Pacific Gas & Electric (PCG)

New Long-Term Generation Resource Commitments

As discussed in the “Overview” section above, in December 2004, the CPUC issued a final decision which approved, with certain modifications, each investor-owned electric utility’s LTPP in order to authorize each utility to plan for and procure the resources necessary to provide reliable service to their customers for the ten-year period 2005-2014. The decision recognizes that each utility will have capacity needs over the ten-year period, especially in 2011 when most of the electricity purchase contracts entered into by the DWR expire. In January 2005, several parties submitted applications for rehearing of the December 2004 CPUC decision. The Utility is unable to predict how or when the CPUC will respond to those applications.

In the LTPP filing the Utility assumed, under a medium load scenario, that:

•                  By 2014, its procurement responsibility would be reduced by approximately 4,000 megawatts, or MW; and

•                  Power plants currently providing 2,000 MW of generation to the Utility would retire within the next five or six years.

In addition, the LTPP reflects that all California investor-owned electric utilities are required to achieve an electricity planning reserve margin of 15% to 17% in excess of peak capacity electricity requirements by June 1, 2006.

The CPUC may require the Utility, or the Utility may elect, to satisfy all or a part of the resources necessary to meet their customers’ energy needs by developing or acquiring additional generation facilities or by entering into long-term power purchase agreements. The December 2004 CPUC decision requires the utilities to solicit bids from providers of all potential sources of new generation (e.g., conventional or renewable resources to be provided under utility owned projects or turnkey developments, or buyouts, or under third party power purchase agreements) through a single, open, transparent and competitive request for offers, or RFO, process, although a utility can tailor a RFO to meet specific resource needs. The CPUC requires the utilities to use an independent evaluator to review the RFO process. Before the CPUC decision was issued, the CPUC had approved the Utility’s solicitation of offers for utility-owned generation development and for generation to be provided under long-term power purchase agreements for approximately 1,200 MW of peaking resources by 2008 and an additional 1,000 MW of load-following resources by 2010. The Utility issued two RFOs in November 2004 for these resources. In order to incorporate elements of the CPUC’s December 2004 decision, the Utility notified bidders on January 7, 2005 that it was deferring its RFOs to evaluate how to incorporate new RFO requirements adopted by the CPUC. The Utility expects to issue updated RFOs in March 2005 and request initial bids to be submitted in April 2005. It is anticipated that contracts for the winning bidders would be submitted to the CPUC for approval in the second half of 2005. Completed projects could result in rate base additions in 2008.

To help assure recovery of the Utility’s cost of new long-term resource commitments, the CPUC adopted a non-bypassable charge to be collected from all customers on whose behalf the Utility makes these new commitments, including those who subsequently receive generation from other load-serving entities.

In addition, in its decision approving the LTPP, the CPUC recognized that credit rating agencies will consider obligations under long-term procurement contracts to have debt-like characteristics that will adversely affect the Utility’s credit ratios, which may, in turn, adversely affect the resulting credit ratings. The CPUC has agreed that it will consider the debt equivalence impact of procurement contracts on credit ratings in future cost of capital proceedings. The Utility is required to employ S&P’s method for assessing the debt equivalence of power purchase agreements when evaluating bids in an all-source solicitation, except that the debt equivalence factor should be 20% instead of 30%. As the Utility enters into contracts with counterparties, the Utility will be exposed to the risk that counterparties will fail to perform and associated business credit risks.

New Long-Term Generation Resource Commitments

In accordance with the Utility’s CPUC-approved long-term electricity procurement plan, the Utility has requested offers from providers of all potential sources of new generation (e.g., conventional or renewable resources to be provided under utility-owned projects or turnkey developments, or buyouts, or under third party power purchase agreements) for approximately 1,200 megawatts, or MW, of peaking resources by 2008 and an additional 1,000 MW of load-following resources by 2010.

Initial bids were submitted in late April 2005. It is anticipated that contracts for the winning bidders will be submitted to the CPUC for approval in the second half of 2005.

