10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number	Exact Name of Registrant as specified in its charter	State or Other Jurisdiction of Incorporation or Organization		IRS Employer Identification Number
1-12609	PG&E CORPORATION	California		94-3234914
1-2348	PACIFIC GAS AND ELECTRIC COMPANY	California		94-0742640
PG&E Corporation One Market, Spear Tower Suite 2400 San Francisco, California 94105 (Address of principal executive offices) (Zip Code) (415) 267-7000 (Registrant's telephone number, including area code)			Pacific Gas and Electric Company 77 Beale Street P.O. Box 770000 San Francisco, California 94177 (Address of principal executive offices) (Zip Code) (415) 973-7000 (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
PG&E Corporation: Common Stock, no par value	New York Stock Exchange
Pacific Gas and Electric Company: First Preferred Stock, cumulative, par value $25 per share:	American Stock Exchange
Redeemable: 5% Series A, 5%, 4.80%, 4.50%, 4.36%
Nonredeemable: 6%, 5.50%, 5%

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

PG&E Corporation	Yes x No o
Pacific Gas and Electric Company	Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:

PG&E Corporation	Yes ¨ No x
Pacific Gas and Electric Company	Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

PG&E Corporation	Yes x No o
Pacific Gas and Electric Company	Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:

PG&E Corporation	x
Pacific Gas and Electric Company	x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

PG&E Corporation	Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨
Pacific Gas and Electric Company	Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

PG&E Corporation	Yes ¨ No x
Pacific Gas and Electric Company	Yes o No x

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrants as of June 30, 2006, the last business day of the second fiscal quarter:

PG&E Corporation Common Stock	$13,640 million
Pacific Gas and Electric Company Common Stock	Wholly owned by PG&E Corporation
Common Stock outstanding as of February 20, 2007:
PG&E Corporation:	350,817,275 (excluding shares held by a wholly owned subsidiary)
Pacific Gas and Electric Company:	Wholly owned by PG&E Corporation

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the documents listed below have been incorporated by reference into the indicated parts of this report, as specified in the responses to the item numbers involved:

Designated portions of the combined 2006 Annual Report to Shareholders	Part I (Item 1, Item 1.A.), Part II (Items 5, 6, 7, 7A, 8 and 9A)
Designated portions of the Joint Proxy Statement relating to the 2007	Part III (Items 10, 11, 12, 13 and 14)
Annual Meetings of Shareholders

TABLE OF CONTENTS

		Page
	Units of Measurement	iv
PART I
Item 1.	Business	1
	General	1
	Corporate Structure and Business	1
	Corporate and Other Information	1
	Employees	1
	Forward Looking Statements	1
	PG&E Corporation's Regulatory Environment	3
	Federal Energy Regulation	3
	State Energy Regulation	3
	The Utility's Regulatory Environment	4
	Federal Energy Regulation	4
	State Energy Regulation	5
	Other Regulation	7
	Competition	7
	Competition in the Electricity Industry	7
	Competition in the Natural Gas Industry	9
	Ratemaking Mechanisms	10
	Cost-of-Service Ratemaking	10
	Electricity and Natural Gas Distribution and Electricity Generation Operations	10
	General Rate Cases	10
	Attrition Rate Adjustments	11
	Cost of Capital Proceedings	11
	Baseline Allowance	11
	Public Purpose and Other Programs	11
	Energy Efficiency Programs	11
	Demand Response Programs	12
	Self-Generation Incentive, California Solar Initiative	12
	Low-Income Energy Efficiency Programs and California Alternate Rates for Energy	12
	Climate Protection Tariff	12
	Rate Recovery of Costs of New Electricity Generation Resources	12
	Overview	12
	Costs Incurred Under New Power Purchase Agreements	13
	Costs of Utility-Owned Generation Resource Projects	13
	DWR Electricity and DWR Revenue Requirements	14
	Electricity Transmission	14
	Transmission Owner Rate Cases	14
	CAISO Transmission Revenues	15
	Reliability Service Costs	15
	Transmission Access Charge	15
	Natural Gas	15
	The Gas Accord	15
	Biennial Cost Allocation Proceeding	16
	Natural Gas Procurement	16
	Interstate and Canadian Natural Gas Transportation and Storage	16

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	Electric Utility Operations	17
	Electricity Resources	17
	Owned-Generation Facilities	17
	DWR Power Purchases	18
	Third-Party Power Purchase Agreements	18
	Future Long-Term Generation Resources	19
	Electricity Transmission	20
	Electricity Distribution Operations	20
	2006 Electricity Deliveries	21
	Electricity Distribution Operating Statistics	21
	Natural Gas Utility Operations	22
	2006 Natural Gas Deliveries	23
	Natural Gas Operating Statistics	23
	Natural Gas Supplies	24
	Gas Gathering Facilities	25
	Interstate and Canadian Natural Gas Transportation Services Agreements	25
	Environmental Matters	26
	General	26
	Air Qualityand Climate Change	27
	Water Quality	27
	Compressor Station Litigation	29
	Endangered Species	29
	Hazardous Waste Compliance and Remediation	29
	Nuclear Fuel Disposal	31
	Nuclear Decommissioning	31
	Electric and Magnetic Fields	31
Item 1A.	Risk Factors	32
Item 1B.	Unresolved Staff Comments	32
Item 2.	Properties	32
Item 3.	Legal Proceedings	32
	Diablo Canyon Power Plant	33
	Complaints Filed by the California Attorney General, City and County of San Francisco	33
	The California Air Resources Board	34
Item 4.	Submission of Matters to a Vote of Security Holders	35
	Executive Officers of the Registrants	35
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	38
Item 6.	Selected Financial Data	39
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	40
Item 9A.	Controls and Procedures	40
Item 9B.	Other Information	40
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	42
Item 11.	Executive Compensation	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	43

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Item 13.	Certain Relationships and Related Transactions, and Director Independence	43
Item 14.	Principal Accountant Fees and Services	43
PART IV
Item 15.	Exhibits and Financial Statement Schedules	44
	Signatures	50
	Report of Independent Registered Public Accounting Firm	51
	Financial Statement Schedules	52

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UNITS OF MEASUREMENT

1 Kilowatt (kW)	=	One thousand watts
1 Kilowatt-Hour (kWh)	=	One kilowatt continuously for one hour
1 Megawatt (MW)	=	One thousand kilowatts
1 Megawatt-Hour (MWh)	=	One megawatt continuously for one hour
1 Gigawatt (GW)	=	One million kilowatts
1 Gigawatt-Hour (GWh)	=	One gigawatt continuously for one hour
1 Kilovolt (kV)	=	One thousand volts
1 MVA	=	One megavolt ampere
1 Mcf	=	One thousand cubic feet
1 MMcf	=	One million cubic feet
1 Bcf	=	One billion cubic feet
1 MDth	=	One thousand decatherms

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PART I

Item 1. Business.

General 

Corporate Structure and Business

PG&E Corporation, incorporated in California in 1995, is a holding company whose primary purpose is to hold interests in energy-based businesses. PG&E Corporation conducts its business principally through Pacific Gas and Electric Company, or the Utility, a public utility operating in northern and central California. The Utility engages in the businesses of electricity and natural gas distribution, electricity generation, procurement and transmission, and natural gas procurement, transportation and storage. The Utility was incorporated in California in 1905. PG&E Corporation became the holding company of the Utility and its subsidiaries on January 1, 1997.

The Utility served approximately 5.1 million electricity distribution customers and approximately 4.2 million natural gas distribution customers at December 31, 2006. The Utility had approximately $34.4 billion of assets at December 31, 2006, and generated revenues of approximately $12.5 billion in 2006. Its revenues are generated mainly through the sale and delivery of electricity and natural gas. The Utility is regulated primarily by the California Public Utilities Commission, or the CPUC, and the Federal Energy Regulatory Commission, or the FERC.

Corporate and Other Information

The principal executive office of PG&E Corporation is located at One Market, Spear Tower, Suite 2400, San Francisco, California 94105, and its telephone number is (415) 267-7000. The principal executive office of the Utility is located at 77 Beale Street, P.O. Box 770000, San Francisco, California 94177, and its telephone number is (415) 973-7000. PG&E Corporation and the Utility file various reports with the Securities and Exchange Commission, or the SEC. These reports, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on both PG&E Corporation's website, www.pgecorp.com, and the Utility's website, www.pge.com. The information contained on these websites is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.

Employees

At December 31, 2006, PG&E Corporation and its subsidiaries had approximately 20,400 employees, including approximately 20,200 employees of the Utility. Of the Utility's employees, approximately 13,400 are covered by collective bargaining agreements with three labor unions: the International Brotherhood of Electrical Workers, Local 1245, AFL-CIO, or the IBEW; the Engineers and Scientists of California, IFPTE Local 20, AFL-CIO and CLC, or the ESC; and the Service Employees International Union, Local 24/7, or the SEIU. The ESC and IBEW collective bargaining agreements expire on December 31, 2008. The SEIU collective bargaining agreement expires on February 28, 2009.

Forward-Looking Statements

This combined Annual Report on Form 10-K, including the information incorporated by reference from the joint Annual Report to Shareholders for the year ended December 31, 2006, or the 2006 Annual Report, contains forward-looking statements that are necessarily subject to various risks and uncertainties. These statements are based on current estimates, expectations and projections about future events, and assumptions regarding these events and management's knowledge of facts as of the date of this report. These forward-looking statements relate to, among other matters, estimated capital expenditures, estimated Utility rate base, estimated environmental remediation liabilities, the anticipated outcome of various regulatory and legal proceedings, future cash flows, and the level of future equity or debt issuances, and are also identified by words such as “assume,” “expect,” “intend,” “plan,” “project,” “believe,” “estimate,” “predict,” “anticipate,” “aim, “ “may,” “might,” “should,” “would,” “could,” “goal,” “potential” and similar expressions. PG&E Corporation and the Utility are not able to predict all the factors that may affect future results. Some of the factors that could cause future results to differ materially from those expressed or implied by the forward-looking statements, or from historical results, include, but are not limited to:

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·   the Utility’s ability to timely recover costs through rates;

·   the outcome of regulatory proceedings, including ratemaking proceedings pending at the CPUC and the FERC;

·   the adequacy and price of electricity and natural gas supplies, and the ability of the Utility to manage and respond to the volatility of the electricity and natural gas markets;

·   the effect of weather, storms, earthquakes, fires, floods, disease, other natural disasters, explosions, accidents, mechanical breakdowns, acts of terrorism, and other events or hazards that could affect the Utility’s facilities and operations, its customers and third parties on which the Utility relies;

·   the potential impacts of climate change on the Utility’s electricity and natural gas operations;

·   changes in customer demand for electricity and natural gas resulting from unanticipated population growth or decline, general economic and financial market conditions, changes in technology including the development of alternative energy sources, or other reasons;

·   operating performance of the Utility’s Diablo Canyon nuclear generating facilities, or Diablo Canyon, the occurrence of unplanned outages at Diablo Canyon, or the temporary or permanent cessation of operations at Diablo Canyon;

·   the ability of the Utility to recognize benefits from its initiatives to improve its business processes and customer service;

·   the ability of the Utility to timely complete its planned capital investment projects;

·   the impact of changes in federal or state laws, or their interpretation, on energy policy and the regulation of utilities and their holding companies;

·   the impact of changing wholesale electric or gas market rules, including the California Independent System Operator’s, or the CAISO’s, new rules to restructure the California wholesale electricity market;

·   how the CPUC administers the conditions imposed on PG&E Corporation when it became the Utility’s holding company;

·   the extent to which PG&E Corporation or the Utility incurs costs in connection with pending litigation that are not recoverable through rates, from third parties, or through insurance recoveries;

·   the ability of PG&E Corporation and/or the Utility to access capital markets and other sources of credit;

·   the impact of environmental laws and regulations and the costs of compliance and remediation;and

·   the effect of municipalization, direct access, community choice aggregation, or other forms of bypass.

For more information about the more significant risks that could affect the outcome of these forward-looking statements and PG&E Corporation's and the Utility's future financial condition and results of operations, see the discussion under the heading “Risk Factors” that appears near the end of the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations,” or the MD&A, in the 2006 Annual Report that is incorporated by reference into this Annual Report on Form 10-K. PG&E Corporation and the Utility do not undertake an obligation to update forward-looking statements, whether in response to new information, future events or otherwise.

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PG&E Corporation's Regulatory Environment

Federal Energy Regulation

As a public utility holding company, PG&E Corporation is subject to the requirements of the Energy Policy Act of 2005, or the EPAct, which became effective on February 8, 2006. Among its key provisions, the EPAct repealed the Public Utility Holding Company Act of 1935 and enacted the Public Utility Holding Company Act of 2005, or PUHCA 2005. Under PUHCA 2005, public utility holding companies fall principally under the regulatory oversight of the FERC, an independent agency within the U.S. Department of Energy, or the DOE.

During 2006, the FERC issued rules implementing PUHCA 2005 that impose on holding companies and their subsidiaries various requirements concerning access to books and records, accounting, record retention and the filing of reports. On June 15, 2006, PG&E Corporation filed a notification of waiver with the FERC, which was deemed granted by operation of law on August 14, 2006. The effect of this waiver is to exempt PG&E Corporation and its subsidiaries from all requirements of PUHCA 2005 other than the obligation to provide access to their books and records to the FERC and the CPUC for ratemaking purposes. The books and records provisions to which PG&E Corporation and its subsidiaries remain subject under PUHCA 2005 are largely duplicative of other provisions under the Federal Power Act of 1935 and state law.

In addition to enacting PUHCA 2005, the EPAct also significantly modified the FERC's authority and standard of review for mergers and consolidations involving public utilities and their holding companies under Section 203 of the Federal Power Act of 1935.

