Pacific Gas & Electric (PCG)

2008 STIP – Operational Performance Measures

(1)

The index combines a Customer Satisfaction Score, which has a 75% weighting and a Brand Favorability Score, which has a 25% weighting. The Customer Satisfaction Score is a measure of overall satisfaction with Pacific Gas and Electric Company's operational performance in delivering services such as reliability, pricing of services, and customer service experience. The Brand Favorability Score is a measure of overall favorability toward the Pacific Gas and Electric Company brand. The Brand Favorability Score measures residential, small business, and medium business customer perceptions, with weightings based on revenue: 60 percent for residential customers and 40 percent for business customers. These scores are derived from the results of surveys conducted by an independent third party.

(2)

The Reliable Energy Delivery Index is a composite score that measures key drivers of reliability, including outage frequency and duration (based on the System Average Interruption Frequency Index and the Customer Average Interruption Duration Index), execution of electric-based work units, and gas transmission and distribution integrity.

(3)

This index is an average of positive responses to selected questions in the Employee Engagement Premier Survey. The Survey is the primary tool used to measure employee engagement at PG&E Corporation and Pacific Gas and Electric Company.

(4)

Safety Performance is measured as the Occupational Safety & Health Administration (OSHA) Recordable Rate, which is based on the number of OSHA Recordable injuries, illnesses, or exposures that (1) result in medical treatment beyond first aid or result in work restrictions, death, or loss of consciousness, and (2) occur in the current year. Achievement of the Safety Performance measure is based on the reduction of the OSHA Recordable Rate from the prior year.

For 2008, the Committee adopted an incentive design feature to ensure that a low STIP performance score due to weak financial performance could not be offset solely by strong operational performance. Under this design feature, if corporate financial performance does not exceed 98% of the targeted corporate financial performance goal for 2008, the aggregate operational performance STIP score cannot exceed 1.0. For example, if actual operational performance resulted in an aggregate operational performance STIP score of 2.0, but actual corporate financial performance fell below 98% and resulted in a STIP financial performance score of 0.5, the aggregate operational performance STIP score would be reduced to 1.0 and the overall STIP score would be 0.8, calculated as follows:

•

A reduced operational performance STIP score of 1.0 multiplied by 60% weighting = 0.6

plus

•

A STIP financial performance score of 0.5 multiplied by 40% weighting = 0.2

equals

•

An overall STIP score of 0.8 (and a total award of 80% of target).

The combined 2008 operational performance results yielded a combined 2008 STIP operational performance score of 1.338. This score was combined with the corporate financial performance score of 0.938 to yield an overall 2008 STIP score of 1.178. The 2008 STIP payments to the NEOs are shown in the Summary Compensation Table.

For 2008, the Committee had full discretion as to the determination of final officer STIP payments. The Committee did not exercise its discretion to modify any 2008 STIP payments.

2009 STIP Structure

In December 2008, the Committee approved the structure for the 2009 STIP and the weighting of each component. For the 2009 STIP, the Committee established a STIP structure in which corporate financial performance, as measured by earnings from operations, will account for 50% of the overall STIP performance score. The remaining 50% of the overall 2009 STIP score is based on the extent to which key operational objectives are met. These operational STIP goals are based on the same measures used in 2008, and are shown in the table below. As such, these operational STIP goals further the Committee's objective of aligning officer compensation with, among

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other things, the delivery of safe, reliable, and exceptional service to utility customers.

For 2009, the corporate financial performance goal for STIP is based on PG&E Corporation's budgeted earnings from operations for 2009 that were previously approved by the Board of Directors, and is consistent with the basis for reporting and guidance to the financial community. Management has publicly provided guidance that PG&E Corporation's 2009 earnings from operations are expected to be in the range of $3.15 to $3.25 per share, representing growth in earnings from operations of between 6.8% to 10.2% compared to 2008 earnings from operations. 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 93% 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 105% of budgeted earnings from operations, resulting in a maximum STIP financial performance score of 2.0. To meet the maximum goal, 2009 earnings from operations would have to range between 12.1% to 15.7% greater than 2008 earnings from operations based on the expected earnings from operations per share range for 2009. 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.

The target operational performance goals for the 2009 STIP are described in the table below.

