Pacific Gas & Electric (PCG)

Regulation and Statement of Financial Accounting Standards No. 71

PG&E Corporation and the Utility account for the financial effects of regulation in accordance with SFAS No. 71,”Accounting for the Effects of Certain Types of Regulation,” as amended, or SFAS No. 71.  SFAS No. 71 applies to regulated entities whose rates are designed to recover the costs of providing service.  The Utility is regulated by the CPUC, the FERC and the Nuclear Regulatory Commission, or NRC, among others.  SFAS No. 71 applies to all of the Utility’s operations except for the operations of a natural gas pipeline.

SFAS No. 71 provides for recording regulatory assets and liabilities when certain conditions are met.  Regulatory assets represent the capitalization of incurred costs that would otherwise be charged to expense when it is probable that the incurred costs will be included for ratemaking purposes in the future.  Amortization of regulatory assets is charged to expense during the period that the costs are reflected in regulated revenues.  Regulatory liabilities represent rate actions of a regulator that will result in amounts that are to be credited to customers through the ratemaking process.

To the extent that portions of the Utility’s operations cease to be subject to SFAS No. 71 or recovery is no longer probable as a result of changes in regulation or the Utility’s competitive position, the related regulatory assets and liabilities are written off.

Regulation and Statement of Financial Accounting Standards No. 71

PG&E Corporation and the Utility account for the financial effects of regulation in accordance with “Accounting for the Effects of Certain Types of Regulation,” as amended, or SFAS No. 71. SFAS No. 71 applies to regulated entities whose rates are designed to recover the costs of providing service. The Utility is regulated by the CPUC, the FERC and the Nuclear Regulatory Commission, or the NRC, among others. As discussed further in Note 2, during the first quarter of 2004, the Utility began reapplying SFAS No. 71 to its generation operations. As a result, as of March 31, 2004, the Utility recorded a generation regulatory asset of approximately $1.2 billion. SFAS No. 71 now applies to all of the Utility’s operations except for the operations of a natural gas pipeline.

SFAS No. 71 provides for recording regulatory assets and liabilities when certain conditions are met. Regulatory assets represent the capitalization of incurred costs that would otherwise be charged to expense when it is probable that the incurred costs will be included for ratemaking purposes in the future. Regulatory liabilities represent rate actions of a regulator that will result in amounts that are to be credited to customers through the ratemaking process.

To the extent that portions of the Utility’s operations cease to be subject to SFAS No. 71 or recovery is no longer probable as a result of changes in regulation or the Utility’s competitive position, the related regulatory assets and liabilities are written off.

Regulation and Statement of Financial Accounting Standards No. 71

        PG&E Corporation and the Utility account for the financial effects of regulation in accordance with "Accounting for the Effects of Certain Types of Regulation," as amended, or SFAS No. 71. SFAS No. 71 applies to regulated entities whose rates are designed to recover the costs of providing service. The Utility is regulated by the CPUC, the FERC and the Nuclear Regulatory Commission, or the NRC, among others. As discussed further in Note 2, during the first quarter of 2004, the Utility began reapplying SFAS No. 71 to its generation operations. As a result, as of March 31, 2004, the Utility recorded a generation regulatory asset of approximately $1.2 billion. SFAS No. 71 now applies to all of the Utility's operations except for the operations of a natural gas pipeline.

        SFAS No. 71 provides for recording regulatory assets and liabilities when certain conditions are met. Regulatory assets represent the capitalization of incurred costs that would otherwise be charged to expense when it is probable that the incurred costs will be included for ratemaking purposes in the future. Regulatory liabilities represent rate actions of a regulator that will result in amounts that are to be credited to customers through the ratemaking process.

        To the extent that portions of the Utility's operations cease to be subject to SFAS No. 71 or recovery is no longer probable as a result of changes in regulation or the Utility's competitive position, the related regulatory assets and liabilities are written off.