Pacific Gas & Electric (PCG)

Transportation and Storage

The Utility currently faces price and volumetric risk for the portion of intrastate natural gas transportation capacity that is not contracted under fixed reservation charges used by core customers. Non-core customers contract with the Utility for natural gas transportation and storage, along with natural gas parking and lending (market center) services. The Utility is at risk for any natural gas transportation and storage revenue volatility. Transportation is sold at competitive market-based rates within a cost-of-service tariff framework. There are significant seasonal and annual variations in the demand for natural gas transportation and storage services. The Utility sells most of its pipeline capacity based on the volume of natural gas that is transported by its customers. As a result, the Utility’s natural gas transportation revenues fluctuate.

The Utility uses value-at-risk to measure the expected maximum change over a one-day period in the 18-month forward value of its transportation and storage portfolio. This calculation is based on a 95% confidence level, which means that there is a 5% probability that the portfolio will incur a change in value in one day at least as large as the reported value-at-risk. For example, if the value-at-risk is calculated at $5 million, there is a 95% probability that if prices moved against current positions, the change in the value of the portfolio resulting from a one-day price movement would not exceed $5 million. The value-at-risk provides an indication of the Utility’s exposure to potential market conditions that could impact revenues based on one-day price changes. It is also a way to measure the effectiveness of hedge strategies on a portfolio.

The Utility’s value-at-risk for its transportation and storage portfolio was approximately $4 million at December 31, 2004 and approximately $4 million at December 31, 2003. A comparison of daily values-at-risk is included in order to provide context around the one-day amounts. The Utility’s high, low and average transportation and storage value-at-risk during 2004 were approximately $6 million, $2 million and $4 million, respectively. The Utility’s high, low and average transportation and storage value-at-risk during 2003 were approximately $13 million, $2 million and $5 million, respectively.

Value-at-risk has several limitations as a measure of portfolio risk, including, but not limited to, underestimation of the risk of a portfolio with significant options exposure, mismatch of one-day liquidation period assumed in the value-at-risk methodology as compared to the longer term holding period of the storage and transportation portfolio, and inadequate indication of the exposure of a portfolio to extreme price movements. In addition, value-at-risk does not measure intra-day risk from position changes nor does it measure volumetric uncertainty in the demand for pipeline services.

Due to the limitations of value-at-risk, the Utility enhanced the calculation methodology during the fourth quarter of 2004 to 1) capture uncertainty with respect to demand (volumetric uncertainty) for pipeline services, 2) reflect the market

Transportation and Storage

The Utility currently faces price and volumetric risk for the portion of intrastate natural gas transportation capacity that is not contracted under fixed reservation charges used by core customers.  Non-core customers contract with the Utility for natural gas transportation and storage, along with natural gas parking and lending (market center) services.  The Utility is at risk for any natural gas transportation and storage revenue volatility.  Transportation is sold at competitive market-based rates within a cost-of-service tariff framework.  There are significant seasonal and annual variations in the demand for natural gas transportation and storage services.  The Utility sells most of its pipeline capacity based on the volume of natural gas that is transported by its customers.  As a result, the Utility’s natural gas transportation revenues fluctuate.

The Utility uses value-at-risk to measure the Utility’s exposure to market conditions that could impact transportation and storage revenues based on changes in market prices and demand for pipeline and storage services over a rolling 12-month holding period.  This calculation is based on a 99% confidence level, which means that there is a 1% probability that the impact to revenues will be at least as large as the reported value-at-risk.  The Utility’s value-at-risk calculated under this methodology was approximately $35 million at March 31, 2005.  The Utility’s high, low, and average value-at-risk during the three months ended March 31, 2005 were approximately $43 million, $34 million and $38 million, respectively. Value-at-risk has several limitations as a measure of portfolio risk, including, but not limited to, inadequate indication of the exposure of a portfolio to extreme price movements and not capturing the intra-day risk related to position changes.

Beginning January 1, 2005, the Utility began calculating value-at-risk using the methodology described above on a prospective basis only.  For comparative purposes in 2005, the Utility will continue to report value-at-risk for the transportation and storage portfolio under the methodology formerly used in addition to value-at-risk calculated under the enhanced methodology.

Prior to January 1, 2005, the Utility used value-at-risk to measure the expected maximum change over a one-day period in the rolling 18-month forward value of its transportation and storage portfolio.  This calculation is based on a 95% confidence level, which means that there is a 5% probability that the portfolio will incur a loss in value in one day at least as large as the reported value-at-risk.  For example, if the value-at-risk is calculated at $5 million, there is a 95% probability that the value of the portfolio resulting from a one-day price movement would not decline by more than $5 million.  This value-at-risk methodology provides an indication of the Utility’s exposure to potential market conditions that could impact revenues based on one-day price changes.  It is also a way to measure the effectiveness of hedge strategies on a portfolio.