State Energy Regulation

PG&E Corporation is not a public utility under the laws of California. The CPUC has authorized the formation of public utility holding companies subject to various conditions related to finance, human resources, records and bookkeeping, and the transfer of customer information. The financial conditions provide that:

·   the Utility cannot guarantee any obligations of PG&E Corporation without prior written consent from the CPUC;

·   the Utility's dividend policy must be established by the Utility's Board of Directors as though the Utility were a stand-alone utility company;

·   the capital requirements of the Utility, as determined to be necessary and prudent to meet the Utility's obligation to serve or to operate the Utility in a prudent and efficient manner, must be given first priority by PG&E Corporation's Board of Directors (known as the “first priority” condition); and

·   The Utility must maintain on average its CPUC-authorized utility capital structure, although it can request a waiver of this condition if an adverse financial event reduces the Utility's equity ratio by 1% or more.

(As discussed below under “Item 3 - Legal Proceedings,” the California Attorney General and the City and County of San Francisco have alleged that PG&E Corporation and its directors, as well as the directors of the Utility, violated the CPUC’s holding company conditions during the California 2000-2001 energy crisis. PG&E Corporation and the Utility believe that they have complied with applicable statutes, CPUC decisions, rules and orders.)

The CPUC also has adopted complex and detailed rules governing transactions between California's electricity and natural gas distribution companies and their non-regulated affiliates. The rules address the use of the regulated utilities’ names and logos by their non-regulated affiliates, the separation of regulated utilities and their non-regulated affiliates, information exchange among the affiliates, and energy procurement-related transactions among regulated utilities and their non-regulated affiliates. The rules also prohibit each utility from engaging in certain practices that would discriminate against energy service providers that compete with that utility's non-regulated affiliates. In December 2006, the CPUC revised its rules to, among other changes:

·   emphasize that the holding company may not aid or abet a utility's violation of the rules or act as a conduit to provide confidential information to an affiliate;

·   require prior CPUC approval before the utility can contract with an affiliate for resource procurement (e.g., electricity or gas), except in blind transactions where the identity of the other party is not known until the transaction is consummated;

·   require certain key officers to provide annual certifications of compliance with the affiliate rules;

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·   prohibit certain key officers from serving in the same position at both the utility and the holding company, or, in the alternative, prohibit the sharing of lobbying, regulatory relations and certain legal services (except for legal services necessary to the provision of permitted shared services);

·   require the utility to obtain a “nonconsolidation opinion” indicating that it would not be consolidated into a bankruptcy of its holding company;

·   adopt as part of the affiliate rules the utilities’ current requirements to maintain a balanced capital structure (proportions of equity, long term debt, and preferred stock) consistent with that most recently determined to be reasonable by the CPUC; and  

·   make the CPUC's Energy Division responsible for hiring the independent auditors to conduct the biennial audits to verify that the utility is in compliance with the affiliate rules.

The CPUC has established specific penalties and enforcement procedures for affiliate rules violations. Utilities are required to self-report affiliate rules violations.

The Utility's Regulatory Environment

Various aspects of the Utility's business are subject to a complex set of energy, environmental and other governmental laws, regulations and regulatory proceedings at the federal, state and local levels. In addition to enacting PUHCA 2005 to replace the Public Utility Holding Company Act of 1935 as discussed above, the EPAct significantly amended various federal energy laws applicable to electric and natural gas markets, including the Federal Power Act of 1935, the Natural Gas Act of 1938 and the Public Utility Regulatory Policies Act of 1978, or PURPA.

This section and the “Ratemaking Mechanisms” section below summarize some of the more significant laws, regulations and regulatory mechanisms affecting the Utility. These summaries are not an exhaustive description of all the laws, regulations and regulatory proceedings that affect the Utility. The energy laws, regulations and regulatory proceedings may change or be implemented or applied in a way that the Utility does not currently anticipate. For discussion of specific regulatory proceedings affecting the Utility, see the section of the MD&A entitled “Regulatory Matters” in the 2006 Annual Report.

Federal Energy Regulation

The FERC

The FERC regulates the transmission and wholesale sales of electricity in interstate commerce and the transmission and sale of natural gas for resale in interstate commerce. The FERC also regulates interconnections of transmission systems with other electric systems and generation facilities; tariffs and conditions of service of regional transmission organizations, including the CAISO; and the terms and rates of wholesale electricity sales. The EPAct granted the FERC significant new responsibilities to oversee the reliability of the nation’s electricity transmission grid, to prevent market manipulation, and to supplement state transmission siting efforts in certain electric transmission corridors that are determined to be of national interest. The EPAct also expanded the FERC’s authority to impose penalties for violation of certain federal statutes, including the Federal Power Act of 1935 and the Natural Gas Act of 1938, and for violations of FERC-approved regulations. The FERC can impose penalties of up to $1,000,000 per day per violation. The FERC has jurisdiction over the Utility's electricity transmission revenue requirements and rates, the licensing of substantially all of the Utility's hydroelectric generation facilities, and the interstate sale and transportation of natural gas.

Electric Reliability Standards; Development of Transmission Grid. As part of its directive to oversee the development of mandatory electric reliability standards to protect the national bulk power system, the FERC certified the North American Electric Reliability Corp., or the NERC, as the nation’s Electric Reliability Organization under the EPAct. The NERC is responsible for developing and enforcing electric reliability standards, subject to FERC review. All proposed reliability standards must be submitted by the NERC to the FERC for its approval. The NERC has requested the FERC to approve a delegation agreement to permit the NERC to delegate its enforcement authority for a geographic area known as the Western Interconnection to the Western Electricity Coordinating Council. Failure of the Utility to comply with FERC-approved electric reliability standards may subject the Utility to penalties. In addition, the CAISO is responsible for providing open access electricity transmission service on a non-discriminatory basis, planning transmission system additions and assuring the maintenance of adequate reserves of generation capacity.

The FERC also has issued a rule on electric transmission pricing reforms designed to promote needed investment in energy infrastructure and to reduce transmission congestion. In addition, the FERC issued a rule to require transmission organizations with organized electricity markets to make available to load-serving entities long-term firm transmission rights so these entities can enter into long-term transmission service arrangements without being exposed to unhedged congestion cost risk.

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Prevention of Market Manipulation. The EPAct also gave the FERC broader authority to police and penalize the exercise of market power or behavior intended to manipulate the prices paid in FERC-jurisdictional transactions. In January 2006, the FERC adopted rules to prohibit market manipulation, modeling its new rules on SEC Rule 10b-5, which prohibits fraud and manipulation in the purchase or sale of securities. Under the FERC's new regulations, it is unlawful for any entity, directly or indirectly, in connection with the purchase or sale of natural gas, electric energy, or transportation/transmission services subject to the jurisdiction of the FERC: (1) to use or employ any device, scheme or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon any person.

Several parties, including the Utility and the State of California, are seeking refunds on behalf of California electricity purchasers from electricity suppliers, including municipal and governmental entities, for overcharges incurred in the CAISO and California Power Exchange, or PX, wholesale electricity markets between May 2000 and June 2001 through various proceedings pending at the FERC and other judicial proceedings. Many issues raised in these proceedings, including the extent of the FERC’s refund authority, and the amount of potential refunds after taking into account certain costs incurred by the electricity suppliers, have not been resolved. It is uncertain when these proceedings will be concluded.

The Utility has entered into settlements with various electricity suppliers resolving certain disputed claims and the Utility's refund claims against these power suppliers. The Utility continues to pursue additional refunds through settlement discussions with other electricity suppliers. Future amounts received under these settlements, and any future settlements with electricity suppliers, will be credited to customers after deductions for contingencies and amounts related to certain wholesale power purchases. For further discussion, see the section of Note 17: Commitments and Contingencies - California Energy Crisis Proceedings, of the Notes to the Consolidated Financial Statements in the 2006 Annual Report.

QF Regulation. Under PURPA, electric utilities were required to purchase energy and capacity from independent power producers that are qualifying cogeneration facilities, or QFs. To implement the purchase requirements of PURPA, the CPUC required California investor-owned electric utilities to enter into long-term power purchase agreements with QFs and approved the applicable terms, conditions, prices and eligibility requirements. The EPAct significantly amended the purchase requirements of PURPA. As amended, Section 210(m) of PURPA authorizes the FERC to waive the obligation of an electric utility under Section 210 of PURPA to purchase the electricity offered to it by a QF (under a new contract or obligation) if the FERC finds that the QF has nondiscriminatory access to one of three defined categories of competitive wholesale electricity markets. The statute permits such waivers as to a particular QF or on a “service territory-wide basis.” The Utility plans to wait until after the new day-ahead market structure provided for in the CAISO’s Market Redesign and Technology Update, or MRTU, initiative to restructure the California electricity market becomes effective to assess whether it will file a request with the FERC to terminate its obligations under PURPA to enter into new QF purchase obligations.

The NRC

The Nuclear Regulatory Commission, or the NRC, oversees the licensing, construction, operation and decommissioning of nuclear facilities, including the two nuclear generating units at Diablo Canyon and the Utility’s retired nuclear generating unit at Humboldt Bay, or Humboldt Bay Unit 3. NRC regulations require extensive monitoring and review of the safety, radiological, environmental and security aspects of these facilities. In the event of non-compliance, the NRC has the authority to impose fines or to force a shutdown of a nuclear plant, or both. NRC safety and security requirements have, in the past, necessitated substantial capital expenditures at Diablo Canyon, and additional significant capital expenditures could be required in the future.

The NRC operating license for Diablo Canyon Unit 1 expires in November 2024 and the NRC operating license for Diablo Canyon Unit 2 expires in August 2025. Under the terms of these licenses, there must be sufficient storage capacity for the radioactive spent fuel produced by this plant. For a discussion of the Utility’s spent fuel storage project, see “Environmental Matters - Nuclear Fuel Disposal,” below.

State Energy Regulation

California Legislature

The Utility's operations have been significantly affected by various statutes passed by the California legislature, including:

·   Assembly Bill 1890. Assembly Bill 1890, enacted in 1996, mandated the restructuring of the California electricity industry, commencing in 1998 with the implementation of a market framework for electricity generation in which generators and other energy providers were permitted to charge market-based rates for wholesale electricity and the investor-owned utilities’ customers were given the choice to become “direct access” customers by buying energy from an alternate service provider other than the regulated utilities. Among other provisions, Assembly Bill 1890 provided for the establishment of the CAISO, as a nonprofit public benefit corporation, to operate and control the state-wide electricity transmission grid and ensure efficient use and reliable operation of the transmission grid.

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·   Assembly Bill 1X. Assembly Bill 1X, enacted during the California 2000-2001 energy crisis, authorized the California Department of Water Resources, or the DWR, beginning on February 1, 2001, to purchase electricity and sell that electricity directly to the investor-owned electric utilities' retail customers. Assembly Bill 1X required the California investor-owned electric utilities to deliver electricity purchased by the DWR under long-term contracts and to act as the DWR's billing and collection agent.

·   Assembly Bill 57. Assembly Bill 57, enacted in September 2002 and amended by Senate Bill 1976, required the California investor-owned utilities to resume purchasing power on January 1, 2003, required the CPUC to allocate electricity to be provided under the DWR contracts among the customers of the California investor-owned electric utilities, requires the utilities to file short- and long-term electricity resource procurement plans with the CPUC for approval, and authorizes the utilities to recover their reasonable wholesale procurement costs incurred under a CPUC-approved procurement plan through the establishment of new electricity procurement balancing accounts to allow timely recovery by the utilities of differences between recorded revenues and costs incurred under the approved procurement plans.

·   Senate Bill 1078. Senate Bill 1078, enacted in September 2002 (as amended by SB 107 enacted in September 2006 and effective on January 1, 2007) established the Renewables Portfolio Standard Program, which requires each California retail seller of electricity, except municipal utilities, to increase its purchases of eligible renewable energy (such as biomass, small hydro, wind, solar and geothermal energy) by at least 1% of its retail sales per year, the annual procurement target, so that the amount of electricity purchased from eligible renewable resources equals at least 20% of its total retail sales by 2010.  

·   Assembly Bill 380. Assembly Bill 380, enacted in September 2005, requires the CPUC in consultation with the CAISO, to establish resource adequacy requirements for all load-serving entities, including the California investor-owned electric utilities but excluding local publicly owned electric utilities. Assembly Bill 380 requires each load-serving entity to maintain physical generating capacity adequate to meet its load requirements, including, but not limited to, peak demand and planning and operating reserves, deliverable to locations and at times as may be necessary to provide reliable electric service.

·   Assembly Bill 32. Assembly Bill 32, enacted in September 2006 to address climate change, requires the California Air Resources Board, or the CARB, to adopt regulations to limit statewide greenhouse gas emissions, to 1990 levels by 2020. (See “Environmental Matters” below for more information.)

·   Senate Bill 1368. Senate Bill 1368, also enacted in September 2006, prohibits any load-serving entity, including investor-owned electric utilities, from entering into a long-term financial commitment for baseload generation (i.e., electricity generation from a power plant that is designed and intended to provide electricity at an annualized plant capacity factor of at least 60%) unless it complies with a greenhouse gas emission performance standard. (See “Environmental Matters” below for more information.)

