Significant Accounting Policies (Policy)

6 Months Ended

Jun. 30, 2011

Significant Accounting Policies

Pension and Other Postretirement Benefits

Pension and Other Postretirement Benefits

PG&E Corporation and the Utility provide a non-contributory defined benefit pension plan for eligible employees and retirees (referred to collectively as "pension benefits"), contributory postretirement medical plans for eligible employees and retirees and their eligible dependents, and non-contributory postretirement life insurance plans for eligible employees and retirees (referred to collectively as "other benefits"). PG&E Corporation and the Utility use a December 31 measurement date for all plans.

The net periodic benefit costs reflected in PG&E Corporation's Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010 were as follows:

	Pension Benefits				Other Benefits
	Three Months Ended June 30,				Three Months Ended June 30,
(in millions)	2011		2010		2011		2010
Service cost for benefits earned		$ 82		$ 69		$ 11		$ 9
Interest cost		164		161		23		23
Expected return on plan assets		(167)		(156)		(20)		(18)
Amortization of transition obligation		-		-		6		6
Amortization of prior service cost		9		13		6		6
Amortization of unrecognized loss		12		11		1		1
Net periodic benefit cost		100		98		27		27
Less: transfer to regulatory account (1)		(36)		(58)		-		-
Total		$ 64		$ 40		$ 27		$ 27

⁽¹⁾ The Utility recorded $36 million and $58 million for the three month periods ended June 30, 2011 and 2010, respectively, to a regulatory account as the amounts are probable of recovery from customers in future rates.

	Pension Benefits				Other Benefits
	Six Months Ended June 30,				Six Months Ended June 30,
(in millions)	2011		2010		2011		2010
Service cost for benefits earned		$ 164		$ 139		$ 22		$ 19
Interest cost		328		322		46		46
Expected return on plan assets		(334)		(312)		(40)		(36)
Amortization of transition obligation		-		-		12		12
Amortization of prior service cost		18		27		12		12
Amortization of unrecognized loss		24		21		2		2
Net periodic benefit cost		200		197		54		55
Less: transfer to regulatory account (1)		(72)		(115)		-		-
Total		$ 128		$ 82		$ 54		$ 55

⁽¹⁾ The Utility recorded $72 million and $115 million for the six month periods ended June 30, 2011 and 2010, respectively, to a regulatory account as the amounts are probable of recovery from customers in future rates.

There was no material difference between PG&E Corporation's and the Utility's consolidated net periodic benefit costs for the three and six months ended June 30, 2011 and 2010.

Variable Interest Entities

Variable Interest Entities

The Utility has contracts to purchase energy and capacity from variable interest entities ("VIE"s). The Utility evaluated these contracts and determined that it either does not have a variable interest in the VIE or it is not the primary beneficiary of the VIE where a variable interest exists. The determination of whether the Utility has a variable interest in a VIE includes an analysis of the impact the power purchase agreement has on the variability in the VIE's gross margin. The primary beneficiary determination considers which entity has the power to direct the activities of the VIE that are most significant to the VIE's economic performance, and may include any decision-making rights associated with designing the VIE, dispatch rights, operating and maintenance activities, and re-marketing activities of the power plant after the end of the power purchase agreement with the Utility. The Utility's financial exposure is limited to the amount it pays for delivered electricity and capacity and the Utility has not provided any other support to these VIEs. (See Note 10 below.)

The Utility has consolidated the accounts of PG&E Energy Recovery Funding LLC ("PERF") at June 30, 2011 as the Utility continues to be the primary beneficiary of PERF. The Utility has determined that it is PERF's primary beneficiary because the Utility is exposed to PERF's losses and returns through the Utility's 100% equity investment in PERF and the Utility was involved in the design of PERF, an activity that was significant to PERF's economic performance. The assets of PERF were $703 million at June 30, 2011 and primarily consisted of assets related to energy recovery bonds, which are included in other noncurrent assets – regulatory assets in the Condensed Consolidated Balance Sheets. The liabilities of PERF were $637 million at June 30, 2011 and consisted of liabilities related to energy recovery bonds, which are included in current and noncurrent liabilities in the Condensed Consolidated Balance Sheets. (See Note 4 below.) The assets of PERF are only available to settle the liabilities of PERF and PERF's creditors have no recourse to the Utility.

As of June 30, 2011, PG&E Corporation's affiliates had entered into four tax equity agreements with two privately held companies to fund residential and commercial retail solar energy installations. Under these agreements, PG&E Corporation has agreed to provide lease payments and investment contributions of up to $398 million to these companies in exchange for the right to receive the benefits from local rebates, federal investment tax credits or grants, and a share of the customer payments made to these companies. The majority of these amounts are recorded in other noncurrent assets – other in PG&E Corporation's Condensed Consolidated Balance Sheets. As of June 30, 2011, PG&E Corporation had made total payments of $251 million under these tax equity agreements and received $99 million in benefits and customer payments. PG&E Corporation holds a variable interest in these companies as a result of these agreements. PG&E Corporation was not the primary beneficiary of, and did not consolidate any of these companies at June 30, 2011. In making this determination, PG&E Corporation evaluated which party has control over these companies' significant economic activities such as designing the companies, vendor selection, construction, customer selection, and re-marketing activities at the end of customer leases, and determined that these activities are under the control of these companies. PG&E Corporation's financial exposure from these arrangements is generally limited to its lease payments and investment contributions to these companies.