Pacific Gas & Electric (PCG)

How Did the Compensation Committee Benchmark and Establish the 2008 Officer Compensation Program?

During the last quarter of fiscal year 2007, the Committee reviewed a market analysis conducted by Hewitt of each NEO's compensation levels for 2007 to determine whether to adjust any NEO's pay for 2008. In February 2008, the Committee (and the independent members of the applicable Board of Directors in the cases of the CEOs of PG&E Corporation and Pacific Gas and Electric Company) approved adjustments to the base salaries, target short-term incentive opportunities, and long-term incentives for NEOs effective March 1, 2008.

PG&E Corporation uses a primary Pay Comparator Group of publicly traded gas and electric utilities to evaluate market practice and assess its competitive pay position. In addition, PG&E Corporation may use a secondary general industry comparator group of general industry companies having a similar revenue and market capitalization scope to that of PG&E Corporation. All elements of total direct pay are compared individually and in the aggregate to each of the comparator groups.

The Pay Comparator Group is reviewed and approved annually by the Committee and consists of all companies listed in the Standard & Poor's Multi-Utilities Index and Electrics Index, as well as the Dow Jones Utility Index. A total of 27 companies were listed in 2008:

AES Corporation
Allegheny Energy
Ameren Corporation
American Electric Power
CenterPoint Energy, Inc.
CMS Energy
Consolidated Edison
DTE Energy
Dominion Resources, Inc.
Duke Energy
Edison International
Entergy Corporation
Exelon Corporation
FPL Group

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First Energy
Integrys Energy Group, Inc.
NiSource, Inc.
PPL Corporation
Pinnacle West Capital
Progress Energy, Inc.
Public Service Enterprise Group
Sempra Energy
Southern Company
TECO Energy
TXU Corporation
Williams Companies
Xcel Energy, Inc.

For 2008, the secondary general industry comparator group was based on Hewitt's proprietary executive compensation database focusing on 72 companies with annual revenues between $8 billion and $20 billion (with a median revenue of $12.1 billion and a market capitalization of $15.2 billion). This secondary market reference is used, if at all, to compare compensation for officers whose job scope and skill set are easily transferable to other industries, such as officers responsible for corporate support functions. A list of the 72 companies included in the general industry comparator group is included as an appendix to this Joint Proxy Statement.

PG&E Corporation also identifies a Performance Comparator Group, which is a subset of the Pay Comparator Group, consisting of the companies with operating characteristics and business models most comparable to PG&E Corporation, and uses this group as the basis for corporate performance comparisons. Corporate performance comparisons are generally based on relative total shareholder return, defined as stock price appreciation and dividends ("TSR"). Like PG&E Corporation, these companies emphasize their core rate-regulated utility activities and have either a distribution focus or an integrated utility focus. For 2008, this industry peer group consisted of:

Ameren Corporation
American Electric Power
CenterPoint Energy, Inc.
Consolidated Edison
Entergy Corporation
FPL Group
NiSource, Inc.
Pinnacle West Capital
Progress Energy, Inc.
Southern Company
TECO Energy
Xcel Energy, Inc.

Although the Committee reviews the compensation practices of all the companies in the comparator groups, as described above, and seeks to provide a meaningful and competitive pay package to the NEOs, the Committee does not adhere to strict formulas or survey data to determine the actual mix of compensation elements, including allocation between cash and non-cash or between different forms of equity awards. The Committee considers various additional factors, including each NEO's scope of responsibility and organizational impact, experience, and performance, as well as PG&E Corporation's overall financial and operating results. This flexibility is important in supporting the overall pay philosophy and meeting the Committee's objectives of attracting, retaining, and motivating a talented executive leadership team.