The CPUC

The CPUC has jurisdiction to set the rates, terms and conditions of service for the Utility's electricity distribution, electricity generation, natural gas distribution, and natural gas transportation and storage services in California. The CPUC also has jurisdiction over the Utility's issuances of securities, dispositions of utility assets and facilities, energy purchases on behalf of the Utility's electricity and natural gas retail customers, rate of return, rates of depreciation, aspects of the siting and operation of natural gas transportation assets, oversight of nuclear decommissioning and aspects of the siting of the electricity transmission system. Ratemaking for retail sales from the Utility's generation facilities is under the jurisdiction of the CPUC. To the extent that this electricity is sold for resale into wholesale markets, however, it is under the ratemaking jurisdiction of the FERC. In addition, the CPUC has general jurisdiction over most of the Utility’s operations, and regularly reviews utility performance, using measures such as the frequency and duration of outages. The CPUC also conducts investigations into various matters, such as deregulation, competition and the environment, in order to determine its future policies. The CPUC consists of five members appointed by the Governor of California and confirmed by the California State Senate for staggered six-year terms.

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PG&E Corporation and the Utility entered into a settlement agreement with the CPUC on December 19, 2003 to resolve the Utility's proceeding filed under Chapter 11 of the U.S. Bankruptcy Code that had been pending in the U.S. Bankruptcy Court for the Northern District of California, or the Bankruptcy Court, since April 2001, referred to as the Chapter 11 Settlement Agreement. The nine-year Chapter 11 Settlement Agreement established certain regulatory assets and addressed various ratemaking matters in order to restore the Utility’s financial health and enable it to emerge from Chapter 11 and fully resume its traditional role of providing safe and reliable electric and gas service at just and reasonable rates, subject to CPUC regulation. The terms of the Chapter 11 Settlement Agreement were incorporated into the Utility’s plan of reorganization under Chapter 11 which became effective on April 12, 2004. Although the Utility's operations are no longer subject to the oversight of the Bankruptcy Court, the Bankruptcy Court retains jurisdiction to hear and determine disputes arising in connection with the interpretation, implementation or enforcement of the Chapter 11 Settlement Agreement, in addition to other matters. (For more information, see Note 15 of the Notes to the Consolidated Financial Statements included in the 2006 Annual Report.)

The California Energy Resources Conservation and Development Commission

The California Energy Resources Conservation and Development Commission, commonly called the California Energy

Commission, or the CEC, is the state's primary energy policy and planning agency. The CEC is responsible for licensing of all thermal power plants over 50 MW, overseeing funding programs that support public interest energy research, advancing energy science and technology through research, development and demonstration, and providing market support to existing, new and emerging renewable technologies. In addition, the CEC is responsible for forecasting future energy needs used by the CPUC in determining the adequacy of the utilities' electricity procurement plans.

Other Regulation

The Utility obtains permits, authorizations and licenses in connection with the construction and operation of the Utility's generation facilities, electricity transmission lines, natural gas transportation pipelines and gas compressor station facilities. Discharge permits, various Air Pollution Control District permits, U.S. Department of Agriculture-Forest Service permits, FERC hydroelectric generation facility and transmission line licenses, and NRC licenses are some of the more significant examples. Some licenses and permits may be revoked or modified by the granting agency if facts develop or events occur that differ significantly from the facts and projections assumed in granting the approval. Furthermore, discharge permits and other approvals and licenses are granted for a term less than the expected life of the associated facility. Licenses and permits may require periodic renewal, which may result in additional requirements being imposed by the granting agency. (For more information see “Environmental Matters - Water Quality” below.)

The Utility has over 520 franchise agreements with various cities and counties that permit the Utility to install, operate and maintain the Utility's electric, natural gas, oil and water facilities in the public streets and roads. In exchange for the right to use public streets and roads, the Utility pays annual fees to the cities and counties. Franchise fees are computed pursuant to statute under either the Broughton Act or the Franchise Act of 1937. However, there are 38 charter cities that can set fees of their own determination. The Utility also periodically obtains permits, authorizations and licenses in connection with distribution of electricity and natural gas. Under these permits, authorizations and licenses, the Utility has rights to occupy and/or use public property for the operation of the Utility's business and to conduct certain related operations.

Competition

Historically, energy utilities operated as regulated monopolies within service territories where they were essentially the sole suppliers of natural gas and electricity services. These utilities owned and operated all of the businesses and facilities necessary to generate, transport and distribute energy. Services were priced on a combined, or bundled, basis with rates charged by the energy companies designed to include all the costs of providing these services. Under traditional cost-of-service regulation, the utilities undertook a continuing obligation to serve their customers, in return for which the utilities were authorized to charge regulated rates sufficient to recover their costs of service, including timely recovery of their operating expenses and a reasonable return on their invested capital. The objective of this regulatory policy was to provide universal access to safe and reliable utility services. Regulation was designed in part to take the place of competition and ensure that these services were provided at fair prices.

In recent years, energy utilities have faced intensifying pressures to unbundle, or price separately, those services that are no longer considered natural monopolies. The most significant of these services are the commodity components—the supply of electricity and natural gas. The driving forces behind these competitive pressures have been customers who believe that they can obtain energy at lower unit prices and competitors who want access to those customers. Regulators and legislators responded to these forces by providing for more competition in the energy industry. Regulators and legislators, to varying degrees, have required utilities to unbundle rates in order to allow customers to compare unit prices of the utilities and other providers when selecting their energy service provider.

Competition in the Electricity Industry

Federal. At the federal level, many provisions of the EPAct support the development of competition in the wholesale electric market. The EPAct has directed the FERC to develop rules to encourage fair and efficient competitive markets by employing best practices in market rules and reducing barriers to trade between markets and among regions. The EPAct also gives the FERC authority to prevent accumulation and exercise of market power by assuring that proposed mergers and acquisitions of public utility companies and their holding companies are in the public interest and by addressing market power in jurisdictional wholesale markets through its new powers to establish and enforce rules prohibiting market manipulation.

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Even before the passage of the EPAct, the FERC's policies supported the development of a competitive electricity generation industry. FERC Order 888, issued in 1996, established standard terms and conditions for parties seeking access to regulated utilities' transmission grids. Order 888 requires all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to have on file open access non-discriminatory transmission tariffs, or OATT, that contain minimum terms and conditions of non-discriminatory service. The FERC's subsequent Order 2000, issued in late 1999, established national standards for regional transmission organizations, and advanced the view that a regulated, unbundled transmission sector should facilitate competition in both wholesale electricity generation and retail electricity markets. On February 16, 2007, the FERC issued Order 890 that is designed to (1) strengthen the form of OATT adopted in Order 888 to ensure that it achieves its original purpose of remedying undue discrimination; (2) provide greater specificity in the form of OATT to reduce opportunities for undue discrimination and facilitate the FERC’s enforcement; and (3) increase transparency in the rules applicable to planning and use of the transmission system.

The FERC also has issued rules on the interconnection of generators larger than 20 MW with a transmission system to require regulated transmission providers, such as the Utility or the CAISO, to use standard interconnection procedures and a standard agreement for generator interconnections. These rules are intended to limit opportunities for transmission providers to favor their own generation, facilitate market entry for generation competitors by streamlining and standardizing interconnection procedures, and encourage needed investment in generation and transmission. Under the rules and associated tariffs, a new generator is required to pay for the transmission system upgrades needed in order to interconnect the generator. The generator will be reimbursed over a five-year period after the power plant achieves commercial operation. The cost of the network upgrades then is recovered by the regulated transmission provider in its overall transmission rates.

State. At the state level, Assembly Bill 1890, enacted in 1996, mandated the restructuring of the California electricity industry commencing in 1998. Assembly Bill 1890 established a market framework for electricity generation in which generators and other electricity providers were permitted to charge market-based prices for wholesale electricity through transactions conducted on the PX. As a result of the California 2000-2001 energy crisis, the PX filed a petition for bankruptcy protection and now operates solely to reconcile remaining refund amounts owed and make compliance filings as required by the FERC in the California refund proceeding still pending at the FERC. Established pursuant to AB 1890 to take control of the California investor-owned electric transmission facilities in California, the CAISO currently administers a real-time or “spot” wholesale market for the sale of electric energy. The market is used to allocate space on the transmission lines, maintain operating reserves and match supply with demand in real time. In September 2006, the FERC approved the CAISO’s proposal to establish its MRTU initiative to restructure the California electricity market and to enhance power grid reliability. The FERC directed the CAISO to make certain changes to the MRTU proposal, including a requirement to comply with the FERC’s new rule that regional transmission organizations provide long-term transmission rights to users of the transmission grid. The MRTU tariffs, currently estimated to become effective on January 31, 2008, will apply to all load-serving entities, including the investor-owned utilities, serving California consumers.

Assembly Bill 1890 also permitted retail end-use customers to choose their energy service provider by becoming a direct access customer. To ensure that the DWR recovers its costs to procure electricity, Assembly Bill 1X required the CPUC to suspend the right of retail end-user customers to become direct access customers until the DWR no longer procures electricity on behalf of the customers of the California investor-owned electric utilities. The CPUC suspended direct access on September 20, 2001. The CPUC has assessed an additional charge on certain direct access customers to avoid a shift of costs from direct access customers to customers who receive bundled service. The CPUC has been asked to open a proceeding to determine whether to re-establish direct access by January 1, 2008. Although the Utility supports the ability of customers to choose their energy provider, the Utility believes there are a number of important policy and implementation questions that must be addressed before re-establishing direct access in order to ensure that all customers are treated equitably, with no undue cost responsibility burdens or risks being placed either on any one customer group or on the utilities.

The Utility’s customers may also obtain power from a “community choice aggregator” instead of obtaining power from the Utility. California Assembly Bill 117, enacted in 2002, permits cities and counties to purchase and sell electricity for their local residents and businesses once they have registered as community choice aggregators. Under Assembly Bill 117, the Utility would continue to provide distribution, metering and billing services to the community choice aggregators' customers and would be those customers' provider of electricity of last resort. However, once registration has occurred, each community choice aggregator would procure electricity for all of its residents who do not affirmatively elect to continue to receive electricity from the Utility. The CPUC has adopted rules to implement community choice aggregation, including the imposition of a surcharge on retail end-users of the community choice aggregator to prevent a shifting of costs to customers of a utility who receive bundled services. Assembly Bill 117 also authorized the Utility to recover from each community choice aggregator any costs of implementing the program that are reasonably attributable to the community choice aggregator, and to recover from customers any costs of implementing the program not reasonably attributable to a community choice aggregator.

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Competition in the Natural Gas Industry

FERC Order 636, issued in 1992, required interstate natural gas pipeline companies to divide their services into separate gas commodity sales, transportation and storage services. Under Order 636, interstate natural gas pipeline companies must provide transportation service whether or not the customer (often a local gas distribution company) buys the natural gas commodity from these companies. The Utility’s natural gas pipelines are located within the State of California and are exempt from FERC rules and regulations applicable to interstate pipelines. Instead, the Utility’s pipeline operations are subject to the jurisdiction of the CPUC.

                 The Utility’s gas transmission and storage system has operated under the CPUC-approved “Gas Accord” market structure since 1998. This market structure largely mimics the regulatory framework required by FERC for interstate gas pipelines. The original Gas Accord, approved by the CPUC in 1998, is a CPUC-approved settlement agreement reached among the Utility and many interested parties, under which the natural gas transportation and storage services that the Utility provides were separated for ratemaking purposes from the Utility's distribution services. The Gas Accord changed the terms of service and rate structure for natural gas transportation, allowing the Utility's core customers (i.e., residential and small commercial customers) greater flexibility to purchase natural gas from competing suppliers. The Utility's noncore customers (i.e., industrial, larger commercial and electric generation customers) purchase their natural gas from producers, marketers and brokers, and purchase their preferred mix of transportation, storage and distribution services from the Utility. Although they can select the gas suppliers of their choice, substantially all core customers buy natural gas, as well as transportation and distribution services, from the Utility as a bundled service.

Under the Gas Accord structure noncore customers have access to capacity rights for firm service, as well as interruptible (or “as-available”) services. All services are offered on a nondiscriminatory basis to any creditworthy customer. The Gas Accord market structure has resulted in a robust wholesale gas commodity market at the Utility’s “citygate,” which refers to the interconnection between the big “backbone” gas transmission system and the smaller, downstream local transmission systems.

In December 2004, the CPUC approved the Gas Accord III which retained the Gas Accord market structure and resolved the rates, terms and conditions of service for the Utility’s natural gas and transportation system through 2007. The Utility is obligated to file a new rate case proposing gas transmission and storage rates and terms and conditions of service, for the period commencing January 1, 2008.  The Utility currently is scheduled to submit that filing on March 15, 2007.  In the event the CPUC does not issue a final decision approving new rates effective January 1, 2008, the Gas Accord III provides that the rates and terms and conditions of service in effect as of December 31, 2007, will remain in effect, with an automatic 2 percent escalation in the rates as of January 1, 2008.

The Utility competes with other natural gas pipeline companies for customers transporting natural gas into the southern California market on the basis of transportation rates, access to competitively priced supplies of natural gas, and the quality and reliability of transportation services. The most important competitive factor affecting the Utility's market share for transportationof natural gas to the southern California market is the total delivered cost of western Canadian natural gas relative to the total delivered cost of natural gas from the southwestern United States. The total delivered cost of natural gas includes, in addition to the commodity cost, transportation costs on all pipelines that are used to deliver the natural gas, which, in the Utility's case, includes the cost of transportation of the natural gas from Canada to the California border and the amount that the Utility charges for transportation from the border to southern California. In general, when the total cost of western Canadian natural gas increases relative to other competing natural gas sources, the Utility's market share of transportation services into southern California decreases. The Utility also competes for storage services with other third-party storage providers, primarily in northern California.