The Utility’s value-at-risk for its transportation and storage portfolio calculated under the methodology used prior to January 1, 2005 was approximately $2 million at March 31, 2005 and approximately $3 million at March 31, 2004.  A comparison of daily values-at-risk is included in order to provide context around the one-day amounts.  The Utility’s high, low and average transportation and storage value-at-risk during the three months ended March 31, 2005 were approximately $4 million, $2 million and $2 million, respectively.  The Utility’s high, low and average transportation and storage value-at-risk during the three months ended March 31, 2004 were approximately $6 million, $3 million and $4 million, respectively.

Value-at-risk calculated under the methodology used prior to January 1, 2005 has several limitations as a measure of portfolio risk, including, but not limited to, underestimation of the risk of a portfolio with significant options exposure, mismatch of one-day liquidation period assumed in the value-at-risk methodology as compared to the longer term holding period of the storage and transportation portfolio, and inadequate indication of the exposure of a portfolio to extreme price

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Transportation and Storage

        The Utility currently faces price and volumetric risk for the portion of intrastate natural gas transportation capacity that is not contracted under fixed reservation charges used by core customers. Non-core customers contract with the Utility for natural gas transportation and storage, along with natural gas parking and lending (market center) services. The Utility is at risk for any natural gas transportation and storage revenue volatility. Transportation is sold at competitive market-based rates within a cost-of-service tariff framework. There are significant seasonal and annual variations in the demand for natural gas transportation and storage services. The Utility sells most of its pipeline capacity based on the volume of natural gas that is transported by its customers. As a result, the Utility's natural gas transportation revenues fluctuate.

        The Utility uses value-at-risk to measure the expected maximum change over a one-day period in the 18-month forward value of its transportation and storage portfolio. This calculation is based on a 95% confidence level, which means that there is a 5% probability that the portfolio will incur a change in value in one day at least as large as the reported value-at-risk. For example, if the value-at-risk is calculated at $5 million, there is a 95% probability that if prices moved against current positions, the change in the value of the portfolio resulting from a one-day price movement would not exceed $5 million. The value-at-risk provides an indication of the Utility's exposure to potential market conditions that could impact revenues based on one-day price changes. It is also a way to measure the effectiveness of hedge strategies on a portfolio.

        The Utility's value-at-risk for its transportation and storage portfolio was approximately $4 million at December 31, 2004 and approximately $4 million at December 31, 2003. A comparison of daily values-at-risk is included in order to provide context around the one-day amounts. The Utility's high, low and average transportation and storage value-at-risk during 2004 were approximately $6 million, $2 million and $4 million, respectively. The Utility's high, low and average transportation and storage value-at-risk during 2003 were approximately $13 million, $2 million and $5 million, respectively.

        Value-at-risk has several limitations as a measure of portfolio risk, including, but not limited to, underestimation of the risk of a portfolio with significant options exposure, mismatch of one-day liquidation period assumed in the value-at-risk methodology as compared to the longer term holding

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period of the storage and transportation portfolio, and inadequate indication of the exposure of a portfolio to extreme price movements. In addition, value-at-risk does not measure intra-day risk from position changes nor does it measure volumetric uncertainty in the demand for pipeline services.

        Due to the limitations of value-at-risk, the Utility enhanced the calculation methodology during the fourth quarter of 2004 to 1) capture uncertainty with respect to demand (volumetric uncertainty) for pipeline services, 2) reflect the market conditions in which the pipeline operates by increasing the holding period to 12 months, and 3) include the uncertainty associated with the option exposure in the pipeline portfolio.

        The calculation of value-at-risk under this methodology is based on a 99% confidence level, which means that there is a 1% probability that the portfolio will incur a change in value at least as large as the modified value-at-risk. This value-at-risk measure provides an indication of the Utility's exposure to potential market conditions that could impact revenues based on changes in market prices and demand for pipeline services over the 12-month holding period. The value-at-risk calculated under this methodology was approximately $35 million at December 31, 2004.

        The Utility will calculate value-at-risk using the enhanced methodology on a prospective basis only, beginning January 1, 2005. For comparative purposes in 2005, the Utility will continue to report value-at-risk under the methodology formerly used in addition to value-at-risk calculated under the enhanced methodology.