2007 STIP – Operational Performance Measures

⁽¹⁾

This measure reflects a weighted composite of the overall customer satisfaction indices of Pacific Gas and Electric Company's residential and business customers, as reported by the J.D. Power Residential Customer Satisfaction Survey and the J.D. Power Business Customer Satisfaction Survey. The weighting of the residential customers' score was 60% and the weighting of the business customers' score was 40%.

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⁽²⁾

The Business Transformation Index is comprised of five measurement points that define success in achieving key Business Transformation operational, financial, and post-implementation objectives. The five measurement points are (1) overall Business Transformation cost performance in comparison to budgeted amounts, (2) overall Business Transformation benefit performance in comparison to planned/budgeted amounts, (3) new business customer connection performance for cycle time and number of customer commitments met, (4) SmartMeter™ project performance for number of meters installed and activated, and (5) the extent to which core Business Transformation initiatives are implemented compared to the planned schedule and scope of initiatives.

⁽³⁾

The Premier Survey is the primary tool used to measure employee engagement at PG&E Corporation and Pacific Gas and Electric Company.

⁽⁴⁾

An "OSHA Recordable" is an occupational (job-related) injury or illness that requires medical treatment beyond first aid, or results in work restrictions, death, or loss of consciousness. This metric measures the percentage reduction in Pacific Gas and Electric Company's OSHA Recordable rate from the prior year.

The combined 2007 operational performance results yielded a combined 2007 STIP operational performance score of 1.308. This score was combined with the corporate financial performance score of 1.074 to yield an overall 2007 STIP score of 1.191. The 2007 STIP payments to the NEOs are shown in the Summary Compensation Table.

For 2007, the Committee had full discretion as to the determination of final officer STIP payments. The Committee did not exercise its discretion to modify any 2007 STIP payments.

In December 2007, the Committee approved the structure for the 2008 STIP and the weighting of each component. For the 2008 STIP, the Committee established a STIP structure in which corporate financial performance, as measured by corporate earnings from operations, will account for 40% of the overall STIP performance score, 20% will be based on Pacific Gas and Electric Company's success in improving reliability, 20% will be based on Pacific Gas and Electric Company's success in improving customer satisfaction, 10% will be based on the results of an employee opinion survey, and the remaining 10% will be based on achieving safety standards.

The corporate financial performance measure for the 2008 STIP is based on PG&E Corporation's budgeted earnings from operations for 2008 that were previously approved by the Board of Directors, and is consistent with the basis for reporting and guidance to the financial community. Management has publicly provided guidance that PG&E Corporation's 2008 earnings from operations are expected to range from $2.90 to $3.00 per share, representing growth in earnings from operations of between 4.3% to 8% compared to 2007 earnings from operations. 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 to range between 10.6% to 14.4% greater than 2007 earnings from operations. The Committee believes this presents a significant challenge to management and, if achieved, would justify a maximum STIP financial performance score of 2.0.

For 2008, the Committee adopted an incentive design feature to ensure that a low STIP performance score due to weak financial performance cannot be offset solely by strong operational performance. Under this design feature, if corporate financial performance does not exceed 98% of the targeted corporate financial performance goal for 2008, the aggregate operational performance STIP score cannot exceed 1.0 (or 100% of the weighted award target). For example, if actual operational performance resulted in an aggregate operational performance STIP score of 2.0, but actual corporate financial performance fell below 98% and resulted in a STIP financial performance score of 0.5, the aggregate operational performance STIP score

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would be reduced to 1.0 and the overall STIP score would be 0.8, calculated as follows:

•

A reduced operational performance STIP score of 1.0 multiplied by 60% weighting = 0.6

plus

•

A STIP financial performance score of 0.5 multiplied by 40% weighting = 0.2

equals

•

An overall STIP score of 0.8 (and a total award of 80% of target).

The target operational performance goals for the 2008 STIP are described in the table below. The Customer Satisfaction and Brand Health Index replaces the index used in the 2007 STIP structure, which was based on residential and business customer satisfaction indices as reported in the J.D. Power Residential Customer Satisfaction Survey and the J.D. Power Business Customer Satisfaction Survey. The Reliable Energy Delivery Index replaces the Business Transformation Index used in the 2007 STIP structure.