PG&E Corporation, through its subsidiary, PG&E Strategic Capital, Inc., along with Fort Chicago Energy Partners, L.P. and Northwest Pipeline Corporation, have agreed to jointly pursue the development of a new 232-mile interstate gas transmission pipeline that would increase natural gas supplies for the entire West Coast region of the United States. The proposed Pacific Connector Gas Pipeline, together with the Jordan Cove liquefied natural gas, or LNG, terminal in Coos Bay, Oregon, being developed by Fort Chicago Partners, L.P., would open growing West Coast natural gas markets to diverse worldwide natural gas supply sources, providing additional alternatives to traditional Canadian, Southwest and Rocky Mountain supplies and increasing supply options and reliability. The proposed Pacific Connector Gas Pipeline would connect the proposed Jordan Cove LNG terminal to Northwest Pipeline Corporation’s pipeline system in Oregon, and to the Utility's backbone gas transmission system near Malin, Oregon. Other potential interconnects include Tuscarora Gas Transmission Company’s pipeline system which serves northern Nevada. The proposed Pacific Connector Gas Pipeline would be capable of delivering 1 bcf per day to the West Coast natural gas market, to customers in the Pacific Northwest through Northwest Pipeline Corporation's pipeline system, to the Utility's system for delivery to customers in California, and to customers in northern Nevada through Tuscarora Gas Transmission Company’s pipeline system. On May 1, 2006, the FERC approved a request to begin the environmental assessment process for the Pacific Connector Gas Pipeline under the National Environmental Policy Act. The public will have an opportunity to participate in this process.  The full application to request the FERC’s authorization to construct the Pacific Connector Gas Pipeline is scheduled to be submitted to the FERC in April 2007. The development and construction of the Pacific Connector Gas Pipeline depends upon the construction of the proposed LNG terminal at Jordan Cove by Fort Chicago Partners, L.P. PG&E Corporation cannot predict whether Fort Chicago Partners, L.P. will be successful in completing the development and construction of its proposed LNG terminal.  In addition, the development and construction of the proposed LNG terminal and the proposed Pacific Connector Gas Pipeline are subject to obtaining required permits, regulatory approvals, and commitments under long-term transportation contracts. Assuming the required permits, authorizations, and long-term transportation commitments are timely received and that other conditions are timely satisfied, it is anticipated that the proposed LNG terminal and the proposed Pacific Connector Gas Pipeline would begin commercial operation in 2011.

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Ratemaking Mechanisms

Cost-of-Service Ratemaking

The Utility’s rates for electricity and natural gas utility services are based on its costs of service. Before rates can be set, the CPUC and the FERC must determine the amount of “revenue requirements” that the Utility can collect from its customers. The CPUC determines the Utility’s revenue requirements associated with electricity and gas distribution operations, electricity generation, and natural gas transportation and storage. The FERC determines the Utility’s revenue requirements associated with its electricity transmission operations.

Revenue requirements are designed to allow a utility an opportunity to recover its reasonable operating and capital costs of providing utility services, including a return of, and a fair rate of return on, its investment in utility facilities, or rate base. Revenuerequirements are primarily determined based on the Utility’s forecast of future costs, including the costs of purchasing electricity and natural gas for the Utility's customers. The components of revenue requirements for electricity and natural gas utility service include depreciation, operating, administrative and general expenses, taxes and return on investment, as applicable, for each area of these services, including distribution, transmission, transportation, generation, procurement and public purpose programs.

The Utility’s regulatory balancing accounts are used as a mechanism for the Utility to recover amounts incurred for certain costs, primarily commodity costs. Sales balancing accounts accumulate differences between revenues and the Utility's authorized revenue requirements. Cost balancing accounts accumulate differences between incurred costs and authorized revenue requirements. The Utility also obtained CPUC approval for balancing account treatment of variances between forecasted and actual commodity costs and volumes. To the extent that the Utility is unable to recover its costs through rates because the Utility’s actual costs are determined to be unreasonable or are higher than forecast, the Utility may be unable to earn its authorized rate of return.

The amount of authorized revenue requirements are allocated among customer classes (mainly residential, commercial, industrial and agricultural) and specific rates are established to produce the required revenue. The Utility's rates reflect the sum of individual revenue requirement components authorized by the CPUC and the FERC. Changes in any individual revenue requirement affect customers' rates and could affect the Utility's revenues. The timing of the CPUC and other regulatory decisions affect when the Utility is able to record the authorized revenues. In annual true-up proceedings, the Utility requests the CPUC to authorize an adjustment to electric and gas rates effective to (1) reflect over- and under-collections in the Utility's major electric and gas balancing accounts, and (2) implement various other electricity and gas revenue requirement changes authorized by the CPUC or the FERC. Generally, rate changes become effective on the first day of the following year. Balances in all CPUC-authorized accounts are subject to review, verification audit and adjustment, if necessary, by the CPUC.

Electricity and Natural Gas Distribution and Electricity Generation Operations

General Rate Cases

The General Rate Case, or GRC, is the primary proceeding in which the CPUC determines the amount of revenue requirements that the Utility is authorized to collect from customers to recover the Utility’s basic business and operational costs related to its electricity and natural gas distribution and electricity generation operations. The CPUC generally conducts a GRC every three years. The CPUC sets revenue requirement levels for a three-year rate period based on a forecast of costs for the first, or test, year. Typical interveners in the Utility's GRC include the CPUC’s Division of Ratepayer Advocates, or the DRA, and The Utility Reform Network, or TURN. On August 21, 2006, the Utility, together with the DRA and other parties, filed a motion with the CPUC seeking approval of a settlement agreement reached among the parties to resolve all of the issues raised by these parties and all revenue requirement-related issues raised by other parties in the Utility’s 2007 GRC proceeding. The settlement agreement proposes to set the Utility’s revenue requirements for a four-year period, 2007-2010, rather than for a typical three-year period. Under this proposal, the Utility’s next GRC would be effective January 1, 2011. On February 13, 2007, the administrative law judge overseeing the GRC issued a proposed decision that recommends modifications to the settlement agreement. On the same day, an alternate proposed decision was issued by the assigned CPUC Commissioner in the GRC that recommends that the settlement agreement be approved. For more information, see “Regulatory Matters - 2007 General Rate Case” in the MD&A in the 2006 Annual Report.

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Attrition Rate Adjustments

The CPUC may authorize the Utility to receive annual increases for the years between GRCs in the base revenues authorized for the test year of a GRC in order to avoid a reduction in earnings in those years due to, among other things, inflation and increases in invested capital. These adjustments are known as attrition rate adjustments. Attrition rate adjustments provide increases in the revenue requirements that the Utility is authorized to collect in rates for electricity and natural gas distribution and electricity generation operations. The proposed settlement agreement in the Utility’s 2007 GRC includes a provision for attrition adjustments to be made in 2008, 2009 and 2010.

Cost of Capital Proceedings

The CPUC generally conducts an annual cost of capital proceeding to determine the Utility's authorized capital structure and the authorized rate of return that the Utility may earn on its electricity and natural gas distribution and electricity generation assets. The cost of capital proceeding establishes the relative weightings of common equity, preferred equity and debt in the Utility's total authorized capital structure for a specific year. The CPUC then establishes the authorized return on each component that the Utility will collect in its authorized rates. The Chapter 11 Settlement Agreement requires the CPUC to authorize a minimum return on equity for the Utility of 11.22% until the Utility receives a credit rating of “A3” from Moody’s Investor Services or “A-” from Standard & Poor’s Rating Services. The Utility’s CPUC-authorized capital structure for 2006 and 2007 consists of 46% long-term debt, 2% preferred stock and 52% equity. The Utility’s CPUC-authorized rate of return that the Utility may earn on its electricity and natural gas distribution and electricity generation rate base for 2006 and 2007 is 6.02% for long-term debt, 5.87% for preferred stock and 11.35% for equity, resulting in an overall rate of return on rate base of 8.79%. The CPUC will next re-evaluate the level of the Utility’s authorized return on equity and capital structure for the calendar year 2008. The Utility is required to file its 2008 cost of capital application by May 8, 2007.

Although the FERC has authority to set the Utility’s rate of return for its electricity transmission operations, the rate of return is often unspecified if the Utility's transmission rates are determined through a negotiated rate settlement. The Utility’s rates of return for its backbone and local gas transmission and storage operations through 2007 have been previously set in the Gas Accord, described below, at 11.22% for the return on equity and 8.77% for the overall rate of return.

Baseline Allowance

The CPUC sets and periodically revises a baseline allowance for the Utility's residential gas and electricity customers. A customer's baseline allowance is the amount of its monthly usage that is covered under the lowest possible natural gas or electric rate. Natural gas or electricity usage in excess of the baseline allowance is covered by higher rates that increase with usage.

Public Purpose and Other Programs

The Utility administers, and/or funds, several state-mandated and CPUC-authorized public purpose and other programs. California law requires the CPUC to authorize certain levels of funding for electric and gas public purpose programs related to energy efficiency, low-income energy efficiency, research and development, and renewable energy resources. In addition, California law requires the CPUC to authorize funding for the California Solar Initiative discussed below, and other self-generation programs. In addition, the CPUC has authorized additional funding for energy efficiency and demand response programs. For 2006 expenditures, the CPUC has authorized the Utility to collect revenue requirements of approximately $583 million from electricity customers to fund these electricity public purpose and other programs and to collect revenue requirements of approximately $99 million from gas customers to fund these natural gas public purpose programs. The CPUC is responsible for authorizing the programs, funding levels and cost recovery mechanisms for the Utility's operation of both energy efficiency and low-income energy efficiency programs. The CEC administers both the electric public interest research and development program and the renewable energy program on a statewide basis. In 2006, the Utility transferred $109 million to the CEC for these programs. These programs include:

·   Energy Efficiency Programs. The CPUC has authorized 2006 through 2008 energy efficiency portfolio plans and program funding levels, not including funding for evaluation, measurement and verification, or EM&V activities for the Utility and the other investor-owned California utilities. The CPUC approved funding of approximately $867 million for the Utility's energy efficiency programs over the 2006 through 2008 period, 20% of which is to be awarded to third parties through a competitive bid process. The CPUC also has authorized funding for EM&V activities of approximately $75 million for the Utility over the 2006 through 2008 period. The increased energy efficiency funding level is part of a larger effort by the State of California to reduce consumption of fossil fuels. The increased funding level will enable both residential and business customers to take more advantage of the diverse mix of energy efficiency programs.

·   Demand Response Programs. Demand response programs provide financial incentives and other benefits to participating customers to curtail on-peak energy use. In March 2006, the CPUC authorized 2006 through 2008 demand response programs and funding levels for the Utility and other investor-owned California utilities. The CPUC approved funding of approximately $109 million for the Utility’s demand response programs over the 2006 through 2008 period, which include some demand response programs that will be provided by third parties. In November 2006, the CPUC approved augmented demand response programs for the Utility and other investor-owned California utilities in order to promote system reliability during the summer peak demand periods of 2007 and 2008. These augmented programs were approved within the existing authorized budget. Programs requiring additional funding beyond the already authorized level will require further regulatory authorization. On February 15, 2007, the CPUC approved the Utility’s proposal to start a limited deployment of an airconditioning load control program that is expected to yield 5 MW of load relief for summer 2007. In early spring 2007, the Utility anticipates requesting that the CPUC approve an expanded air conditioning load control program that is expected to yield approximately 300 MW of additional load relief by the end of 2010. These increased demand response programs are part of an effort by the state of California to promote demand reduction through price-responsive programs and reliability-triggered programs.

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·   Self-Generation Incentive and California Solar Initiative. The Utility administers the self-generation incentive program authorized by the CPUC to provide incentives to electricity customers who install clean or renewable distributed generation resources that meets all or a portion of their onsite energy usage. The CPUC also authorized the California investor-owned utilities to collect an additional $2.1 billion over the 2007 through 2016 period from their customers to fund customer incentives for the installation of retail solar energy projects to serve onsite load. The goal of this program, called the California Solar Initiative, or the CSI, is to bring 1,940 MW of solar power on-line by 2017 through the California investor-owned utilities. Of the total amount authorized, the Utility has been allocated $946 million to fund customer incentives, research, development and demonstration activities (with an emphasis on the demonstration of solar and solar-related technologies), and administration expenses. California Senate Bill 1, enacted in August 2006, modified the CSI program to include participation of the California municipal utilities. The overall goal of the CSI is to install 3,000 MW (through both investor-owned electric utilities and electric municipal utilities) through 2017.

·   Low-Income Energy Efficiency Programs and California Alternate Rates for Energy. The CPUC has approved funding of $78 million in each of 2007 and 2008 to support energy efficiency programs for low-income and fixed-income customers. The Utility also provides a discount rate called the California Alternate Rates for Energy, or CARE, for low-income customers. This rate subsidy is paid for by the Utility's other customers. For 2006, the amount of this subsidy was approximately $458 million (including avoided surcharges).

Climate Protection Tariff

In December 2006, the CPUC approved the Utility’s proposal to allow customers to choose to neutralize greenhouse gas emissions associated with their energy use. Beginning in 2007, customers who choose to enroll in the program will pay a small premium on their monthly utility bill, based on their energy usage, to fund environmental projects aimed at removing carbon dioxide and other greenhouse gases from the air. The Utility estimates that this program will generate approximately $20 million during its first three years to fund these greenhouse gas reduction projects, which will initially be focused on forest restoration and conservation projects in California. The Utility would select projects to fund through a competitive bidding process using stringent criteria and protocols developed by an independent non-profit organization, the California Climate Action Registry. Project types are expected to expand beyond forestry, such as potentially to dairy biogas methane reduction projects, as more certification protocols become available. The greenhouse gas reduction projects will be overseen by an external advisory group consisting of a wide range of community groups, businesses and non-profit conservation agencies. The program will be reviewed by independent auditors and the Utility will regularly report program results to the CPUC, as well as to all participating customers.

