Pacific Gas & Electric (PCG)

Average 2008 Target Compensation for Other NEOs

The Committee believes that these proportions of target base salary relative to short-term and long-term incentives provide the right mix to attract, retain, and motivate officers with the necessary skills and experience for the development and successful operation of PG&E Corporation's businesses. They also provide a direct connection between compensation and performance in both the achievement of key operating results and long-term shareholder value, as more fully described below.

Base Salary

Base salary is the fixed cash amount paid to an officer each year. The Committee aims to set base salary at levels that are competitive with the average base salary for comparable officers in the Pay Comparator Group, taking account of factors such as incumbent's skill set relative to industry peers, experience, time in position, criticality of the role, difficulty of replacement, position level relative to that of other officers, individual performance, and expected future contributions. Consistent with the Committee's objective of tying a significant component of every NEO's compensation directly to PG&E Corporation's performance for shareholders through short-term and long-term incentives, actual base salary comprises only 15% to 38% of target NEO total compensation, depending on officer level.

For 2008, the Committee approved a base salary increase budget of 4.0% intended to apply to each officer's base salary adjustments, mid-year discretionary salary increases, and lump-sum payments. The comparative data showed that the companies in the Pay Comparator Group expected to provide officers a 3.7% average salary increase in 2008, and that those companies' average salary increase in 2007 was 4.1 percent. With one exception, each NEO's base pay at PG&E Corporation and Pacific Gas and Electric Company is within a range of between 15% greater and 15% less than the appropriate benchmark position in the Pay Comparator Group average at the time of benchmarking. The Committee believes that this level of comparability is appropriate and consistent with the pay philosophy. For the one exception, there was insufficient comparative data for the position of Senior Vice President, Corporate Strategy and Development of PG&E Corporation, held by Rand L. Rosenberg. In the absence of comparative data, Mr. Rosenberg's base salary was set at a level consistent with the base salaries of the Chief Financial Officer and the General Counsel, based upon factors such as scope of responsibility, organizational impact, experience, and individual performance.

Effective January 1, 2008, the annual base salary for John S. Keenan was increased to $500,000 from $435,000. This increase reflects his increased responsibilities following his appointment as Senior Vice President and Chief Operating Officer of Pacific Gas and Electric Company. Prior to that time, Mr. Keenan served as Senior Vice President, Generation and Chief Nuclear Officer. Effective March 24, 2008, Barbara L. Barcon was hired as Vice President, Finance and Chief Financial Officer of Pacific Gas and Electric Company. Her annual base salary of $300,000 is comparable to the average base salary of comparable officers in the Pay Comparator Group.

Short-Term Incentives

The Committee aims to set target STIP awards that are competitive with the average short-term incentive awards for comparable officers in the Pay Comparator Group. Target STIP awards are based on a percentage of base pay (called the participation rate) that varies according to officer level.

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2008 STIP Results

For 2008, the Committee approved target STIP awards that range from 45% of base salary for lower-level executive officers to 100% of base salary for the CEO of PG&E Corporation. This range of target STIP awards is consistent with the Pay Comparator Group's practice. Each year, the Committee establishes financial and operational performance goals at minimum (or "threshold"), target, and maximum levels, and determines the relative weightings of each component for the succeeding year (STIP structure). The Committee designs the STIP structure with the objective of aligning officer compensation with the successful management of assets and resources to generate stable and growing financial results for the benefit of shareholders, as well as to deliver safe, reliable, and exceptional service to utility customers. The relative weightings balance direct (through earnings from operations) and indirect (through key operational objectives) factors that contribute to performance for shareholders.

Actual STIP payments are determined by the Committee based on the extent to which the pre-established performance goals are met. STIP payments are calculated by multiplying an individual's target STIP award by the overall STIP performance score, which can range from zero if minimum performance goals are not met to 2.0 if maximum performance goals are met.

Under the 2008 STIP structure approved by the Committee in December 2007, 40% of the overall STIP score is based on corporate financial performance, as measured by corporate earnings from operations. The corporate financial performance goal is based on PG&E Corporation's 2008 budgeted earnings from operations that were previously approved by the Board of Directors, consistent with the basis for reporting and guidance to the financial community.⁽¹⁾

(1)

PG&E Corporation uses a financial performance goal and provides earnings guidance based on "earnings from operations." This measure is not a substitute or alternative for consolidated net income presented in accordance with generally accepted accounting principles (GAAP). Earnings from operations exclude items impacting GAAP results that do not reflect the normal course of operations, such as changes in accounting methods, workforce restructuring, and one-time occurrences.

(2)

For 2008, per-share earnings on a GAAP basis were $3.63, which included income from a settlement of 2001-2004 tax audits, totaling $257 million or $0.68 per share.

The Committee has adopted threshold, target, and maximum STIP financial performance goals that correspond to STIP financial performance scores ranging from 0.5 to 2.0. The threshold goal is met if actual earnings from operations are at least 91% of budgeted earnings from operations, resulting in a minimum STIP financial performance score of 0.5. The target goal is met if actual earnings from operations are equal to budgeted earnings from operations, resulting in a target STIP financial performance score of 1.0. The maximum goal is met if actual earnings from operations exceed 106% of budgeted earnings from operations, resulting in a maximum STIP financial performance score of 2.0. To meet the maximum goal, 2008 earnings from operations would have needed to be 15.3% greater than the 2007 actual earnings from operations results. The Committee believes that this presents a significant challenge to management and, if achieved, would justify a maximum STIP financial performance score of 2.0.

Management publicly provided guidance that PG&E Corporation's 2008 earnings from operations per share were expected to be in the range of $2.90 to $3.00 per share. On February 24, 2009, PG&E Corporation disclosed that its earnings from operations per share were $2.95.⁽²⁾ Based on 2008 earnings from operations per share, the Committee determined that the target 2008 STIP corporate financial performance goal resulted in an actual STIP corporate financial performance result of 0.938.

The remaining 60% of the overall 2008 STIP score was based on the extent to which key operational objectives were met. These operational STIP goals were based on some of the same measures that management uses to track operational performance generally, and are described in the table below. As such, these operational STIP goals further the Committee's objective of aligning officer compensation with, among other things, the delivery of safe, reliable, and exceptional service to utility customers.

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