Pacific Gas & Electric (PCG)

Regulatory Assets

        Regulatory assets comprise the following:

        Amortization of regulatory assets are charged to expense during the period that the costs are reflected in regulated revenues. In light of the satisfaction of various conditions to the implementation of the plan of reorganization, the accounting probability standard required to be met under SFAS No. 71 in order for the Utility to recognize the regulatory assets provided under the Settlement Agreement (as described in Note 2) was met as of March 31, 2004. Therefore, the Utility recorded the $3.7 billion, pre-tax ($2.2 billion, after-tax), regulatory asset established under the Settlement Agreement, or the Settlement Regulatory Asset, and $1.2 billion, pre-tax ($0.7 billion, after-tax), for the Utility retained generation regulatory assets in the first quarter of 2004 (see Note 2 for further discussion). As of December 31, 2004, the Utility has recorded pre-tax offsets to the Settlement Regulatory Asset of approximately $309 million ($183 million after-tax) for supplier settlements and approximately $233 million ($138 million, after-tax) for amortization of the Settlement Regulatory Asset.

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        The Utility's regulatory asset related to rate reduction bonds is amortized simultaneously with the amortization of the rate reduction bonds liability, and is expected to be recovered by the end of 2007. The Utility's regulatory assets related to deferred income tax will be recovered over the period of reversal of the accumulated deferred taxes to which they relate. Based on current regulatory ratemaking and income tax laws, the Utility expects to recover deferred income tax-related regulatory assets over periods ranging from 1 to 37 years. The Utility's regulatory asset related to the unamortized loss, net of gain, on reacquired debt will be recovered over the remaining original amortization period of the reacquired debt over periods ranging from 1 to 22 years. The Utility's regulatory asset related to environmental compliance represents the portion of the Utility's environmental liability recognized at the end of the period in excess of the amount that has been recovered through rates charged to customers. This amount will be recovered in future rates. The Utility's regulatory assets associated with the plan of reorganization will be recovered over periods ranging from 2 to 30 years. The Utility's regulatory asset relating to post-transition period contract termination costs are being amortized and collected in rates on a straight-line basis until the end of September 2014, the contract's original termination date. This amount will be recovered in future rates.

        In general, the Utility does not earn a return on regulatory assets where the related costs do not accrue interest. Accordingly, the only regulatory asset on which the Utility earns a return on is the regulatory assets relating to the Settlement Agreement, retained generation and unamortized loss, net of gain on reacquired debt.