Rate Recovery of Costs of New Electricity Generation Resources

Overview

Each California investor-owned electric utility is responsible to procure electricity to meet customer demand, plus applicable reserve margins, not satisfied from that utility's own generation facilities and existing electricity contracts (including DWR allocated contracts). Each utility must submit a long-term procurement plan covering a ten-year period to the CPUC for approval. California legislation, Assembly Bill 57, allows the California investor-owned utilities to recover their wholesale electricity procurement costs incurred in compliance with their CPUC-approved procurement plans. After CPUC approval of the procurement plans, the utilities may, if appropriate, conduct a competitive request for offers, or RFO, from providers of all potential sources of new generation (e.g., conventional or renewable resources to be provided under turnkey developments, buyouts or power purchase agreements) to meet the utility’s projected need for electricity resources. Agreements entered into after the conclusion of the competitive bidding process are submitted to the CPUC for approval, along with a request for the CPUC to authorize revenue requirements to recover the costs associated with that contract. If necessary, the utilities conduct separate competitive solicitations to meet their resource adequacy and renewable energy resource requirements. The utilities submit the contracts after the conclusion of these solicitations to the CPUC for approval and authorization of the associated revenue requirements.

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The Utility recovers its electricity procurement costs and the fuel costs for the Utility’s own generation facilities (but excluding the costs of electricity allocated to the Utility under DWR contracts) through the Energy Resource Recovery Account, or the ERRA, a balancing account authorized by the CPUC in accordance with Assembly Bill 57. The ERRA tracks the difference between the authorized revenue requirement and actual costs incurred under the Utility's authorized procurement plans and contracts. To determine the authorized revenue requirement recorded in the ERRA, each year the CPUC reviews the Utility’s forecasted costs under power purchase agreements and fuel costs. Although California legislation requiring the CPUC to adjust a utility’s retail electricity rates when the forecast aggregate over-collections or under-collections in the ERRA exceed 5% of a utility's prior year electricity procurement revenues (excluding amounts collected for the DWR contracts) expired on January 1, 2006, the CPUC has extended this mandatory rate adjustment mechanism for the length of a utility’s resource commitment or 10 years, whichever is longer. The CPUC also performs periodic compliance reviews of the procurement activities recorded in the ERRA to ensure that the Utility’s procurement activities are in compliance with its approved procurement plans. The Chapter 11 Settlement Agreement also provides that the Utility will recover its reasonable costs of providing utility service, including power procurement costs.

The authorized revenue requirements for capital costs and non-fuel operating and maintenance costs for Utility-owned generation are addressed in the Utility’s GRC. The revenue requirement to recover the initial capital costs for CPUC-approved utility owned generation projects will be recovered through a balancing account, the Utility Generation Balancing Account, or the UGBA, which will track the difference between the CPUC-approved forecast of initial capital costs, adjusted from time to time as permitted by the CPUC, and actual costs. The initial revenue requirement for the utility-owned projects generally would begin to accrue in the UGBA as of the new facility’s commercial operation date or the date a completed facility is transferred to the Utility, and would be included in rates on January 1 of the following year.

Costs Incurred Under New Power Purchase Agreements

During 2006, the CPUC approved several power purchase agreements with third parties in accordance with the Utility’s CPUC-approved long-term procurement plan and to meet renewable energy and resource adequacy requirements. The CPUC also authorized the Utility to recover fixed and variable costs associated with these contracts through the ERRA.

For new non-renewable generation purchased from third parties under power purchase agreements, the utilities may elect to recover any above-market costs through either (1) the imposition of a non-bypassable charge imposed on bundled and departing customers only or (2) the allocation of the “net capacity costs” (i.e., contract price less energy revenues) to all “benefiting customers” in the utilities’ service territory, including direct access customers and community choice aggregation customers. (For information about the status of direct access and community choice aggregation, see the section above entitled “Competition  - Competition in the Electricity Industry.”) The non-bypassable charge can be imposed from the date of signing a power purchase agreement and last for 10 years from the date the new generation unit comes on line or for the term of the contract, whichever is less. Utilities are allowed to justify a cost recovery period longer than 10 years on a case-by-case basis.

If a utility elects to use the net capacity cost allocation method, the net capacity costs would be allocated for the term of the contract or 10 years, whichever is less, starting on the date the new generation unit comes on line. Under this allocation mechanism, the energy rights to the contract are auctioned off to maximize the energy revenues and minimize the net capacity costs that would be subject to allocation. If no bids are accepted for the energy rights, the utility would retain the rights to the energy and would value it at spot market prices for the purposes of determining the net capacity costs to be allocated until the next periodic auction.

Costs of Utility-Owned Generation Resource Projects

During 2006, the CPUC approved three agreements related to Utility-owned generation projects. The CPUC also authorized the amount of revenue requirements thatthe Utility is authorized to recover related to each project to recover capital costs and non-fuel operations and maintenance costs.

·   Gateway Generating Station. In June 2006, the CPUC authorized the Utility to acquire the equipment, permits and contracts relating to a partially completed 530-MW power plant in Antioch, California, referred to as the Gateway Generating Station, or Gateway. The Utility completed the acquisition in November 2006. The CPUC authorized the Utility to recover approximately $295 million in capital costs to complete the construction of the facility as well as costs for its operation. On February 15, 2007, the CPUC approved the Utility’s request to recover an additional approximately $75 million necessary to convert the plant from fresh water cooling to dry cooling in order to reduce the environmental impact of the facility and as a result of changes to Gateway’s environmental permits. The Utility also has requested the CEC to amend the facility’s current permit to authorize the plant to be converted from fresh water cooling to dry cooling. The Utility expects that the CEC will issue a decision in the second quarter of 2007. Subject to obtaining the permit amendment from the CEC, meeting construction schedules, operational performance requirements and other conditions, the Utility estimates that it will complete construction of the Gateway facility and commence operations in 2009

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Colusa Power Plant. In November 2006, the CPUC approved an agreement for the development and construction of a 657-MW power plant to be located in Colusa County, California. The CPUC adopted an initial capital cost for the Colusa project that is equal to the sum of the fixed contract costs plus the Utility’s estimated owner’s costs and a contingency amount to account for the risk and uncertainty in the estimation of owner’s costs. (Owner’s costs include the Utility’s expenses for

·    Colusa Power Plant. In November 2006, the CPUC approved an agreement for the development and construction of a 657-MW power plant to be located in Colusa County, California. The CPUC adopted an initial capital cost for the Colusa project that is equal to the sum of the fixed contract costs plus the Utility’s estimated owner’s costs and a contingency amount to account for the risk and uncertainty in the estimation of owner’s costs. (Owner’s costs include the Utility’s expenses for legal, engineering and consulting services as well as the costs for internal personnel and overhead related to the project.)The CPUC also authorized the Utility to adjust the initial capital cost for the Colusa project to reflect any actual incentive payments made to, or liquidated damages received from, the contractors through notification to the CPUC but without a reasonableness review. Subject to obtaining required permits,meeting construction schedules, operational performance requirements and other conditions, it is anticipated that the Colusa project will commence operations in 2010 at an estimated cost of approximately $673 million.  

·   Humboldt Bay. In November 2006, the CPUC also approved an agreement for the construction of a 163-MW power plant to re-power the Utility’s existing Humboldt Bay power plant, which is at the end of its useful life. The CPUC adopted an initial capital cost of the Humboldt Bay project equal to the sum of the fixed contract costs plus the Utility’s estimated owner’s costs, but limited the contingency amount for owner’s costs to 5 percent of the fixed contract cost and estimated owner’s costs. Subject to obtaining required permits and meeting construction schedules, operational performance requirements and other conditions, it is anticipated that the Humboldt Bay project will commence operations in 2009 at an estimated cost of approximately $239 million.

On December 11, 2006, the Utility submitted its 2006 long-term procurement plan covering procurement over 2007-2016 to the CPUC for approval. For more information about the 2006 plan, see the section of MD&A in the 2006 Annual Report entitled “Regulatory Matters - Electricity Generation Resources.”

DWR Electricity and DWR Revenue Requirements

During the California 2000-2001 energy crisis, the DWR entered into long-term contracts to purchase electricity from third parties. The electricity provided under these contracts has been allocated to the electric customers of the three California investor-owned electric utilities. The DWR pays for its costs of purchasing electricity from a revenue requirement collected from these customers through a rate component called the DWR “power charge.” The rates that these customers pay also include a “bond charge” to pay a share of the DWR's revenue requirements to recover costs associated with the DWR's $11.3 billion bond offering completed in November 2002. The proceeds of this bond offering were used to repay the State of California and lenders to the DWR for electricity purchases made before the implementation of the DWR's revenue requirement and to provide the DWR with funds to make its electricity purchases. Because the Utility acts as a billing and collection agent for the DWR, amounts collected for the DWR and any adjustments are not included in the Utility's revenues.

Electricity Transmission

The Utility's electricity transmission revenue requirements and its wholesale and retail transmission rates are subject to authorization by the FERC. The Utility has two main sources of transmission revenues: charges under the Utility's transmission owner tariff and charges under specific contracts with wholesale transmission customers that the Utility entered into before the CAISO began its operations in March 1998. These wholesale customers are referred to as existing transmission contract customers and are charged individualized rates based on the terms of their contracts. Other customers pay transmission rates that are established by the FERC in the Utility's transmission owner tariff rate cases. These FERC-approved rates are included by the CPUC in the Utility's retail electric rates, consistent with the federal filed rate doctrine, and are collected from retail electric customers receiving bundled service.

Transmission Owner Rate Cases

The primary FERC rate-making proceeding to determine the amount of revenue requirements the Utility is authorized to recover for its electric transmission costs and to earn its return on equity is the transmission owner rate case. A transmission owner rate case is generally held every year and sets rates for a one-year period. The Utility is typically able to charge new rates, subject to refund, before the outcome of the FERC ratemaking review process. The Utility's transmission owner tariff includes two rate components. The primary component consists of base transmission rates intended to recover the Utility's operating and maintenance expenses, depreciation and amortization expenses, interest expense, tax expense and return on equity. The Utility derives the majority of the Utility's transmission revenue from base transmission rates. The other component consists of rates intended to reflect credits and charges from the CAISO. The CAISO credits the Utility for transmission revenues received by the CAISO. The CAISO also charges the Utility for reliability service costs and imposes a transmission access charge for the Utility’s use of CAISO-controlled transmission facilities in serving its customers. These credits and charges are described below.

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On August 1, 2006, the Utility filed its transmission owner rate case application with the FERC requesting authorization of an annual transmission revenue requirement effective October 1, 2006. On September 29, 2006, the FERC issued an order accepting the Utility’s rate application, suspending the requested rate changes for five months to become effective March 1, 2007, subject to refund. On February 15, 2007, the Utility submitted an offer of settlement reached by the parties and requested that the settlement judge recommend that the FERC approve the settlement.  For more information, see“Regulatory Matters - FERC Transmission Rate Case” in the MD&A in the 2006 Annual Report.

CAISO Transmission Revenues

CAISO transmission revenues include:

·   the proceeds received from the CAISO for wholesale wheeling service (i.e., the transfer of electricity that is being sold in the wholesale market) that the CAISO provides to third parties using the Utility’s transmission facilities, and

·   revenues that the CAISO collects from transmission users to relieve congestion on the Utility’s transmission line (either in the form of financial hedges such as firm transmission rights relating to future deliveries of electricity or in the form of a usage charge to manage congestion relating to real time delivery of electricity).

The amount of CAISO transmission revenues is adjusted by the shortfall or surplus resulting from any cost differences between the amount the Utility is entitled to receive from certain wholesale customers under specific contracts and the amount the Utility is entitled to receive or be charged for scheduling services under the CAISO’s rules and protocols.

Reliability Service Costs

The CAISO has entered into reliability must run, or RMR, agreements with various power plant owners, including the Utility, that require designated units in certain power plants, known as RMR units, to remain available to generate electricity upon the CAISO's demand when the generation from those RMR units is needed for local transmission system reliability. RMR agreements are established or extended by the CAISO on an annual basis.  As a participating transmission owner under the Transmission Control Agreement with the CAISO, the Utility is responsible for reimbursing the CAISO for the RMR payments it makes to power plant owners within or adjacent to the Utility's service territory. The Utility tracks these costs in the reliability services balancing account. Periodically, the Utility’s transmission owner rates are adjusted to refund over-collections to the Utility’s customers as a result of the effect of these reliability service costs or to collect any under-collections from customers. During 2006, the CPUC adopted rules to implement state law requirements for California investor-owned utilities to meet resource adequacy requirements, including rules to address local transmission system reliability issues.  As the utilities fulfill their responsibility to meet these requirements, the number of RMR agreements with the CAISO and the associated costs will decline.  

For further discussion of other RMR-related issues, see the section of Note 17: Commitments and Contingencies -  Reliability Must Run Agreements, of the Notes to the Consolidated Financial Statements in the 2006 Annual Report.

Transmission Access Charge

The CAISO imposes a transmission access charge on users of the CAISO-controlled electric transmission grid. The CAISO's transmission access charge methodology approved by the FERC in December 2004, provides for a transition over a 10-year period to a uniform statewide high-voltage transmission rate, based on the revenue requirements associated with facilities operated at 200 kV and above of all transmission owning entities that become participating transmission owners under the CAISO tariff. The transmission access charge methodology may result in a cost shift from transmission owners whose costs for existing transmission facilities at 200 kV and above are higher than that embedded in the uniform transmission access charge rate, to transmission owners with lower embedded costs for existing high voltage transmission, such as the Utility. The Utility's obligation for this cost differential has been capped at $32 million per year during the 10-year transition period.

