Pacific Gas & Electric (PCG)

Power Purchase Agreements

As part of the ordinary course of business, the Utility entered into various agreements to purchase energy and makes payments on existing power purchase agreements.  At March 31, 2005, the undiscounted future expected power purchase agreement payments were as follows:

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Power Purchase Agreements

Qualifying Facility Power Purchase Agreements  The Utility is required by CPUC decisions to purchase energy and capacity from independent power producers that are qualifying facilities under the Public Utility Regulatory Policies Act of 1978, or PURPA. To implement PURPA, the CPUC required California investor-owned electric utilities to enter into long-term power purchase agreements with qualifying facilities and approved the applicable terms, conditions, prices and eligibility requirements. These agreements require the Utility to pay for energy and capacity. Energy payments are based on the qualifying facility’s actual electrical output and CPUC-approved energy prices, while capacity payments are based on the qualifying facility’s total available capacity and contractual capacity commitment. Capacity payments may be adjusted if the qualifying facility fails to meet or exceeds performance requirements specified in the applicable power purchase agreement.

As of December 31, 2004, the Utility had agreements with 300 qualifying facilities for approximately 4,300 megawatts, or MW, that are in operation. Agreements for approximately 3,950 MW expire at various dates between 2005 and 2028. Qualifying facility power purchase agreements for approximately 350 MW have no specific expiration dates and will terminate only when the owner of the qualifying facility exercises its termination option. The Utility also has power purchase agreements with approximately 50 inoperative qualifying facilities. The total of approximately 4,300 MW consists of approximately 2,600 MW from cogeneration projects, 700 MW from wind projects and 1,000 MW from projects with other fuel sources, including biomass, waste-to-energy, geothermal, solar and hydroelectric.

On January 22, 2004, the CPUC ordered the California investor-owned electric utilities to allow owners of qualifying facilities with certain power purchase agreements expiring before the end of 2005 to extend these contracts for five years with modified pricing terms. As of December 31, 2004, thirteen qualifying facilities had entered into such five-year contract extensions. Qualifying facility power purchase agreements accounted for approximately 23% of the Utility’s 2004 electricity sources, approximately 20% of the Utility’s 2003 electricity sources, and approximately 25% of the Utility’s 2002 electricity sources. No single qualifying facility accounted for more than 5% of the Utility’s 2004, 2003 or 2002 electricity sources.

There are proceedings pending at the CPUC that may impact both the amount of payments to qualifying facilities and the number of qualifying facilities holding power purchase agreements with the Utility. The CPUC will address whether certain payments for short-term power deliveries required by the power purchase agreements comply with the pricing requirements of the PURPA. The CPUC is also considering whether to require the California investor-owned electric utilities to enter into new power purchase agreements with existing qualifying facilities with expiring power purchase agreements and with newly-constructed qualifying facilities. PG&E Corporation and the Utility are unable to estimate the outcome of these proceedings.

In a proceeding pending at the CPUC, the Utility has requested refunds in excess of $500 million for overpayments from June 2000 through March 2001 that were made to qualifying facilities pursuant to CPUC orders at approved rates. The net after-tax amount of any qualifying facilities refunds, which the Utility actually realizes in cash, claim offsets or other credits, would be

Power Purchase Agreements

        Qualifying Facility Power Purchase Agreements—The Utility is required by CPUC decisions to purchase energy and capacity from independent power producers that are qualifying facilities under the Public Utility Regulatory Policies Act of 1978, or PURPA. To implement PURPA, the CPUC required California investor-owned electric utilities to enter into long-term power purchase agreements with qualifying facilities and approved the applicable terms, conditions, prices and eligibility requirements. These agreements require the Utility to pay for energy and capacity. Energy payments are based on the qualifying facility's actual electrical output and CPUC-approved energy prices, while capacity payments are based on the qualifying facility's total available capacity and contractual capacity commitment. Capacity payments may be adjusted if the qualifying facility fails to meet or exceeds performance requirements specified in the applicable power purchase agreement.

        As of December 31, 2004, the Utility had agreements with 300 qualifying facilities for approximately 4,300 megawatts, or MW, that are in operation. Agreements for approximately 3,950 MW expire at various dates between 2005 and 2028. Qualifying facility power purchase agreements for approximately 350 MW have no specific expiration dates and will terminate only when the owner of the qualifying facility exercises its termination option. The Utility also has power purchase agreements with approximately 50 inoperative qualifying facilities. The total of approximately 4,300 MW consists of approximately 2,600 MW from cogeneration projects, 700 MW from wind projects and 1,000 MW from projects with other fuel sources, including biomass, waste-to-energy, geothermal, solar and hydroelectric.

        On January 22, 2004, the CPUC ordered the California investor-owned electric utilities to allow owners of qualifying facilities with certain power purchase agreements expiring before the end of 2005 to extend these contracts for five years with modified pricing terms. As of December 31, 2004, thirteen qualifying facilities had entered into such five-year contract extensions. Qualifying facility power purchase agreements accounted for approximately 23% of the Utility's 2004 electricity sources, approximately 20% of the Utility's 2003 electricity sources, and approximately 25% of the Utility's 2002 electricity sources. No single qualifying facility accounted for more than 5% of the Utility's 2004, 2003 or 2002 electricity sources.

        There are proceedings pending at the CPUC that may impact both the amount of payments to qualifying facilities and the number of qualifying facilities holding power purchase agreements with the Utility. The CPUC will address whether certain payments for short-term power deliveries required by the power purchase agreements comply with the pricing requirements of the PURPA. The CPUC is also considering whether to require the California investor-owned electric utilities to enter into new

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power purchase agreements with existing qualifying facilities with expiring power purchase agreements and with newly-constructed qualifying facilities. PG&E Corporation and the Utility are unable to estimate the outcome of these proceedings.

        In a proceeding pending at the CPUC, the Utility has requested refunds in excess of $500 million for overpayments from June 2000 through March 2001 that were made to qualifying facilities pursuant to CPUC orders at approved rates. The net after-tax amount of any qualifying facilities refunds, which the Utility actually realizes in cash, claim offsets or other credits, would be credited to customers, either as a reduction to the principal amount of the second series of ERBs anticipated to be issued in November 2005, or if refunds are received after the second series of ERBs is issued, as a credit to the balancing account that tracks recovery of the customer costs and benefits related to the ERBs. PG&E Corporation and the Utility are unable to estimate the outcome of this proceeding.

        Irrigation Districts and Water Agencies—The Utility has contracts with various irrigation districts and water agencies to purchase hydroelectric power. Under these contracts, the Utility must make specified semi-annual minimum payments based on the irrigation districts' and water agencies' debt service requirements, regardless if any hydroelectric power is supplied, and variable payments for operation and maintenance costs incurred by the suppliers. These contracts expire on various dates from 2005 to 2031. The Utility's irrigation district and water agency contracts accounted for approximately 5% of the Utility's 2004 electricity sources, approximately 5% of the Utility's 2003 electricity sources and approximately 4% of the Utility's 2002 electricity sources.