Pacific Gas & Electric (PCG)

Fair Value of Financial Instruments

        The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Significant differences can occur between the fair value and carrying amount of financial instruments that are recorded at historical amounts.

        PG&E Corporation and the Utility use the following methods and assumptions in estimating fair value disclosures for financial instruments:

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The fair values of cash and cash equivalents, restricted cash and deposits, net accounts receivable, price risk management assets and liabilities, short-term borrowings, accounts payable, customer deposits, the Utility's variable rate pollution control bond loan agreements, Floating Rate First Mortgage Bonds due 2006, and the pollution control bond bridge facilities approximate their carrying values as of December 31, 2004 and 2003;



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The fair values of fixed rate First Mortgage Bonds, fixed rate pollution control loan agreements, rate reduction bonds, and the Utility's preferred stock were determined based on quoted market prices; and



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The fair value of PG&E Corporation's 9.50% Convertible Subordinated debt for which no market quotation is readily available, was determined by a third-party using the present value of future cash flows incorporating estimates of borrowing rates currently available to PG&E Corporation for instruments of similar maturity and the Black-Scholes option valuation model (including a stock volatility assumption of 15-20%).

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        The carrying amount and fair value of PG&E Corporation's and the Utility's financial instruments are as follows (the table below excludes financial instruments with fair values that approximate their carrying values, as these instruments are presented in the Consolidated Balance Sheets):

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Excludes the estimated fair value of dividend participation rights component on a pre-tax basis of approximately $91 million at December 31, 2004. See Note 3 for further discussion.