Pacific Gas & Electric (PCG)

CAPITAL EXPENDITURES

The Utility’s investment in plant and equipment totaled approximately $1.6 billion in 2004, $1.7 billion in 2003 and $1.5 billion in 2002. The Utility’s annual capital expenditures are expected to increase to an average of approximately $2.0 billion annually over the next five years. These expenditures are necessary to replace aging and obsolete equipment and accommodate anticipated electricity and natural gas load growth of approximately 2% and 1.2% per year, respectively. Capital expenditures for which contracts or firm commitments exist have, in addition to being included in estimated capital expenditures, been included in the “Contractual Commitments” table above, which details the Utility’s contractual obligations and commitments at December 31, 2004. The estimate of capital expenditures over the next five years includes the following significant capital expenditure projects:

•                  New customer connections and expansion of the existing electricity and natural gas distribution systems anticipated to average approximately $400 million annually over the next five years;

•                  Replacements and upgrades to portions of the Utility’s electricity distribution system anticipated to average approximately $400 million annually over the next five years;

•                  Replacement of natural gas distribution pipelines expected to average approximately $70 million annually over the next five years;

•                  Replacements and capacity expansion of the electricity transmission system expected to average approximately $400 million annually over the next five years;

The Utility’s investment in plant and equipment is necessary to replace aging and obsolete equipment and accommodate anticipated electricity and natural gas load growth.  It is estimated that the Utility’s base capital expenditures will approximate $1.9 billion in each of 2005 and 2006 (excluding potential investments in an advanced metering infrastructure, as discussed below).

CAPITAL EXPENDITURES

        The Utility's investment in plant and equipment totaled approximately $1.6 billion in 2004, $1.7 billion in 2003 and $1.5 billion in 2002. The Utility's annual capital expenditures are expected to increase to an average of approximately $2.0 billion annually over the next five years. These expenditures are necessary to replace aging and obsolete equipment and accommodate anticipated electricity and natural gas load growth of approximately 2% and 1.2% per year, respectively. Capital expenditures for which contracts or firm commitments exist have, in addition to being included in estimated capital expenditures, been included in the "Contractual Commitments" table above, which details the Utility's contractual obligations and commitments at December 31, 2004. The estimate of capital expenditures over the next five years includes the following significant capital expenditure projects:

•

New customer connections and expansion of the existing electricity and natural gas distribution systems anticipated to average approximately $400 million annually over the next five years;



•

Replacements and upgrades to portions of the Utility's electricity distribution system anticipated to average approximately $400 million annually over the next five years;



•

Replacement of natural gas distribution pipelines expected to average approximately $70 million annually over the next five years;



•

Replacements and capacity expansion of the electricity transmission system expected to average approximately $400 million annually over the next five years;



•

Replacements and upgrades to the Utility's natural gas transportation facilities expected to average approximately $120 million annually over the next five years;



•

Replacements and upgrades of existing facilities at the Utility's Diablo Canyon power plant, including the turbine and steam generator replacement projects, potential investments in a new combined cycle generation unit in Contra Costa County that may be acquired pursuant to a settlement agreement with Mirant, and replacements, upgrades and relicensing of the Utility's hydroelectric generation facilities. All of these generation-related projects are expected to average approximately $370 million annually over the next five years; and



•

Investment in common plant, including computers, vehicles, facilities and communications equipment, expected to average approximately $200 million annually over the next five years.

        The Utility retains the ability to delay or defer substantial amounts of these planned expenditures in light of changing economic conditions and changing technology. It is also possible that these projects may be replaced by other projects. Consistent with past practice, the Utility expects that any capital expenditures will be included in its rate base and recoverable in rates. Based on the estimate of average capital expenditures of approximately $2.0 billion annually over the next five years, the Utility's average annual rate base would grow by approximately 4.5% per year over the five-year period.

        The Utility's residual net open position is expected to increase over time. To meet this need, the Utility will need to enter into contracts with third-party generators for additional supplies of electricity, develop or otherwise acquire additional generation facilities or satisfy its residual net open position through a combination of the two. The discussion above does not include any capital expenditures for new generation facilities aside from the Contra Costa project described above. The discussion above also does not include any capital expenditures necessary to implement advanced metering improvements.

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        The estimate of capital expenditures discussed above does not include up to $2.0 billion in additional potential expenditures over the 2005 through 2009 period for:

•

New generation facilities to comply with the Utility's long-term electricity procurement plan as approved by the CPUC. To meet future resource needs, the Utility will need to enter into contracts with third-party generators for additional supplies of electricity, develop or otherwise acquire additional generation facilities;



•

Electric transmission projects to accommodate system expansions approved by the ISO, interconnections and upgrades triggered by new generation, costs to extend the life of or replace transmission equipment;



•

Implementation of electric distribution reliability and technology driven service enhancements such as advanced metering; and



•

Reliability and service enhancements of the Utility's gas distribution infrastructure to provide access to new natural gas sources.

        The Utility has estimated that if these additional capital expenditures related to new generation, electric transmission and distribution and gas distribution are made, the Utility's total weighted average rate base would grow by approximately 6.5% over the five-year period.