided that in the event either Party becomes aware of a judicial
or administrative proceeding that has resulted in an order requiring disclosure,
or in which any party to such proceeding has sought

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<PAGE>

such an order, it shall so notify the other Party immediately); (ii) disclosure
is necessary to agents, contractors, and employees for the proper prosecution of
their work; or (iii) disclosure is necessary in connection with a bona fide sale
or assignment of an interest in this Agreement, the borrowing of funds,
obtaining of insurance, and/or sale of securities. In such event the disclosing
Party shall notify the other Party of the name of such third party and the
nature of such disclosure prior to the disclosure.

16.      ADDITIONAL PROVISIONS

         16.1     No consent or waiver, expressed or implied, by either Party of
any breach or default by the other Party in the performance of its obligations
hereunder shall be deemed or construed to be a consent to or waiver of any other
breach or default in the performance of any other obligation of the other Party.
Failure on the part of either Party to complain of any act or failure to act by
the other party or to declare the other Party in default, regardless of how long
such failure continues, shall not constitute a waiver by such Party of any of
its rights hereunder.

         16.2     This Agreement supersedes all prior agreements,
representations and understandings, written or oral, pertaining to the subject
matter herein.

         16.3     THIS AGREEMENT AND THE OBLIGATION OF THE PARTIES HEREUNDER
SHALL BE INTERPRETED, CONSTRUED AND CONTROLLED BY THE LAWS OF THE STATE OF
CALIFORNIA.

         16.4     This Agreement was jointly negotiated, and any ambiguities or
uncertainties in the wording of this Agreement shall not be construed for or
against either Party, but shall be construed in a manner which most accurately
reflects the intent of the Parties when this Agreement was executed.

         16.5     This Agreement may be amended only by an instrument in writing
executed by both Parties hereto.

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<PAGE>

         16.6     Each Party shall do all necessary acts and make, execute, and
deliver such written instruments as shall from time to time be reasonably
necessary to carry out the terms of this Agreement.

         16.7     Whenever the context may require, the singular form of nouns,
pronouns and verbs shall include the plural and vice versa.

         16.8     The descriptive headings of all paragraphs of this Agreement
are formulated and used for convenience only and shall not be deemed to affect
the meaning or construction of any such paragraphs.

         16.9     Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of that prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of that
provision in any other jurisdiction.

         16.10    PGT's general Terms and Conditions of its FERC approval Gas
Tariff, First Revised Volume No. 1A, and subsequent changes or revisions, are by
reference made a part hereof.

         16.11    PG&E's Rule 21, as approved by the CPUC and any subsequent
changes or revisions, is by reference made a part hereof.

         16.12    The parties agree that changes ordered by the FERC to any of
the operating procedures established under this Agreement shall be made in
writing as an amendment within sixty (60) days of such FERC order(s).

         16.13    This Agreement is intended solely for the benefit of the
Parties and their permitted successors and assigns and, except as may be
specifically set forth herein, is not intended to and shall not confer rights or
benefits upon any other party.

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<PAGE>




IN WITNESS WHEREOF, the Parties have, through this duly authorized officers or
employees, executed this agreement as of the date herein above written.

                                PACIFIC GAS AND ELECTRIC COMPANY

                                By:   H. O. LAFLASH
                                   -------------------------------------------
                                      H. O. LaFlash
                                      Manager, Business Projects

                                Date: 7/9/96

                                PACIFIC GAS TRANSMISSION COMPANY

                                By:   PETER LUND
                                   -------------------------------------------
                                      Peter Lund
                                      Vice President, Marketing & Transportation

                                Date: 7/2/96

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