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Natural Gas

The Gas Accord

Under a ratemaking pact called the Gas Accord, the Utility's natural gas transportation and storage services were separated for ratemaking purposes from its distribution services. The Gas Accord established natural gas transportation rates and natural gas storage rates. In December 2004, the CPUC approved a multi-party settlement agreement, the Gas Accord III, to retain the Gas Accord market structure, and resolve the rates, and terms and conditions of service for the Utility's natural gas transportation and storage system for the three-year period 2005 through 2007. Under this framework, the costs associated with the Utility’s local transportation and gas storage assets that are used for service to core customers are recovered through balancing account mechanisms that adjust for the difference between actual usage and forecast usage. In addition, approximately 65% of the costs associated with the Utility’s backbone gas transmission system that is used to serve core customers are recovered through fixed charges. The remaining 35% of these costs are recoverable through volumetric charges. Revenues from these charges vary depending on the level of throughput volume. The costs that are recoverable through balancing accounts or fixed reservation charges account for approximately 45% of the Utility’s total revenue requirement for gas transmission and storage. The remainder of the Utility’s gas transmission and storage costs are recovered from core customers through volumetric charges and from noncore customers under firm or interruptible transmission or storage contracts. The Utility’s recovery of this portion of its costs depend on the level of throughput volume, gas prices, and the extent to which noncore customers contract for firm services.

The Utility is obligated to file a new rate case proposing gas transmission and storage rates and terms and conditions of service, for the period commencing January 1, 2008. The Utility currently is scheduled to submit that filing on March 15, 2007. In the event the CPUC does not issue a final decision approving new rates effective January 1, 2008, Gas Accord III provides that the rates and terms and conditions of service in effect as of December 31, 2007, will remain in effect, with an automatic 2 percent escalation in the rates as of January 1, 2008.

Biennial Cost Allocation Proceeding

Certain of the Utility's natural gas distribution costs and balancing account balances are allocated to customers in the Biennial Cost Allocation Proceeding. This proceeding normally occurs every two years and is updated in the interim year for purposes of adjusting natural gas rates to recover from customers any under-collection, or refund to customers any over-collection, in the balancing accounts. Balancing accounts for gas distribution and other authorized expenses accumulate differences between authorized amounts and actual revenues.

Natural Gas Procurement

The Utility sets the natural gas procurement rate for core customers monthly based on the forecasted costs of natural gas, core pipeline capacity and storage costs. The Utility reflects the difference between actual natural gas purchase costs and forecasted natural gas purchase costs in several natural gas balancing accounts, with under-collections and over-collections taken into account in subsequent monthly rates.

The Utility recovers the cost of gas (subject to the ratemaking mechanism discussed below), acquired on behalf of core procurement customers, through its retail gas rates. The Utility is protected against after-the-fact reasonableness reviews of these gas procurement costs under an incentive mechanism known as the Core Procurement Incentive Mechanism, or CPIM. Under the CPIM, the Utility's purchase costs for a twelve-month period are compared to an aggregate market-based benchmark based on a weighted average of published monthly and daily natural gas price indices at the points where the Utility typically purchases natural gas. The CPIM establishes a “tolerance band” around the benchmark index price, and all costs within the tolerance band are fully recovered from core customers. If total natural gas costs fall below the tolerance band, the Utility’s customers and shareholders will share 75% and 25% of the savings below the tolerance band, respectively. Conversely, if total natural gas costs rise above the tolerance band, the Utility’s core customers and shareholders share equally the costs above the tolerance band. The shareholder award is capped at the lower of 1.5% of total natural gas commodity costs or $25 million. While this incentive mechanism remains in place, changes in the price of natural gas, consistent with the market-based benchmark, are not expected to materially impact net income. (For more information see the “Risk Management Activities” section of MD&A in the 2006 Annual Report).

Interstate and Canadian Natural Gas Transportation and Storage

The Utility's interstate and Canadian natural gas transportation agreements with third-party service providers are governed by tariffs that detail rates, rules and terms of service for the provision of natural gas transportation services to the Utility on interstate and Canadian pipelines. United States tariffs are approved for each pipeline for service to all of its shippers, including the Utility, by the FERC in a FERC ratemaking review process, and the applicable Canadian tariffs are approved by the Alberta Energy and Utilities Board and the National Energy Board. The Utility's agreements with interstate and Canadian natural gas transportation service providers are administered as part of the Utility's core natural gas procurement business. Their purpose is to transport natural gas from the points at which the Utility takes delivery of natural gas (typically in Canada and the southwestern United States) to the points at which the Utility's natural gas transportation system begins.

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Electric Utility Operations

Electricity Resources

The following table shows the percentage of the Utility's total sources of electricity for 2006 represented by each major electricity resource:

Owned generation (nuclear, fossil fuel-fired and hydroelectric facilities)	40%
DWR	24%
Qualifying Facilities/Renewables	20%
Irrigation Districts	6%
Other Power Purchases	10%

The Utility is required to dispatch, or schedule, all of the electricity resources within its portfolio, including electricity provided under DWR contracts, in the most cost-effective way. Least-cost dispatch requires the Utility, in certain cases, to schedule more electricity than is necessary to meet its retail load and to sell this additional electricity on the wholesale electricity market.The Utility typically schedules excess electricity when the expected sales proceeds exceed the variable costs to operate a generation facility or buy electricity under an optional contract. Proceeds from the sale of surplus electricity are allocated between the Utility and the DWR based on the percentage of volume supplied by each entity to the Utility's total load. The Utility's net proceeds from the sale of surplus electricity after deducting the portion allocated to the DWR are recorded as a reduction to the cost of electricity.

Owned Generation Facilities

At December 31, 2006, the Utility owned and operated the following generation facilities, all located in California, listed by energy source:

Generation Type	County Location	Number of Units	Net Operating Capacity (MW)
Nuclear:
Diablo Canyon	San Luis Obispo	2	2,240
Hydroelectric:
Conventional	16 counties in northern and central California	107	2,684
Helms pumped storage	Fresno	3	1,212
Hydroelectric subtotal		110	3,896
Fossil fuel:
Humboldt Bay(1)	Humboldt	2	105
Mobile turbines	Humboldt	2	30
Fossil fuel subtotal		4	135
Total		116	6,271

(1) The Humboldt Bay facilities consist of a retired nuclear generation unit and two operatingfossil fuel-fired plants. As described above, the CPUC has approved the Utility’s application to re-power the two fossil fuel-fired plants.

In May 2006, the Utility retired its fossil fuel-fired plant at Hunters Point in San Francisco after the completion of a new 230-kV transmission line from Redwood City to Brisbane, known as the Jefferson-Martin 230-kV Line. The Utility is in the process of decommissioning the Hunters Point power plant. The completed transmission line provides additional transmission system reliability in San Francisco and northern San Mateo County that allowed the Hunters Point fossil-fueled power plant in San Francisco to be retired.

Diablo Canyon Power Plant. The Utility's Diablo Canyon power plant consists of two nuclear power reactor units, with a total-plant net generation capacity of approximately 2,240 MW of electricity. Unit 1 began commercial operation in May 1985, and the operating license for this unit expires in November 2024. Unit 2 began commercial operation in March 1986, and the operating license for this unit expires in August 2025. For the 10-year period ended December 31, 2006, the Utility's Diablo Canyon power plant achieved an average overall capacity factor of approximately 89.8%.

The Utility has entered into various purchase agreements for nuclear fuel with terms ranging from two to five years that are intended to ensure long-term fuel supply. For more information about these agreements, see Note 17: Commitments and Contingencies - Nuclear Fuel Agreements, of the Notes to the Consolidated Financial Statements in the 2006 Annual Report.

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The following table outlines the Diablo Canyon power plant's refueling schedule for the next five years. The Diablo Canyon power plant refueling outages are typically scheduled every 16 to 21 months. The average length of a refueling outage over the last five years has been approximately 48 days. It is anticipated, however, that additional work will be required during future scheduled outages leading up to the replacement of the steam generators in Unit 2 in 2008 and in Unit 1 in 2009. The capital expenditures necessary to complete these projects are discussed further in the “Capital Expenditures” section of MD&A in the 2006 Annual Report. This additional work will lengthen the forecasted outage durations to the time periods shown below. The table below shows outages of approximately 80 days for steam generator replacements. The actual refueling schedule and outage duration will depend on the scope of the work required for a particular outage and other factors.

	2007	2008	2009	2010	2011
Unit 1
Refueling	April	-	January	October
Duration (days)	28	-	74	28
Startup	May	-	April	November
Unit 2
Refueling	-	February	October	-	April
Duration (days)	-	76	28	-	28
Startup	-	April	November	-	May

In addition, as discussed below under “Environmental Matters - Nuclear Fuel Disposal,” the Utility is constructing an on-site dry cask storage facility to store the spent nuclear fuel that is expected to be completed by 2008. To provide another storage alternative in the event that construction of the dry cask storage facility is delayed, in December 2006, the Utility completed the installation of temporary storage racks in each unit's existing spent fuel storage pool that increase the on-site storage capability to permit the Utility to operate Unit 1 until 2010 and Unit 2 until 2011. If the Utility is unable to complete the dry cask storage facility, or if construction is delayed beyond 2010, and if the Utility is otherwise unable to increase its on-site storage capacity, it is possible that the operation of Diablo Canyon may have to be curtailed or halted as early as 2010 with respect to Unit 1 and 2011 with respect to Unit 2 until such time as additional spent fuel can be safely stored.

Hydroelectric Generation Facilities. The Utility's hydroelectric system consists of 110 generating units at 68 powerhouses, including a pumped storage facility, with a total generating capacity of 3,896 MW. The system includes 99 reservoirs, 76 diversions, 174 dams, 184 miles of canals, 44 miles of flumes, 135 miles of tunnels, 19 miles of pipe and 5 miles of natural waterways. The system also includes water rights as specified in 87 permits or licenses and 160 statements of water diversion and use. With the exception of three non-jurisdictional powerhouses totaling approximately 7.7 MW, all of the Utility's powerhouses are licensed by the FERC. Pursuant to the Federal Power Act, the term of a hydroelectric project license issued by the FERC is between 30 and 50 years. In the last five years, the FERC has renewed six hydroelectric project licenses associated with a total of 699 MW. The Utility is in the process of seeking FERC renewal of licenses associated with approximately 1,314 MW of hydroelectric power. Although the original licenses associated with 917 MW of the 1,314 MW have expired, the licenses are automatically renewed each year until completion of the relicensing process. Licenses associated with approximately 2,569 MW, including the 699 MW recently relicensed, will expire between 2013 and 2043.

DWR Power Purchases

During 2006, electricity from the DWR contracts allocated to the Utility provided approximately 24% of the electricity delivered to the Utility's customers. The DWR purchased the electricity under contracts with various generators. The Utility, as an agent, is responsible for administration and dispatch of the DWR's electricity procurement contracts allocated to the Utility’s customers. The DWR remains legally and financially responsible for its electricity procurement contracts. As described above under “Ratemaking Mechanisms,” the Utility acts as a billing and collection agent to collect the DWR's revenue requirements from the Utility's customers. For more information regarding the DWR contracts, see Note 17: Commitments and Contingencies - Third Party Power Purchase Agreements, of the Notes to the Consolidated Financial Statements in the 2006 Annual Report.

Third-Party Power Purchase Agreements

Qualifying Facility Power Purchase Agreements. As of December 31, 2006, the Utility had agreements with 268 QFs for approximately 4,150 MW that are in operation. Agreements for approximately 3,800 MW expire at various dates between 2007 and 2028. QF power purchase agreements for approximately 350 MW have no specific expiration dates and will terminate only when the owner of the QF exercises its termination option. The Utility also has power purchase agreements with approximately 68 inoperative

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QFs. The total of approximately 4,150 MW consists of approximately 2,550 MW from cogeneration projects, 600 MW from wind projects and 1,000 MW from projects with other fuel sources, including biomass, waste-to-energy, geothermal, solar and hydroelectric.

QF power purchase agreements accounted for approximately 20% of the Utility’s 2006 electricity sources, 22% of the Utility’s 2005 electricity sources and approximately 23% of the Utility's 2004 electricity sources. No single QF accounted for more than 5% of the Utility's 2006, 2005 or 2004 electricity sources.

Renewable Energy Contracts. California law requires that each California retail seller of electricity, except for municipal utilities, increase its purchases of renewable energy (such as biomass, wind, solar and geothermal energy) by at least 1% of its retail sales per year, so that the amount of electricity purchased from renewable resources equals at least 20% of its total retail sales by the end of 2010. During 2006, the Utility entered into several new renewable power purchase contracts that will help the Utility meet its goals. Currently, power from eligible renewable energy resources comprises approximately 12% of the Utility’s retail sales. The Utility expects to comply with its 2004, 2005, 2006 and 2007 annual targets. Although the Utility expects it will achieve the 20% target using the “flexible compliance” rules by 2010, actual deliveries of renewable power may not comprise 20% of its bundled retail sales by 2010 due to such factors as the time required for the construction of new generation facilities and/or needed transmission capacity. Failure to satisfy the targets may result in a penalty of five cents per kWh, with an annual penalty cap of $25 million. The exact amount of any penalty and conditions under which it would be applied is subject to the CPUC’s review of the circumstances for under-delivery.

Irrigation Districts and Water Agencies. The Utility has contracts with various irrigation districts and water agencies to purchase hydroelectric power. Under these contracts, the Utility must make specified semi-annual minimum payments based on the irrigation districts' and water agencies' debt service requirements, whether or not any hydroelectric power is supplied, and variable payments for operation and maintenance costs incurred by the suppliers. These contracts expire on various dates from 2007 to 2031. The Utility's irrigation district and water agency contracts accounted for approximately 6% of the Utility’s 2006 electricity sources, and approximately 5% of the Utility’s 2005 and 2004 electricity sources.

