Pacific Gas & Electric (PCG)

Refinancing Supported by a Dedicated Rate Component

In connection with the Settlement Agreement, PG&E Corporation and the Utility agreed to seek to refinance the remaining unamortized balance of the Settlement Regulatory Asset and related federal, state, and franchise taxes, in an aggregate amount of up to $3.0 billion, in two separate series up to one year apart, to be secured by a dedicated rate component, or DRC, provided that authorizing legislation was adopted and certain conditions were met. In June 2004, the California Governor signed into law Senate Bill 772, which authorizes the issuance of energy recovery bonds, or ERBs, to be secured by the establishment of a DRC, to refinance the Settlement Regulatory Asset and related taxes.

In November 2004, the CPUC approved the Utility’s application for a wholly owned subsidiary to issue ERBs. In December 2004, the Utility received a favorable private letter ruling from the IRS. After satisfaction of all conditions, on February 10, 2005, PG&E Energy Recovery Funding LLC, or PERF, a limited liability company wholly owned and consolidated by the Utility (but legally separate from the Utility), issued the first series of ERBs for approximately $1.9 billion. The Utility, as servicer, will collect DRC charges from customers and remit collected amounts to PERF to enable PERF to pay principal and interest on the ERBs. The proceeds of the first series of ERBs were paid by PERF to the Utility and will be used by the Utility to refinance the remaining unamortized after-tax balance of the Settlement Regulatory Asset through the redemption and repurchase of higher cost equity and debt. The proceeds of the second series of ERBs, anticipated to be issued in November 2005 in an aggregate amount of up to $1.1 billion, will be paid by PERF to the Utility to pre-fund the Utility’s recovery through rates of the tax payments that will be due as the Utility collects the DRC over the term of the first series of ERBs to pay principal.

Refinancing Supported by a Dedicated Rate Component

        In connection with the Settlement Agreement, PG&E Corporation and the Utility agreed to seek to refinance the remaining unamortized balance of the Settlement Regulatory Asset and related federal, state, and franchise taxes, in an aggregate amount of up to $3.0 billion, in two separate series up to one year apart, to be secured by a dedicated rate component, or DRC, provided that authorizing legislation was adopted and certain conditions were met. In June 2004, the California Governor signed into law Senate Bill 772, which authorizes the issuance of energy recovery bonds, or ERBs, to be secured by the establishment of a DRC, to refinance the Settlement Regulatory Asset and related taxes.

        In November 2004, the CPUC approved the Utility's application for a wholly owned subsidiary to issue ERBs. In December 2004, the Utility received a favorable private letter ruling from the IRS. After satisfaction of all conditions, on February 10, 2005, PG&E Energy Recovery Funding LLC, or PERF, a limited liability company wholly owned and consolidated by the Utility (but legally separate from the Utility), issued the first series of ERBs for approximately $1.9 billion. The Utility, as servicer, will collect DRC charges from customers and remit collected amounts to PERF to enable PERF to pay principal and interest on the ERBs. The proceeds of the first series of ERBs were paid by PERF to the Utility and will be used by the Utility to refinance the remaining unamortized after-tax balance of the Settlement Regulatory Asset through the redemption and repurchase of higher cost equity and debt. The proceeds of the second series of ERBs, anticipated to be issued in November 2005 in an aggregate amount of up to $1.1 billion, will be paid by PERF to the Utility to pre-fund the Utility's recovery through rates of the tax payments that will be due as the Utility collects the DRC over the term of the first series of ERBs to pay principal.