Pacific Gas & Electric (PCG)

Property, Plant and Equipment

        Property, plant and equipment are reported at their original costs. Original costs include:

•

Labor and materials;



•

Construction overhead; and



•

Capitalized interest or an allowance for funds used during construction, or AFUDC.

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        As discussed in Note 3, substantially all of the Utility's real property and certain tangible personal property related to the Utility's facilities serve as collateral for the first mortgage bonds, or First Mortgage Bonds.

        Capitalized Interest and AFUDC—AFUDC is the estimated cost of debt and equity funds used to finance regulated plant additions that is allowed to be recorded as part of the costs of construction projects. AFUDC is recoverable from customers through rates once the property is placed in service. The Utility had capitalized interest and AFUDC of approximately $32 million at December 31, 2004 and $29 million at December 31, 2003. PG&E Corporation on a stand-alone basis did not have any capitalized interest and AFUDC at December 31, 2004 and 2003.

        Depreciation—The Utility's composite depreciation rate was 3.42% in 2004, 2003 and 2002.

        The useful lives of the Utility's property, plant and equipment are authorized by the CPUC and the FERC and depreciation expense is included within the recoverable costs of service included in rates charged to customers. Depreciation expense includes a component for the original cost of assets and a component for estimated future removal costs, net of any salvage value at retirement. The Utility has a separate rate component for the accrual of its recorded obligation for nuclear decommissioning, which is included in depreciation, amortization and decommissioning expense in the accompanying Consolidated Statements of Operations.

        PG&E Corporation and the Utility charge the original cost of retired plant and removal costs less salvage value to accumulated depreciation upon retirement of plant in service for the Utility's lines of business that apply SFAS No. 71, which include electricity and natural gas distribution, electricity generation and transmission, and natural gas transportation and storage. PG&E Corporation and the Utility expense repair and maintenance costs as incurred.

        Nuclear Fuel—Property, plant and equipment also includes nuclear fuel inventories. Stored nuclear fuel inventory is stated at weighted average cost. Nuclear fuel in the reactor is amortized based on the amount of energy output.

        Capitalized Software Costs—PG&E Corporation and the Utility capitalize costs incurred during the application development stage of internal use software projects to property, plant and equipment. Capitalized software costs totaled $231 million at December 31, 2004 and $273 million at December 31, 2003, net of accumulated amortization of approximately $196 million at December 31, 2004 and $159 million at December 31, 2003. PG&E Corporation and the Utility amortize capitalized software costs ratably over the expected lives of the projects ranging from 3 to 15 years, commencing upon operational use, in accordance with regulatory recovery requirements.

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