Pacific Gas & Electric (PCG)

Natural Gas Operating Revenues

        The Utility sells natural gas and provides natural gas transportation services to its customers. The Utility's natural gas customers consist of two categories: core and noncore customers. The core customer class is comprised mainly of residential and smaller commercial natural gas customers. The noncore customer class is comprised of industrial and larger commercial natural gas customers. The Utility provides natural gas delivery services to all core and noncore customers connected to the Utility's system in its service territory. Core customers can purchase natural gas from alternate energy service providers or can elect to have the Utility provide both delivery service and natural gas supply. When the Utility provides both supply and delivery, the Utility refers to the service as natural gas bundled service. In 2004, core customers represented over 99% of the Utility's total customers and approximately 35% of its total natural gas deliveries, while noncore customers comprised less than 1% of the Utility's total customers and approximately 65% of its total natural gas deliveries.

        The Utility's transportation system transports gas throughout California to the Utility's distribution system, which, in turn, delivers gas to end-use customers. Utility transportation and distribution services for all customers have historically been bundled or sold together at a combined rate.

        The following table shows a breakdown of the Utility's natural gas operating revenues:

        The Utility's natural gas operating revenues increased approximately $357 million, or 13%, for the year ended December 31, 2004, compared to 2003. The increase in natural gas operating revenues was primarily due to the following factors:

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Bundled natural gas revenues (excluding the effects of the 2003 GRC decision discussed below) increased by approximately $250 million, or 10%, in 2004 compared to 2003, mainly due to a higher cost of natural gas which the Utility is permitted by the CPUC to pass on to its customers through higher rates. The average bundled revenue per thousand cubic feet, or Mcf, of natural gas sold in 2004 (excluding the effects of the 2003 GRC decision discussed below) increased by approximately $0.86, or 9%, as compared to 2003; and



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The approval of the 2003 GRC resulted in an increase in natural gas revenues of approximately $121 million (consisting of a 2004 portion of $69 million and a 2003 portion of $52 million) in 2004 compared to 2003 (see the "Regulatory Matters" section of this MD&A).

        In 2003, the Utility's total natural gas operating revenues increased approximately $520 million, or 22%, compared to 2002. The Utility's bundled natural gas revenues increased by approximately $552 million, or 27%, in 2003 compared to 2002 mainly due to a higher average cost of natural gas, which the Utility is permitted by the CPUC to pass on to its customers through higher rates. The average bundled revenue per Mcf of natural gas sold in 2003 increased $2.06, or 29%, compared to 2002. This increase in bundled natural gas revenues was partially offset by a decrease in transportation service-only revenues of approximately $32 million, or 10%, in 2003 compared to 2002. The decrease in transportation service-only revenues was primarily due to a decrease in demand for natural gas transportation services by certain non-core customers, mainly natural gas-fired electric generators in California. An increase in electricity available from hydroelectric facilities and the greater efficiency of

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generation facilities that commenced operations in 2003 resulted in reduced demand for natural gas transportation services.

        The Utility's natural gas revenues in 2005 will increase due to an increase in natural gas distribution revenue requirements that were approved in the 2003 GRC decision, and will be further impacted by changes in the cost of natural gas.