Pacific Gas & Electric (PCG)

Accounting for Asset Retirement Obligations

On January 1, 2003, PG&E Corporation and the Utility adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” or SFAS No. 143. The Utility identified its nuclear generation and certain fossil fuel generation facilities as having asset retirement obligations under SFAS No. 143. SFAS No. 143 requires that an asset retirement obligation be recorded at fair value in the period in which it is incurred if a reasonable estimate of fair value can be made. In the same period, the associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the long-lived asset. Rate-regulated entities may recognize regulatory assets or liabilities as a result of timing differences between the recognition of costs as recorded in accordance with SFAS No. 143 and costs recovered through the ratemaking process. The cumulative effect of the

Accounting for Asset Retirement Obligations

        On January 1, 2003, PG&E Corporation and the Utility adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," or SFAS No. 143. The Utility identified its nuclear generation and certain fossil fuel generation facilities as having asset retirement obligations under SFAS No. 143. SFAS No. 143 requires that an asset retirement obligation be recorded at fair value in the period in which it is incurred if a reasonable estimate of fair value can be made. In the same period, the associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the long-lived asset. Rate-regulated entities may recognize regulatory assets or

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liabilities as a result of timing differences between the recognition of costs as recorded in accordance with SFAS No. 143 and costs recovered through the ratemaking process. The cumulative effect of the change in accounting principle for the Utility's fossil fuel facilities as a result of adopting SFAS No. 143 was a loss of approximately $1 million, after-tax.

        The Utility has established trust funds that are legally restricted for purposes of settling its nuclear decommissioning obligations. The fair value and carrying value of these trust funds was approximately $1.6 billion at December 31, 2004 and approximately $1.5 billion at December 31, 2003.

        The Utility may have potential asset retirement obligations under various land right documents associated with its transmission and distribution facilities. The majority of the Utility's land rights are perpetual. Any non-perpetual land rights generally are renewed continuously because the Utility intends to utilize these facilities indefinitely. Since the timing and extent of any potential asset retirements are unknown, the fair value of any obligations associated with these facilities cannot be reasonably estimated.

        The Utility collects estimated removal costs in rates through depreciation in accordance with regulatory treatment. These amounts do not represent SFAS No. 143 asset retirement obligations. Historically, these removal costs have been recorded in accumulated depreciation. However, as a result of guidance from the staff of the Securities and Exchange Commission, or SEC, the Utility reclassified this obligation to a regulatory liability in its 2003 and 2002 Consolidated Balance Sheet during 2003. The Utility's estimated removal costs recorded as a regulatory liability were approximately $2.0 billion at December 31, 2004 and approximately $1.8 billion at December 31, 2003.