Pacific Gas & Electric (PCG)

Long-Term Incentives

The LTIP permits the grant of various types of stock-based incentives to NEOs and certain other employees of PG&E Corporation, Pacific Gas and Electric Company, and their subsidiaries. The PG&E Corporation Board of Directors has delegated the administration of the LTIP to the Committee, including the power to determine the types of awards to be granted, the amounts, terms, and conditions of LTIP awards, and the individuals to whom LTIP awards are granted. Grants to the CEOs of PG&E Corporation and Pacific Gas and Electric Company are approved by the independent members of the applicable Board of Directors. The Committee approves guidelines that include the range of target LTIP award values for different categories of employees, as well as the terms and conditions of all LTIP awards to be made in the following year. The guidelines also specify the grant date for annual LTIP awards. Actual awards are made within the range of target LTIP values previously approved by the Committee.

The amount of target LTIP awards for new executive officers is determined by referencing the range of target LTIP values specified in the guidelines approved by the Committee, as well as any unique factors taken into account in the recruiting process in order to induce the officer to join PG&E Corporation or Pacific Gas and Electric Company.

Consistent with its stated compensation philosophy, the Committee establishes target LTIP award value guidelines that generally provide compensation in line with PG&E Corporation's performance for shareholders (i.e., if PG&E Corporation performs at the 50th percentile of the Performance Comparator Group, the total long-term incentive value realized by grant recipients would be approximately equal to long-term incentive compensation at the 50th percentile of the Pay Comparator Group). For 2008, the Committee approved target LTIP values ranging from $300,000 for lower-level executive officers to $5,300,000 for the CEO of PG&E Corporation.

At its December 2007 meeting, the Committee determined that the NEOs would receive one-half of the value of their 2008 LTIP award in restricted stock and one-half of the value in performance shares. The Committee believes that this allocation of equity

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balances the interests of shareholders for increased share value with the interest of officers for long-term compensation as expressed by stock price appreciation and TSR. Details regarding restricted stock and performance share grants are provided below. In December 2007, the Committee (and with regard to Peter A. Darbee and William T. Morrow, the independent members of the applicable Board) approved the recommended 2008 target LTIP award values for the NEOs.

Restricted stock.    Shares of restricted stock may not be transferred or sold until certain conditions are met. Generally, the restrictions will lapse over a five-year period, provided that the recipient is then an employee. The restrictions may lapse sooner if PG&E Corporation's TSR is in the top quartile of its Performance Comparator Group and under certain other circumstances. As the restrictions lapse, the recipient's right to the shares vests and the recipient may transfer or sell the shares.

The number of shares of restricted stock granted in 2008 was determined by dividing one-half of the target LTIP award value by the average daily closing price of a share of PG&E Corporation common stock for the last five days of February 2008 (or the closing price on the grant date for a newly hired officer), as reported on the New York Stock Exchange.

Restricted stock granted in 2008 will vest in 20% increments during each of the first three years. The remaining 40% will vest on the first business day of March 2011 if PG&E Corporation's TSR for the prior three-year period is in the top quartile relative to the Performance Comparator Group. If PG&E Corporation's TSR for that period is not in the top quartile, the restrictions will continue, and the remaining 40% of the restricted stock will vest on the first business day of March 2013.

Restricted stock aligns officers' interests with those of shareholders (i.e., increasing the stock price and dividends), in addition to rewarding officers for top quartile performance through the accelerated vesting feature. Restricted stock also serves as a retention mechanism, as restricted stock generally only vests if the officer remains employed over the vesting period.

The terms of the special award of restricted stock units granted to Peter Darbee in 2008 and the modification of the special award granted to Mr. Darbee in 2007 are discussed below. Restricted stock granted in 2008 is shown in the Grants of Plan-Based Awards in 2008 table below.

Starting with the annual grants in 2009, the Committee has decided to issue restricted stock units (RSUs) in lieu of restricted stock, which would maximize NEOs' flexibility in meeting tax obligations and reduce unintended tax consequences. The RSU awards will vest 20% on the first business day of March on the first, second, and third year following the date of grant, and the remaining 40% grant will vest on the first business day of March in the fourth year following the date of grant. As with restricted stock, RSU grants will align NEO interests with those of shareholders, and also serve as a retention mechanism.

Performance shares.    Performance shares are hypothetical shares of PG&E Corporation common stock that are tied directly to PG&E Corporation's performance for shareholders, aligning officers' interests with those of shareholders.

The number of performance shares granted in 2008 was determined by dividing one-half of the target LTIP award value by the average daily closing price of a share of PG&E Corporation common stock for the last five days of February 2008, as reported on the New York Stock Exchange. Performance shares awarded in 2008 are shown in the Grants of Plan-Based Awards in 2008 table below.

Performance shares granted in 2008 will vest, if at all, at the end of a three-year period, depending on PG&E Corporation's TSR relative to the Performance Comparator Group for the period. The payment for performance shares will be in cash and will be calculated by multiplying (1) the number of vested performance shares, (2) the average closing price of PG&E Corporation common stock over the last 30 calendar days of the year preceding the vesting date, and (3) a payout factor based on corporate performance.

