Pacific Gas & Electric (PCG)

Are There Material Differences Between Compensation Paid to the Different NEOs?

The compensation philosophy and policies discussed throughout the CD&A apply equally to all executive officers. There are no differences in the types of compensation among the NEOs. The differences that exist in the amounts of compensation generally relate to each NEO's position and the pay differences exhibited in benchmark market practices derived from the Pay Comparator Group analysis.

The Committee's philosophy of "pay for performance" aligns the interests of executive officers with the longer-term interests of shareholders. The amount of "at risk" pay varies with executive officer level; the compensation of the most senior executive officers is subject to greater risk than that of lower-level executive officers. For 2008, only 15% of Mr. Darbee's total direct pay is allocated to base pay, 15% is allocated to the annual STIP opportunity, and the remaining 70% is allocated to long-term equity incentives. The pay allocation for other NEOs ranges from 23% to 38% to base pay, 15% to 17% to the annual STIP opportunity, and 45% to 59% to longer-term equity incentives. These allocations are consistent with market practices of companies in the Pay Comparator Group. Further differentiation may result from differences in positional scope of responsibility, organizational impact, incumbent experience and time in the executive position, and individual performance and development. For example, when determining total target compensation for the PG&E Corporation CEO, the Committee first uses competitive market data in assessing appropriate levels of base pay and total annual cash compensation, focusing on how Mr. Darbee's base pay and total cash compensation compare to the market average. Next, to determine the appropriate amount of long-term incentive opportunities, the Committee considers the comparable amounts set by companies in the second quartile of the Pay Comparator Group. The Committee then evaluates Mr. Darbee's leadership, accomplishments, personal development, and PG&E Corporation's performance results to arrive at final total compensation recommendations for the independent members of the Board to review and approve. As part of this process, the Committee considers whether Mr. Darbee has achieved his annual objectives that are reviewed and approved by the Committee at the beginning of each year. These objectives closely track short-term and long-term financial and operational goals for PG&E Corporation, which have previously been reviewed and approved by the Board. His objectives may relate to corporate financial performance and shareholder returns, operational performance, energy procurement plans, investment in utility infrastructure, corporate culture, and effective communications with key stakeholders.

The only material difference in compensation policy among the NEOs relates to the determination of retirement benefits. In the case of selected officers joining PG&E Corporation late in their careers (including Mr. Darbee), as an additional retention mechanism, PG&E Corporation provided additional years of credited service after a specified service period was completed in order to enhance the final retirement benefit calculation or accelerated accrual of credited service during a set period of time. Other than these types of arrangements, all policies, programs, and administrative guidelines are consistently applied to all NEOs.

Are there material differences between compensation paid to the different NEOs?

The compensation philosophy and policies discussed throughout the CD&A apply equally to all executive officers. There are no differences in the types of compensation among the NEOs. The discrepancies that exist in the amounts of compensation generally relate to each NEO's position and the pay differences exhibited in benchmark market practices derived from the Pay Comparator Group analysis.

Higher-level executive officers have a significantly larger portion of their total compensation opportunity contingent on annual and long-term incentives than lower-level executives. This is consistent with peer group market practices, as well as the Committee's pay philosophy of emphasizing performance-based contingent pay and aligning the interests of executive officers with the longer-term interests of shareholders. Based on the compensation actions for 2007, CEO total direct pay is allocated 16% to base pay, 16% to annual cash incentive, and 68% to longer-term equity incentives. The average pay allocation for other NEOs ranges from 31% to 43% to base pay, 17% to 22% to annual cash incentive, and 37% to 52% to longer-term equity incentives.

Further differentiation may result from differences in positional scope of responsibility, organizational impact, incumbent experience and time in the executive position, and individual performance and development. For example, when determining total target compensation for the PG&E Corporation CEO, the Committee first takes into consideration competitive market pay levels for the CEOs in the Pay Comparator Group and where Mr. Darbee is positioned compared to the market average for base pay and total annual cash compensation and the second quartile for long-term incentive grants, consistent with the Committee's pay philosophy. The Committee then evaluates Mr. Darbee's leadership, strategic accomplishments, personal development, and the Corporation's performance results to arrive at final pay recommendations for the independent members of the Board to review and approve. As part of this process,

51

the Committee considers Mr. Darbee's results as compared to annual objectives that are reviewed and approved by the Committee at the beginning of each year. These objectives closely track short-term and long-term financial and operational goals for the Corporation, which have previously been reviewed by the Boards. Such objectives may relate to corporate financial performance, operational performance, energy procurement plans, investment in utility infrastructure, corporate culture, communications with third parties, and business transformation.

The only material difference in compensation policy among the NEOs relates to the determination of retirement benefits. In the case of selected officers (including Mr. Darbee) joining PG&E Corporation late in their careers, and as an additional retention mechanism, PG&E Corporation provided for additional years of credited service after a specified service period was completed, which serves to enhance the final retirement benefit calculation. Other than this new hire arrangement, all policies, programs, and administrative guidelines are consistently applied to all NEOs.