New Long-Term Generation Resource Commitments

        As discussed in the "Overview" section above, in December 2004, the CPUC issued a final decision which approved, with certain modifications, each investor-owned electric utility's LTPP in order to authorize each utility to plan for and procure the resources necessary to provide reliable service to their customers for the ten-year period 2005-2014. The decision recognizes that each utility will have capacity needs over the ten-year period, especially in 2011 when most of the electricity

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purchase contracts entered into by the DWR expire. In January 2005, several parties submitted applications for rehearing of the December 2004 CPUC decision. The Utility is unable to predict how or when the CPUC will respond to those applications.

        In the LTPP filing the Utility assumed, under a medium load scenario, that:

•

By 2014, its procurement responsibility would be reduced by approximately 4,000 megawatts, or MW; and



•

Power plants currently providing 2,000 MW of generation to the Utility would retire within the next five or six years.

        In addition, the LTPP reflects that all California investor-owned electric utilities are required to achieve an electricity planning reserve margin of 15% to 17% in excess of peak capacity electricity requirements by June 1, 2006.

        The CPUC may require the Utility, or the Utility may elect, to satisfy all or a part of the resources necessary to meet their customers' energy needs by developing or acquiring additional generation facilities or by entering into long-term power purchase agreements. The December 2004 CPUC decision requires the utilities to solicit bids from providers of all potential sources of new generation (e.g., conventional or renewable resources to be provided under utility owned projects or turnkey developments, or buyouts, or under third party power purchase agreements) through a single, open, transparent and competitive request for offers, or RFO, process, although a utility can tailor a RFO to meet specific resource needs. The CPUC requires the utilities to use an independent evaluator to review the RFO process. Before the CPUC decision was issued, the CPUC had approved the Utility's solicitation of offers for utility-owned generation development and for generation to be provided under long-term power purchase agreements for approximately 1,200 MW of peaking resources by 2008 and an additional 1,000 MW of load-following resources by 2010. The Utility issued two RFOs in November 2004 for these resources. In order to incorporate elements of the CPUC's December 2004 decision, the Utility notified bidders on January 7, 2005 that it was deferring its RFOs to evaluate how to incorporate new RFO requirements adopted by the CPUC. The Utility expects to issue updated RFOs in March 2005 and request initial bids to be submitted in April 2005. It is anticipated that contracts for the winning bidders would be submitted to the CPUC for approval in the second half of 2005. Completed projects could result in rate base additions in 2008.

        To help assure recovery of the Utility's cost of new long-term resource commitments, the CPUC adopted a non-bypassable charge to be collected from all customers on whose behalf the Utility makes these new commitments, including those who subsequently receive generation from other load-serving entities.

        In addition, in its decision approving the LTPP, the CPUC recognized that credit rating agencies will consider obligations under long-term procurement contracts to have debt-like characteristics that will adversely affect the Utility's credit ratios, which may, in turn, adversely affect the resulting credit ratings. The CPUC has agreed that it will consider the debt equivalence impact of procurement contracts on credit ratings in future cost of capital proceedings. The Utility is required to employ S&P's method for assessing the debt equivalence of power purchase agreements when evaluating bids in an all-source solicitation, except that the debt equivalence factor should be 20% instead of 30%. As the Utility enters into contracts with counterparties, the Utility will be exposed to the risk that counterparties will fail to perform and associated business credit risks.

        The CPUC also determined that for utility-owned generation resources, the utilities are prohibited from recovering initial capital costs in excess of their final bid price. If final project costs are less than the final bid price, the savings would be shared with customers, while any cost overruns would be absorbed by the utilities. Costs of future plant additions and annual operating and maintenance costs and similar costs incurred by a utility would be eligible for cost-of service ratemaking treatment.

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        If the Utility is not able to recover a material part of the cost of developing or acquiring additional generation facilities in rates in a timely manner, PG&E Corporation's and the Utility's financial condition and results of operations would be materially adversely affected.