There will be no payout if PG&E Corporation's TSR falls below the 25th percentile of the Performance Comparator Group; there will be a 25% payout if PG&E Corporation's TSR is at the 25th percentile; there will be a 100% payout if PG&E Corporation's TSR is at the 75th percentile; and there will be a 200% payout if PG&E Corporation's TSR ranks first in the Performance Comparator Group. If PG&E Corporation's TSR is between the 25th percentile and the 75th percentile, or above the 75th percentile, award payouts will be determined by straight-line interpolation, adjusted to round numbers (i.e., the nearest multiple of five). The following table illustrates how this formula is applied when the Performance Comparator Group contains 13 companies, including PG&E Corporation.

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Number of Companies in Total (including PG&E Corporation) = 13

Long-Term Incentives

The LTIP permits the award of various types of stock-based incentives to NEOs and certain other employees of PG&E Corporation, Pacific Gas and Electric Company, and their subsidiaries. The PG&E Corporation Board of Directors has delegated the administration of the LTIP to the Committee, including the power to determine the types of awards to be granted, the amounts, terms, and conditions of LTIP awards, and the individuals to whom LTIP awards are granted. Grants to the CEOs of PG&E Corporation and Pacific Gas and Electric Company also are approved by the independent members of the applicable Board of Directors. The Committee approves guidelines that include the range of target LTIP award values for different categories of employees, as well as the terms and conditions of all LTIP awards to be made in the following year. The guidelines also specify the grant date for annual LTIP awards. Actual awards are generally made within the range of target LTIP values previously approved by the Committee.

The amount of target LTIP awards for new executive officers is determined by referencing the range of target LTIP values specified in the guidelines approved by the Committee, as well as any unique factors taken into account in the recruiting process in order to induce the officer to join PG&E Corporation or Pacific Gas and Electric Company.

Consistent with its stated compensation philosophy, the Committee establishes target LTIP award value guidelines that generally provide compensation in line with PG&E Corporation's performance for shareholders (i.e., if PG&E Corporation performs at the 50th percentile of the Performance Comparator Group, the total long-term incentive value realized by grant recipients would be approximately equal to long-term compensation at the 50th percentile of the Pay Comparator Group). For 2007, the Committee approved target LTIP values ranging from $250,000 for lower-level executive officers to $4,000,000 for the CEO of PG&E Corporation.

At its December 2006 meeting, the Committee determined that the 2007 LTIP target award values for all award recipients, including executive officers, would be equally allocated between restricted stock and performance shares. The Committee believes that this allocation of restricted stock and performance

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shares balances the interests of shareholders for increased share value with the interests of officers for long-term compensation as expressed by stock price appreciation and TSR. Details regarding restricted stock and performance share grants are provided below.

In October 2005, the Committee decided that it would no longer grant stock options to NEOs, based on an analysis of competitive market trends and the impact of accounting rules for expensing stock-based awards.

In December 2006, the Committee (and with regard to Peter A. Darbee and Thomas B. King, the independent members of the applicable Board) approved the recommended 2007 target LTIP award values for the NEOs.

On November 6, 2007, Mr. Morrow received a supplemental LTIP award valued at $2,000,000 to compensate him for his increased responsibilities following his appointment as CEO of Pacific Gas and Electric Company on July 1, 2007, and as a retention mechanism. The supplemental LTIP award is comprised of equal amounts of restricted stock and performance shares, determined by dividing $2,000,000 by the closing stock price of a share of PG&E Corporation common stock, as reported on the New York Stock Exchange on the grant date. Vesting will occur on the same schedule as grants of restricted stock and performance shares, as if the grants had been made on January 1, 2008.

Restricted stock.    Shares of restricted stock may not be transferred or sold until certain conditions are met. Generally, the restrictions will lapse as to equal portions of the shares on the anniversary of the grant date, provided that the recipient is then an employee. The restrictions may lapse sooner if PG&E Corporation's TSR is the top quartile of its Performance Comparator Group and under certain other circumstances. As the restrictions lapse, the recipient's right to the shares becomes vested and the recipient may transfer or sell the shares.

Restricted stock aligns officers' interests with those of shareholders (i.e., increasing the stock price and dividends), in addition to rewarding officers for top quartile performance. Restricted stock also serves as a retention mechanism, as restricted stock generally only vests if the officer remains employed over the vesting period.

The number of shares of restricted stock granted in 2007 was determined by dividing one-half of the target LTIP award value by the average daily closing price of a share of PG&E Corporation common stock for the month of November 2006 (or the closing price on the grant date for a newly hired officer), as reported on the New York Stock Exchange.