Other Power Purchase Agreements. After competitive solicitations, bilateral negotiations, and request for offers or proposals, were conducted, the Utility entered into several agreements with third party power providers during 2006 to meet the Utility’s intermediate and long-term generation resource needs. Under these contracts, the Utility will purchase power from facilities that may start as early as January 1, 2007 to as late as 2011. These combined agreements cover an aggregate of 7,129 MW of contractual capacity that expire between December 31, 2010 and January 31, 2036. Payments are not required under these agreements until the underlying generation facilities are operational.

For more information regarding the Utility's power purchase contracts, see Note 17: Commitments and Contingencies - Third Party Power Purchase Agreements, of the Notes to the Consolidated Financial Statements in the 2006 Annual Report.

Future Long-Term Generation Resources

In accordance with the Utility’s CPUC-approved procurement plan covering 2004-2014, the Utility has entered into contracts covering 2,780 MW of new long-term electricity generation resources in northern California. Three of the agreements provide for the construction of generation facilities to be owned and operated by the Utility: the 530-MW Gateway power plant located in Antioch, California; the 657-MW Colusa power plant located in Colusa, California; and the 163-MW power plant to re-power the Utility’s existing Humboldt Bay power plant, which is at the end of its useful life. Subject to obtaining required permits and meeting construction schedules, operational performance requirements and other conditions, it is anticipated that the Gateway and Humboldt Bay plants will commence operations in 2009 and the Colusa plant will commence operations in 2010. The Utility also executed five power purchase agreements that would provide approximately 1,430 MW of capacity with terms from 10 to 20 years. If permitting and construction schedules are met, the new generation facilities supporting these power purchase agreements are anticipated to begin delivering power to the grid during 2009 through 2010.

On December 11, 2006, the Utility submitted its 2006 long-term electricity procurement plan covering procurement over 2007-2016 to the CPUC for approval. The plan forecasts a need for up to an additional 2,300 MW of new dispatchable and operationally flexible capacity to come on line starting in 2011 to ensure continued reliable service. For more information about the 2006 plan, see the section of MD&A in the 2006 Annual Report entitled “Regulatory Matters - Electricity Generation Resources.”

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Electricity Transmission

At December 31, 2006, the Utility owned 18,640 circuit miles of interconnected transmission lines operated at voltages of 500 kV to 60 kV and transmission substations with a capacity of 53,094 MVA. Electricity is transmitted across these lines and substations and is then distributed to customers through 140,049 circuit miles of distribution lines and substations with a capacity of 26,079 MVA. In 2006, the Utility delivered 84,310 GWh to its customers, including 7,604 GWh delivered to direct access customers. The Utility is interconnected with electric power systems in the Western Electricity Coordinating Council, which includes 14 western states, Alberta and British Columbia, Canada, and parts of Mexico.

In 1998, in connection with electric industry restructuring, the California investor-owned electric utilities relinquished control, but not ownership, of their transmission facilities to the CAISO. The Utility has entered into a Transmission Control Agreement with the CAISO and other participating transmission owners (including Southern California Edison Company, San Diego Gas & Electric Company, and several California municipal utilities) under which the transmission owners have assigned operational control of their electric transmission systems to the CAISO. The Utility is required to give the CAISO two years’ notice and receive approval from the FERC if it wishes to withdraw from the Transmission Control Agreement and take back operational control of its transmission facilities.

The CAISO, which is regulated by the FERC, controls the operation of the transmission system and provides open access transmission service on a nondiscriminatory basis. The CAISO also is responsible for assuring that the reliability of the transmission system is maintained. The Utility acts as a scheduling coordinator to schedule electricity deliveries to the transmission grid. The Utility also acts as a scheduling coordinator to deliver electricity produced by several governmental entities to the transmission grid under contracts the Utility entered into with these entities before the CAISO commenced operation in 1998.

In April 2006, the Utility completed a new 230-kV transmission line from Redwood City to Brisbane, known as the Jefferson-Martin 230-kV Line. The completed transmission line provides additional transmission system reliability in San Francisco and northern San Mateo County. As result of the completion of the transmission line, the Utility was able to retire the Hunters Point power plant in San Francisco. The Utility expects to undertake various transmission projects over the next few years to upgrade and expand the Utility’s transmission system in order to accommodate system load growth, to secure access to renewable generation resources, and to replace aging or obsolete equipment to maintain system reliability and reduce reliance on RMR generation. These potential projects include the construction of the Midway-Gregg 500-kV transmission line designed to increase access to southern California and Southwest generation resources and to reduce RMR generation contracts in the Fresno, California, area.  In addition, the Utility is currently working with several stakeholders in the western United States to assess the feasibility of new large-scale electric transmission expansion projects to address regional electricity needs over the long term.  In addition, the CPUC has adopted a procedure to enable the utilities to recover the cost of electric transmission facilities necessary to interconnect renewable energy resources if those costs cannot be recovered in FERC-approved rates.

Electricity Distribution Operations

The Utility's electricity distribution network extends throughout all or a part of 47 of California's 58 counties, comprising most of northern and central California. The Utility's network consists of 140,049 circuit miles of distribution lines (of which approximately 19% are underground and approximately 81% are overhead). There are 94 transmission substations and 48 transmission-switching stations. A transmission substation is a fenced facility where voltage is transformed from one transmission voltage level to another. There are 602 distribution substations and 110 low-voltage distribution substations. There are 55 combined transmission and distribution substations. Combined transmission and distribution substations have both transmission and distribution transformers.

The Utility's distribution network interconnects to the Utility's electricity transmission system at 1,106 points. This interconnection between the Utility's distribution network and the transmission system typically occurs at distribution substations where transformers and switching equipment reduce the high-voltage transmission levels at which the electricity transmission system transmits electricity, ranging from 500 kV to 60 kV, to lower voltages, ranging from 44 kV to 2.4 kV, suitable for distribution to the Utility's customers. The distribution substations serve as the central hubs of the Utility's electricity distribution network and consist of transformers, voltage regulation equipment, protective devices and structural equipment. Emanating from each substation are primary and secondary distribution lines connected to local transformers and switching equipment that link distribution lines and provide delivery to end-users. In some cases, the Utility sells electricity from its distribution lines or other facilities to entities, such as municipal and other utilities, that then resell the electricity.

During 2006, the Utility began the installation of an advanced metering system for virtually all of the Utility's residential and small commercial electric and gas customers. These meters will enable the Utility to measure usage of electricity on a time-of-use basis and to charge demand-responsive rates to encourage customers to reduce energy consumption during peak demand periods and

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to reduce peak period procurement costs. Advanced meters can record usage in time intervals and be read remotely. The Utility expects to complete the installation of the network infrastructure and advanced meters throughout its service territory by the end of 2011. In 2006, the CPUC also approved the Utility’s proposal to offer customers a new voluntary billing option called critical peak pricing, or CPP, under which customers will be able to take advantage of electricity prices that vary by day and hour, potentially reducing their bills by shifting their energy use away from critical peak periods. By shifting energy demand away from critical peak periods, the Utility anticipates that it would need to purchase less power for critical peak periods. (For more information about the advanced metering initiative, see the section entitled “Capital Expenditures” in the MD&A portion of the 2006 Annual Report.)

2006 Electricity Deliveries

The following table shows the percentage of the Utility's total 2006 electricity deliveries represented by each of its major customer classes.

Total 2006 Electricity Delivered: 84,310 GWh

Agricultural and Other Customers	5	%
Industrial Customers	18	%
Residential Customers	37	%
Commercial Customers	40	%

Electricity Distribution Operating Statistics

The following table shows certain of the Utility's operating statistics from 2002 to 2006 for electricity sold or delivered, including the classification of sales and revenues by type of service.

	2006			2005			2004			2003			2002
Customers (average for the year):
Residential		4,417,638			4,353,458			4,366,897			4,286,085			4,171,365
Commercial		515,297			509,786			509,501			493,638			483,946
Industrial		1,212			1,271			1,339			1,372			1,249
Agricultural		79,006			78,876			80,276			81,378			78,738
Public street and highway lighting		28,799			28,021			27,176			26,650			24,119
Other electric utilities		4			4			3			4			5
Total (1)		5,041,956			4,971,416			4,985,192			4,889,127			4,759,422
Deliveries (in GWh):(2)
Residential		31,014			29,752			29,453			29,024			27,435
Commercial		33,492			32,375			32,268			31,889			31,328
Industrial		15,166			14,932			14,796			14,653			14,729
Agricultural		3,839			3,742			4,300			3,909			4,000
Public street and highway lighting		785			792			2,091			605			674
Other electric utilities		14			33			28			76			64
Subtotal		84,310			81,626			82,936			80,156			78,230
California Department of Water Resources (DWR)		(19,585	)		(20,476	)		(19,938	)		(23,554	)		(21,031	)
Total non-DWR electricity		64,725			61,150			62,998			56,602			57,199
Revenues (in millions):
Residential		4,491		$	3,856		$	3,718		$	3,671		$	3,646
Commercial		4,414			4,114			4,179			4,440			4,588
Industrial		1,293			1,232			1,204			1,410			1,449
Agricultural		483			446			491			522			520
Public street and highway lighting		72			66			71			69			73
Other electric utilities		59			4			22			24			10
Subtotal		10,812			9,718			9,685			10,136			10,286
DWR		(2,119	)		(1,699	)		(1,933	)		(2,243	)		(2,056	)
Direct access credits		—			—			—			(277	)		(285	)
Miscellaneous(3)		261			235			(248	)		(52	)		193
Regulatory balancing accounts		(202	)		(327	)		363			18			40
Total electricity operating revenues	$	8,752		$	7,927		$	7,867		$	7,582		$	8,178
Other Data:
Average annual residential usage (kWh)		7,020			6,834			6,744			6,772			6,577
Average billed revenues (cents per kWh):
Residential		14.48			12.96			12.62			12.65			13.29
Commercial		13.18			12.71			12.95			13.92			14.65
Industrial		8.53			8.25			8.14			9.62			9.84
Agricultural		12.58			11.92			11.41			13.35			13.00
Net plant investment per customer	$	3,148		$	2,966		$	2,790		$	2,689		$	2,105

(1) Starting in 2005, the Utility’s methodology used to count customers changed from the number of billings to the number of active service agreements.

(2)These amounts include electricity provided to direct access customers who procure their own supplies of electricity.

(3) Miscellaneous revenues in 2003 include a $125 million reduction due to refunds to electricity customers from generation-related revenues in excess of generation-related costs.

Natural Gas Utility Operations 

The Utility owns and operates an integrated natural gas transportation, storage and distribution system in California that extends throughout all or a part of 38 of California's 58 counties and includes most of northern and central California. In 2006, the Utility served approximately 4.2 million natural gas distribution customers. The total volume of natural gas throughput during 2006 was approximately 836 Bcf.

At December 31, 2006, the Utility's natural gas system consisted of 40,704 miles of distribution pipelines, 6,138 miles of backbone and local transmission pipelines, and three storage facilities. The Utility's distribution network connects to the Utility's transmission and storage system at approximately 2,200 major interconnection points. The Utility’s backbone transmission system, composed of Lines 300, 400 and 401, is used to transport gas from the Utility’s interconnection with interstatepipelines, other local distribution companies, and California gas fields to the Utility’s local transmission and distribution system. The Utility's Line 300, which interconnects with the U.S. southwest and California-Oregon pipeline systems owned by third parties (Transwestern Pipeline Co., El Paso Natural Gas Company, Questar Southern Trails Pipeline Company and Kern River Pipeline Company), has a receipt capacity at the California-Arizona border of approximately 1.1 Bcf per day. The Utility's Line 400/401 interconnects with the natural gas transportation pipeline of Gas Transmission Northwest Corporation at the California-Oregon border. This line has a receipt capacity at the border of approximately 2.0 Bcf per day. Through interconnections with other interstate pipelines, the Utility can receive natural gas from all the major natural gas basins in western North America, including basins in western Canada, the Rocky Mountains and the southwestern United States. The Utility also is supplied by natural gas fields in California.

The Utility also owns and operates three underground natural gas storage fields connected to the Utility's transmission and storage system. These storage fields have a combined annual cycle capacity of approximately 42 Bcf. In addition, two independent storage operators are interconnected to the Utility's northern California transportation system.

The CPUC divides the Utility's natural gas customers into two categories: core and noncore customers. This classification is based largely on a customer's annual natural gas usage. The core customer class is comprised mainly of residential and smaller commercial natural gas customers. The noncore customer class is comprised of industrial, larger commercial and electric generation natural gas customers. In 2006, core customers represented more than 99% of the Utility's total customers and 39% of its total natural gas deliveries, while noncore customers comprised less than 1% of the Utility's total customers and 61% of its total natural gas deliveries.

The Utility provides natural gas delivery services to all core and noncore customers connected to the Utility's system in its service territory. Core customers can purchase natural gas from alternate energy service providers or can elect to have the Utility provide both delivery service and natural gas supply. When the Utility provides both supply and delivery, the Utility refers to the service as natural gas bundled service. Currently, over 99% of core customers, representing over 96% of core market demand, receive natural gas bundled services from the Utility.

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The Utility does not provide procurement service to noncore customers. Electricity generators, cogenerators, enhanced oil recovery and refiners, and other large noncore customers may not transfer to core service, and smaller noncore customers must sign up for a minimum five-year term if they elect to transfer to core service. These restrictions were put in place because large increases in the Utility's natural gas supply portfolio demand from significant transfers of noncore customers to core service would raise prices for all other core procurement customers and obligate the Utility to reinforce its pipeline system to provide core service reliability on a short-term basis to serve this new load.

