Pacific Gas & Electric (PCG)

Other Income (Expense)

PG&E Corporation’s other expense increased by approximately $93 million in 2004 compared to 2003. The increase was primarily due to a pre-tax charge to earnings, related to the change in market value of non-cumulative dividend participation rights included within PG&E Corporation’s $280 million of 9.50% Convertible Subordinated Notes due 2010, or Convertible Subordinated Notes.

In 2003, PG&E Corporation’s other income decreased by approximately $77 million, compared to 2002, due to the third quarter of 2002 change in the market value of NEGT warrants. In 2001, PG&E Corporation granted to affiliates of lenders through which it was refinancing debt, warrants to purchase up to 2% or 3% of NEGT’s outstanding common stock (depending on how long the loans were outstanding). These warrants were originally recorded at their fair value of approximately $151 million. The fair value of the warrants was marked to market at the end of each reporting period. Changes in fair value of the warrants were recorded as other non-operating expense or income. In the third quarter of 2002, approximately $71 million was recorded in other non-operating income to reflect the reduction to zero of the fair value of the 3% warrants. The 3% warrants were exercised during the first quarter of 2003.

Discontinued Operations

Effective July 8, 2003 (the date NEGT filed a voluntary petition for relief under Chapter 11), NEGT and its subsidiaries were no longer consolidated by PG&E Corporation in its Consolidated Financial Statements. Under accounting principles generally accepted in the United States of America, or GAAP, consolidation is generally required for entities owning more than 50% of the outstanding voting stock of an investee, except when control is not held by the majority owner. Legal reorganization and bankruptcy represent conditions that can preclude consolidation in instances where control rests with an entity other than the majority owner. In anticipation of NEGT’s Chapter 11 filing, PG&E Corporation’s representatives who previously served on the NEGT Board of Directors resigned on July 7, 2003, and were replaced with Board members who are not affiliated with PG&E Corporation. As a result, PG&E Corporation no longer retained significant influence over the ongoing operations of NEGT.

Accordingly, PG&E Corporation has reflected the loss from operations of NEGT through July 7, 2003 as discontinued operations in its Consolidated Statements of Operations. In addition, PG&E Corporation’s negative investment in NEGT of approximately $1.2 billion was reflected as a single amount, under the cost method, within the December 31, 2003 Consolidated Balance Sheet of PG&E Corporation. This negative investment represents the losses of NEGT recognized by PG&E Corporation in excess of its investment in and advances to NEGT.

On October 29, 2004, NEGT’s plan of reorganization became effective, at which time NEGT emerged from Chapter 11 and PG&E Corporation’s equity ownership in NEGT was cancelled. On the effective date, PG&E Corporation reversed its negative investment in NEGT and also reversed net deferred income tax assets of approximately $428 million and a charge of approximately $120 million ($77 million, after tax), in accumulated other comprehensive income, related to NEGT. The resulting net gain has been offset by the $30 million payment made by PG&E Corporation to NEGT pursuant to the parties’ settlement of certain tax-related litigation and other adjustments to NEGT-related liabilities. A summary of the effect on the quarter and year ended December 31, 2004 earnings from discontinued operations is as follows:

Other Income (Expense)

PG&E Corporation’s other expense decreased by approximately $31 million, or 97%, in the three months ended March 31, 2005, compared to the same period in 2004, primarily due to a reduction in the pre-tax charge to earnings, related to the $32 million change in market value of non-cumulative dividend participation rights included within PG&E Corporation’s Convertible Subordinated Notes in the first quarter of 2004.  The change in market value in 2005 was immaterial.

Other Income (Expense)

        PG&E Corporation's other expense increased by approximately $93 million in 2004 compared to 2003. The increase was primarily due to a pre-tax charge to earnings, related to the change in market value of non-cumulative dividend participation rights included within PG&E Corporation's $280 million of 9.50% Convertible Subordinated Notes due 2010, or Convertible Subordinated Notes.

        In 2003, PG&E Corporation's other income decreased by approximately $77 million, compared to 2002, due to the third quarter of 2002 change in the market value of NEGT warrants. In 2001, PG&E Corporation granted to affiliates of lenders through which it was refinancing debt, warrants to purchase up to 2% or 3% of NEGT's outstanding common stock (depending on how long the loans were outstanding). These warrants were originally recorded at their fair value of approximately $151 million. The fair value of the warrants was marked to market at the end of each reporting period. Changes in fair value of the warrants were recorded as other non-operating expense or income. In the third quarter of 2002, approximately $71 million was recorded in other non-operating income to reflect the reduction to zero of the fair value of the 3% warrants. The 3% warrants were exercised during the first quarter of 2003.

Discontinued Operations

        Effective July 8, 2003 (the date NEGT filed a voluntary petition for relief under Chapter 11), NEGT and its subsidiaries were no longer consolidated by PG&E Corporation in its Consolidated Financial Statements. Under accounting principles generally accepted in the United States of America, or GAAP, consolidation is generally required for entities owning more than 50% of the outstanding voting stock of an investee, except when control is not held by the majority owner. Legal reorganization and bankruptcy represent conditions that can preclude consolidation in instances where control rests with an entity other than the majority owner. In anticipation of NEGT's Chapter 11 filing, PG&E Corporation's representatives who previously served on the NEGT Board of Directors resigned on July 7, 2003, and were replaced with Board members who are not affiliated with PG&E Corporation. As a result, PG&E Corporation no longer retained significant influence over the ongoing operations of NEGT.

        Accordingly, PG&E Corporation has reflected the loss from operations of NEGT through July 7, 2003 as discontinued operations in its Consolidated Statements of Operations. In addition, PG&E Corporation's negative investment in NEGT of approximately $1.2 billion was reflected as a single amount, under the cost method, within the December 31, 2003 Consolidated Balance Sheet of PG&E Corporation. This negative investment represents the losses of NEGT recognized by PG&E Corporation in excess of its investment in and advances to NEGT.

        On October 29, 2004, NEGT's plan of reorganization became effective, at which time NEGT emerged from Chapter 11 and PG&E Corporation's equity ownership in NEGT was cancelled. On the

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effective date, PG&E Corporation reversed its negative investment in NEGT and also reversed net deferred income tax assets of approximately $428 million and a charge of approximately $120 million ($77 million, after tax), in accumulated other comprehensive income, related to NEGT. The resulting net gain has been offset by the $30 million payment made by PG&E Corporation to NEGT pursuant to the parties' settlement of certain tax-related litigation and other adjustments to NEGT-related liabilities. A summary of the effect on the quarter and year ended December 31, 2004 earnings from discontinued operations is as follows:

        At December 31, 2004, PG&E Corporation's Consolidated Balance Sheet includes approximately $138 million in income tax liabilities (including $86 million in current income taxes payable) and approximately $25 million of other net liabilities related to NEGT. Until PG&E Corporation reaches final settlement of these obligations, it will continue to disclose fluctuations in these estimated liabilities in discontinued operations. Beginning on the effective date of NEGT's plan of reorganization, PG&E Corporation no longer includes NEGT or its subsidiaries in its consolidated income tax returns.

        PG&E Corporation recorded losses from discontinued operations of approximately $365 million in 2003 and approximately $2.5 billion in 2002.