Restricted stock granted for 2007 will vest in 20% increments over three years. The remaining 40% will vest on the first business day of 2010 if PG&E Corporation's TSR for the prior three-year period is in the top quartile relative to the Performance Comparator Group. If PG&E Corporation's TSR for that period is not in the top quartile, the restrictions will continue, and the remaining 40% of the restricted stock will vest on the first business day of 2012. This acceleration feature adds a performance component to restricted stock that further aligns the interest of officers with those of shareholders by emphasizing increasing returns to shareholders. The terms of the special awards of restricted stock granted to Mr. Darbee and Mr. Morrow in 2007 are discussed below. Restricted stock granted in 2007 is shown in the Grants of Plan-Based Awards in 2007 table below, and is discussed more fully in the narrative following that table.

Performance shares.    Performance shares are hypothetical shares of PG&E Corporation common stock that vest at the end of a pre-set performance period and are settled in cash only if performance targets are met relative to the Performance Comparator Group. Performance shares are tied directly to PG&E Corporation's performance for shareholders and align officers' interests with those of shareholders.

The number of performance shares granted in 2007 was determined by dividing one-half of the target LTIP award value by the average daily closing price of a share of PG&E Corporation common stock for the month of November 2006, as reported on the New York Stock Exchange. Performance shares awarded in 2007 are shown in the Grants of Plan-Based Awards in 2007 table below.

Performance shares granted in 2007 will vest, if at all, at the end of a three-year period, depending on PG&E Corporation's TSR relative to the Performance Comparator Group for the period. The payment for performance shares will be in cash and will be calculated by multiplying (1) the number of vested performance shares, (2) the average closing price of PG&E Corporation common stock over the last 30 calendar days of the year preceding the vesting date, and (3) a payout factor based on corporate performance.

There will be no payout if PG&E Corporation's TSR falls below the 25th percentile of the Performance Comparator Group; there will be a 25% payout if PG&E Corporation's TSR is at the 25th percentile; there will be a 100% payout if PG&E Corporation's TSR is at the 75th percentile; and there will be a 200% payout if PG&E Corporation's TSR ranks first in the Performance Comparator Group. If PG&E Corporation's TSR is between the 25th percentile and the 75th percentile, or above the 75th percentile, award payouts will be determined by straight-line interpolation, adjusted to round numbers (i.e., the nearest multiple of five). The following table illustrates how this formula is applied when the Performance Comparator Group contains 13 companies, including PG&E Corporation.

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Number of Companies in Total (including PG&E Corporation) = 13

Long-Term Incentives

For 2005, various types of stock-based incentives were granted to officers and other key employees of the Corporation and Pacific Gas and Electric Company under the PG&E Corporation Long-Term Incentive Program (PG&E LTIP). The PG&E LTIP expired on December 31, 2005, and was replaced by its successor, the PG&E Corporation 2006 Long-Term Incentive Plan (2006 LTIP), which also permits similar long-term stock-based incentives to be granted to officers and other key employees of the Corporation and Pacific Gas and Electric Company. PG&E Corporation's performance aspiration is to be a top quartile performer. Consistent with this performance aspiration, the Committee's objective is to set long-term incentive targets for officers at this performance level that are equal to the 75th percentile target compensation for comparable officers in the comparator group.

The Committee uses a mixture of equity-based incentives to provide long-term incentive compensation, including stock options, restricted stock, and performance shares. The size of each officer's grant is determined primarily based on the compensation objectives described above.

Performance Shares. Performance shares provide incentives based on a comparison of total shareholder return (dividends plus stock price appreciation) with returns provided by the comparator group over a three-year period.

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Performance shares are hypothetical shares of stock that vest at the end of a three-year period and are settled in cash only if performance targets are met. For performance shares granted in 2005, the amount of cash, if any, that recipients are entitled to receive following the vesting date will be based on a payout percentage measured by the performance of PG&E Corporation's total shareholder returns (TSR) for the prior three-year calendar period compared to the TSR of the 15 other companies in the comparator group. There will be no payout for TSR performance below the 25th percentile of the comparator group. TSR performance at the 25th percentile will result in a 25 percent payout of performance shares; TSR performance at the 75th percentile will result in a 100 percent payout of performance shares; and TSR performance at the 90th percentile or greater will result in a 200 percent payout of performance shares. For performance between the 25th percentile and the target, and between the target and the 90th percentile, award payouts are determined by straight-line interpolation.

Stock Options. Stock options provide incentives based on PG&E Corporation's ability to sustain financial performance. Officers and other key employees of PG&E Corporation and its subsidiaries receive stock options based on their responsibilities. After options vest, the holder may purchase a specified number of shares of PG&E Corporation common stock at the market price on the date of grant.

Stock options granted in 2005 vest in annual increments of 25 percent on the first, second, third, and fourth anniversaries of the date of grant. Options generally must be exercised within 10 years of the date of grant.

Restricted Stock. Restricted stock provides incentives based on its intrinsic economic value, and its future value as tied to the price performance of PG&E Corporation common stock. Officers and other key employees of PG&E Corporation receive restricted stock based on their responsibilities and performance. Restricted stock also aligns the recipients' motivational interests with those of shareholders.

For restricted stock granted in 2005, the restrictions lapse in annual increments of up to 25 percent on the first business day of each of the next four years following the date of grant.