Pacific Gas & Electric (PCG)

Short-Term Incentives

The Committee aims to set target STIP awards that are competitive with the average short-term incentive awards for comparable officers in the Pay Comparator Group. Target STIP awards are based on a percentage of base pay (called the participation rate) that varies according to officer level.

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2008 STIP Results

For 2008, the Committee approved target STIP awards that range from 45% of base salary for lower-level executive officers to 100% of base salary for the CEO of PG&E Corporation. This range of target STIP awards is consistent with the Pay Comparator Group's practice. Each year, the Committee establishes financial and operational performance goals at minimum (or "threshold"), target, and maximum levels, and determines the relative weightings of each component for the succeeding year (STIP structure). The Committee designs the STIP structure with the objective of aligning officer compensation with the successful management of assets and resources to generate stable and growing financial results for the benefit of shareholders, as well as to deliver safe, reliable, and exceptional service to utility customers. The relative weightings balance direct (through earnings from operations) and indirect (through key operational objectives) factors that contribute to performance for shareholders.

Actual STIP payments are determined by the Committee based on the extent to which the pre-established performance goals are met. STIP payments are calculated by multiplying an individual's target STIP award by the overall STIP performance score, which can range from zero if minimum performance goals are not met to 2.0 if maximum performance goals are met.

Under the 2008 STIP structure approved by the Committee in December 2007, 40% of the overall STIP score is based on corporate financial performance, as measured by corporate earnings from operations. The corporate financial performance goal is based on PG&E Corporation's 2008 budgeted earnings from operations that were previously approved by the Board of Directors, consistent with the basis for reporting and guidance to the financial community.⁽¹⁾

(1)

PG&E Corporation uses a financial performance goal and provides earnings guidance based on "earnings from operations." This measure is not a substitute or alternative for consolidated net income presented in accordance with generally accepted accounting principles (GAAP). Earnings from operations exclude items impacting GAAP results that do not reflect the normal course of operations, such as changes in accounting methods, workforce restructuring, and one-time occurrences.

(2)

For 2008, per-share earnings on a GAAP basis were $3.63, which included income from a settlement of 2001-2004 tax audits, totaling $257 million or $0.68 per share.

The Committee has adopted threshold, target, and maximum STIP financial performance goals that correspond to STIP financial performance scores ranging from 0.5 to 2.0. The threshold goal is met if actual earnings from operations are at least 91% of budgeted earnings from operations, resulting in a minimum STIP financial performance score of 0.5. The target goal is met if actual earnings from operations are equal to budgeted earnings from operations, resulting in a target STIP financial performance score of 1.0. The maximum goal is met if actual earnings from operations exceed 106% of budgeted earnings from operations, resulting in a maximum STIP financial performance score of 2.0. To meet the maximum goal, 2008 earnings from operations would have needed to be 15.3% greater than the 2007 actual earnings from operations results. The Committee believes that this presents a significant challenge to management and, if achieved, would justify a maximum STIP financial performance score of 2.0.

Management publicly provided guidance that PG&E Corporation's 2008 earnings from operations per share were expected to be in the range of $2.90 to $3.00 per share. On February 24, 2009, PG&E Corporation disclosed that its earnings from operations per share were $2.95.⁽²⁾ Based on 2008 earnings from operations per share, the Committee determined that the target 2008 STIP corporate financial performance goal resulted in an actual STIP corporate financial performance result of 0.938.

The remaining 60% of the overall 2008 STIP score was based on the extent to which key operational objectives were met. These operational STIP goals were based on some of the same measures that management uses to track operational performance generally, and are described in the table below. As such, these operational STIP goals further the Committee's objective of aligning officer compensation with, among other things, the delivery of safe, reliable, and exceptional service to utility customers.

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Short-Term Incentives

The Committee aims to set target STIP awards that are competitive with the average short-term incentive awards for comparable officers in the Pay Comparator Group. Target STIP awards are based on a percentage of base pay (called the participation rate) that varies according to officer level.

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For 2007, the Committee approved target STIP awards that range from 45% of base salary for lower-level executive officers to 100% of base salary for the CEO of PG&E Corporation. This range of target STIP awards is consistent with the Pay Comparator Group's practice. Effective November 1, 2007, William T. Morrow's STIP participation rate was increased to 75% from 65%, reflecting his increased responsibilities following his appointment as CEO of Pacific Gas and Electric Company on July 1, 2007. Prior to July 1, 2007, Mr. Morrow served as President and Chief Operating Officer of Pacific Gas and Electric Company.

Each year, the Committee establishes financial and operational performance goals at minimum (or "threshold"), target, and maximum levels, and determines the relative weightings of each component for the succeeding year (STIP structure). The Committee designs the STIP structure with the objective of aligning officer compensation with the successful management of assets and resources to generate stable and growing financial results for the benefit of shareholders, as well as to deliver safe, reliable, and exceptional service to utility customers. The relative weightings balance direct (through earnings from operations) and indirect (through key strategic and operation-specific objectives) factors that contribute to returns to shareholders.

Actual STIP payments are determined by the Committee based on the extent to which certain pre-established performance goals are met. STIP payments are calculated by multiplying an individual's target STIP award by the overall STIP performance score, which can range from zero if minimum performance goals are not met to 2 if maximum performance goals are met.

Under the 2007 STIP structure approved by the Committee in December 2006, 50% of the overall STIP score is based on corporate financial performance, as measured by corporate earnings from operations. The corporate financial performance goal is based on PG&E Corporation's 2007 budgeted earnings from operations that were previously approved by the Board of Directors, consistent with the basis for reporting and guidance to the financial community.¹

Management publicly provided guidance that PG&E Corporation's 2007 earnings from operations were expected to be in the upper half of the range of $2.70-$2.80 per share. On February 22, 2008, PG&E Corporation disclosed that its 2007 earnings from operations were $2.78 per share.² Based on 2007 earnings from operations per share, the Committee determined that the target 2007 STIP corporate financial performance goal was exceeded, yielding a STIP corporate financial performance score of 1.074.

¹

PG&E Corporation uses a financial performance goal and provides earnings guidance based on "earnings from operations." This measure is not a substitute or alternative for consolidated net income presented in accordance with generally accepted accounting principles (GAAP). Earnings from operations excludes items impacting GAAP results that management believes do not reflect the normal course of operations, such as changes in accounting methods, workforce restructuring, and one-time occurrences.

²

For 2007, there were no items impacting GAAP results that were excluded. Earnings from operations and net income calculated in accordance with GAAP were the same.

The remaining 50% of the overall 2007 STIP score was based on the extent to which key strategic and operational objectives were met. These operational STIP goals were based on some of the same measures that management uses to track operational performance generally, and are described in the table below.

Short-Term Incentives

The PG&E Corporation and Pacific Gas and Electric Company Short-Term Incentive Plans for 2005 were designed to provide annual incentives to all officers based on the level of achievement in meeting key corporate financial and strategic objectives and, where appropriate, line of business results.

At the beginning of the year, targets are set based on each officer's responsibilities and salary level. Final amounts are determined by the Committee and may range from zero to twice the target, depending on corporate and individual officer performance as measured against the key corporate objectives. The Committee has discretion to adjust or modify any of the performance measures.

In 2005, PG&E Corporation achieved earnings from operations of $907 million. The majority of PG&E Corporation and Pacific Gas and Electric Company officers received Short-Term Incentive Plan awards that ranged from 141 percent to 150 percent of their target awards.