The Utility offers backbone gas transmission, delivery (local transmission and distribution), and storage services as separate and distinct services to its noncore customers. These customers may elect to receive storage services from the Utility or other third-party storage providers. Noncore customers formerly were able to subscribe for natural gas bundled service as if they were core customers but are no longer allowed to do so. Access to the Utility's backbone gas transmission system is available for all natural gas marketers and shippers, as well as noncore customers.

The Utility has regulatory balancing accounts for core customers designed to ensure that the Utility's results of operations over the long term are not affected by weather variations, conservation or changes in their consumption levels. The Utility's results of operations can, however, be affected by noncore consumption levels because there are fewer regulatory balancing accounts related to noncore customers. Approximately 97% of the Utility's natural gas distribution base revenues are recovered from core customers and 3% are recovered from noncore customers.

The California Gas Report is prepared by the California electric and natural gas utilities to present an outlook for natural gas requirements and supplies for California over a long-term planning horizon. It is prepared in even-numbered years followed by a supplemental report in odd-numbered years. The 2006 California Gas Report forecasts average annual growth in the Utility's natural gas deliveries (for core customers and non-core transportation) of approximately 1.3% for the years 2006 through 2025. The natural gas requirements forecast is subject to many uncertainties, and there are many factors that can influence the demand for natural gas, including weather conditions, level of economic activity, conservation, price, and the number and location of electricity generation facilities.

2006 Natural Gas Deliveries

The following table shows the percentage of the Utility's total 2006 natural gas deliveries represented by each of the Utility's major customer classes:

Total 2006 Natural Gas Deliveries: 836 Bcf

Residential Customers	27	%
Transport-only Customers (noncore)	61	%
Commercial Customers	12	%

Natural Gas Operating Statistics

The following table shows the Utility's operating statistics from 2002 through 2006 (excluding subsidiaries) for natural gas, including the classification of sales and revenues by type of service:

	2006			2005			2004			2003			2002
Customers (average for the year):
Residential		3,989,331			3,929,117			3,812,914			3,744,011			3,738,524
Commercial		220,024			216,749			215,547			208,857			206,953
Industrial		988			962			2,178			1,988			1,819
Other gas utilities		6			6			6			6			5
Total		4,210,349			4,146,834			4,030,645			3,954,862			3,947,301
Gas supply (MMcf):
Purchased from suppliers in:
Canada		202,274			204,884			205,180			196,278			210,716
California		(13,401	)		(18,951	)		(9,108	)		(7,421	)		19,533
Other states		103,658			103,237			103,801			102,941			67,878
Total purchased		292,531			289,170			299,873			291,798			298,127
Net (to storage) from storage		4,359			(3,659	)		(532	)		1,359			(218	)
Total		296,890			285,511			299,341			293,157			297,909
Utility use, losses, etc. (1)		(27,610	)		(14,312	)		(19,287	)		(14,307	)		(16,393	)
Net gas for sales		269,280			271,199			280,054			278,850			281,516
Bundled gas sales (MMcf):
Residential		196,092			194,108			201,601			198,580			202,141
Commercial		73,178			77,056			78,080			79,891			78,812
Industrial		10			35			373			379			563
Other gas utilities		___			—			—			—			—
Total		269,280			271,199			280,054			278,850			281,516
Transportation only (MMcf):		559,270			572,869			597,706			525,353			508,090
Revenues (in millions):
Bundled gas sales:
Residential	$	2,452		$	2,336		$	1,944		$	1,836		$	1,379
Commercial		859			885			712			697			499
Industrial		-			—			—			1			3
Other gas utilities		-			—			—			1			1
Miscellaneous		121			(22	)		(29	)		(31	)		127
Regulatory balancing accounts		40			340			316			68			11
Bundled gas revenues		3,472			3,539			2,943			2,572			2,020
Transportation service only revenue		315			237			270			284			316
Operating revenues	$	3,787		$	3,776		$	3,213		$	2,856		$	2,336
Selected Statistics:
Average annual residential usage (Mcf)		49			49			53			53			54
Average billed bundled gas sales revenues per Mcf:
Residential	$	12.50		$	12.04		$	9.64		$	9.25		$	6.82
Commercial		11.73			11.48			9.12			8.73			6.33
Industrial		1.03			0.61			(0.56	)		2.48			4.35
Average billed transportation only revenue per Mcf		0.56			0.42			0.45			0.54			0.62
Net plant investment per customer	$	1,304		$	1,262		$	1,266		$	1,261		$	1,006

(1)Includes fuel for the Utility's fossil fuel-fired generation plants.

Natural Gas Supplies

The Utility purchases natural gas to serve the Utility's core customers directly from producers and marketers in both Canada and the United States. The contract lengths and natural gas sources of the Utility's portfolio of natural gas purchase contracts have fluctuated, generally based on market conditions. During 2006, the Utility purchased approximately 293,000 Mcf of natural gas (net of the sale of excess supply) from 68 suppliers. Consistent with existing CPUC policy directives, substantially all this natural gas was purchased under contracts with a term of one year or less. The Utility's largest individual supplier represented approximately 10.7% of the total natural gas volume the Utility purchased during 2006.

The following table shows the total volume and the average price of natural gas in dollars per Mcf of the Utility's natural gas purchases by region during each of the last five years. The average prices for Canadian and U.S. southwest gas shown below include the commodity natural gas prices, pipeline demand or reservation charges, transportation charges and other pipeline assessments. The volumes purchased are shown net of sales of excess supplies of gas. In 2006, the sale of excess supplies to parties located in California exceeded purchases from parties located in California.

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	2006					2005					2004					2003					2002
	MMcf			Avg. Price		MMcf			Avg. Price		MMcf			Avg. Price		MMcf			Avg. Price		MMcf		Avg. Price
Canada		202,274			6.27		204,884		$	7.12		205,180		$	5.37		196,278		$	4.73		210,716	$	2.42
California (1)		(13,401	)		7.04		(18,951	)	$	7.70		(9,108	)	$	4.89		(7,421	)	$	3.39		19,533	$	2.88
Other states (substantially all U.S. southwest)		103,658			6.51		103,237		$	7.10		103,801		$	5.44		102,941		$	4.63		67,878	$	3.04
Total/weighted average		292,531			6.32		289,170		$	7.07		299,873		$	5.41		291,798		$	4.73		298,127	$	2.59

(1)California purchases include supplies from various California producers and supplies transported into California by others.

Gas Gathering Facilities

The Utility's gas gathering system collects natural gas from third-party wells in California. During 2006, approximately 6% of the gas transported on the Utility's system came from various California producers, with the balance coming from supplies transported into California by others. The natural gas well production is processed by producers to remove various impurities from the natural gas stream and the Utility then odorizes the natural gas so that it may be detected in the event of a leak. The facilities include approximately 395.6 miles of gas gathering pipelines. The Utility receives gas well production at approximately 250 metering facilities. The Utility’s gas gathering system is geographically dispersed and is located in 13 California counties. Approximately 138 MMcf per day of natural gas produced in northern California was delivered into the Utility's gas gathering system during 2006.

Interstate and Canadian Natural Gas Transportation Services Agreements

In 2006, approximately 62% of the gas transported on the Utility's system came from western Canada. The Utility has a number of arrangements with interstate and Canadian third-party transportation service providers to serve core customers' service demands. The Utility has firm transportation agreements for delivery of natural gas from western Canada to the United States- Canadian border with TransCanada NOVA Gas Transmission, Ltd. and TransCanada PipeLines Ltd., B.C. System. These companies' pipeline systems connect at the border to the pipeline system owned by Gas Transmission Northwest Corporation which provides natural gas transportation services to interconnection points with the Utility's natural gas transportation system in the area of California near Malin, Oregon. The Utility has a firm transportation agreement with Gas Transmission Northwest Corporation for these services.

During 2006, approximately 32% of the gas transported on the Utility's system came from the western United States, excluding California. The Utility has firm transportation agreements with Transwestern Pipeline Co., or Transwestern, and El Paso Natural Gas Company, or El Paso, to transport this natural gas from supply points in this region to interconnection points with the Utility's natural gas transportation system in the area of California near Topock, Arizona. The Utility also has a short-term firm transportation agreement with Kern River Gas Transmission Company to transport this natural gas from supply points in this region to an interconnection point with the Utility’s natural gas transportation system at Daggett, California.

The following table shows certain information about the Utility's firm natural gas transportation agreements, including the contract quantities, contract durations and associated demand charges, net of sales of excess supplies, for capacity reservations. These agreements require the Utility to pay fixed demand charges for reserving firm capacity on the pipelines. The total demand charges may change periodically as a result of changes in regulated tariff rates approved by Canadian regulators in the case of TransCanada NOVA Gas Transmission, Ltd. and TransCanada PipeLines Ltd., B.C. System, and by the FERC in all other cases. The Utility may, upon prior notice and with the CPUC’s approval, extend each of these natural gas transportation agreements. On the FERC-regulated pipelines, the Utility has either a right of first refusal or evergreen rights allowing it to renew natural gas transportation agreements at the end of their terms. If another prospective shipper also wants the capacity, the Utility would be required to match the competing bid with respect to both price and term.

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Pipeline	Expiration Date		Quantity MDth per day	Demand Charges for the Year Ended December 31, 2006 (In millions)
TransCanada NOVA Gas Transmission, Ltd.	12/31/2008	(a)	619	25.2
TransCanada PipeLines Ltd., B.C. System	10/31/2008		611	14.3
Gas Transmission Northwest Corporation	10/31/2008		610	56.1
Transwestern Pipeline Co.	03/31/2010		150	19.9
El Paso Natural Gas Company (b)	Various		252	17.2
Kern River Gas Transmission Company	2/28/2007		29	0.4

(a)A small portion (23 MDth/d) of the Utility’s capacity is due to expire on October 31, 2008.

(b) As of December 31, 2006, the Utility has four active contracts with El Paso with expiration dates ranging from February 28, 2007 to June 30, 2010.

Environmental Matters

The following discussion includes certain forward-looking information relating to estimated expenditures for environmental protection measures and the possible future impact of environmental compliance. The information below reflects current estimates that are periodically evaluated and revised. Future estimates and actual results may differ materially from those indicated below. These estimates are subject to a number of assumptions and uncertainties, including changing laws and regulations, the ultimate outcome of complex factual investigations, evolving technologies, selection of compliance alternatives, the nature and extent of required remediation, the extent of the facility owner's responsibility, and the availability of recoveries or contributions from third parties.

General

The Utility is subject to a number of federal, state and local laws and requirements relating to the protection of the environment and the safety and health of the Utility's personnel and the public. These laws and requirements relate to a broad range of activities, including:

·   the discharge of pollutants into air, water and soil;

·   the identification, generation, storage, handling, transportation, treatment, disposal, record keeping, labeling, reporting of, remediation of and emergency response in connection with hazardous and radioactive substances; and

·   land use, including endangered species and habitat protection.

The penalties for violation of these laws and requirements can be severe, and may include significant fines, damages and criminal or civil sanctions. These laws and requirements also may require the Utility, under certain circumstances, to interrupt or curtail operations. To comply with these laws and requirements, the Utility may need to spend substantial amounts from time to time to construct, acquire, modify or replace equipment, acquire permits and/or marketable allowances or other emission credits for facility operations and clean-up or decommission waste disposal areas at the Utility's current or former facilities and at third-party sites where the Utility may have disposed of wastes.

Generally, the Utility has recovered the costs of complying with environmental laws and regulations in the Utility's rates, subject to reasonableness review. Environmental costs associated with the clean-up of sites that contain hazardous substances are subject to a special ratemaking mechanism under which the Utility is authorized to recover hazardous waste remediation costs for environmental claims (e.g., for cleaning up the Utility's facilities and sites where the Utility has sent hazardous substances) from customers. This mechanism allows the Utility to include 90% of the hazardous waste remediation costs in the Utility's rates without a reasonableness review. Ten percent of any net insurance recoveries associated with hazardous waste remediation sites is assigned to the Utility's customers. The balance of any insurance recoveries (90%) is retained by the Utility until it has been reimbursed for the 10% share of clean-up costs not included in rates. Any insurance recoveries above full cost reimbursement levels would then be allocated 60% to customers and 40% to the Utility. Finally, 10% of any recoveries from the Utility's claims against third parties associated with hazardous waste remediation sites is retained by the Utility; 90% of any such recoveries is assigned to the Utility's customers.

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Hazardous waste remediation costs are rising and likely to be significant into the foreseeable future. Based on the Utility's past experience, it believes that it can recover most of the future costs that it may incur to remediate hazardous waste through rates and insurance recoveries. The Utility cannot provide assurance, however, that these costs will not be material, or that the Utility will be able to recover its costs in the future.

Air Quality and Climate Change

The Utility's electricity generation plants, natural gas pipeline operations, fleet and fuel storage tanks are subject to numerous air pollution control laws, including the federal Clean Air Act and similar state and local statutes. These laws and regulations cover, among other pollutants, those contributing to the formation of ground-level ozone, carbon monoxide, sulfur dioxide, nitrogen oxide and particulate matter. Fossil fuel-fired electric utility plants and gas compressor stations used in the Utility's pipeline operations are sources of air pollutants and, therefore, are subject to substantial regulation and enforcement oversight by the applicable governmental agencies. The Utility’s existing and forecast emissions of greenhouse gases are relatively low compared to average emissions by other electric utilities and generators in the country.

In addition, various laws and regulations addressing climate change are being considered or implemented at the federal and state levels. At the federal level, several legislative initiatives have been introduced recently in Congress aimed at addressing climate change through imposition of nation-wide regulatory limits on the emissions of greenhouse gases. No such legislation has yet been enacted by Congress, but extensive hearings and discussion is expected in the coming year.

At the state level, in 2006 California enacted Assembly Bill 32, the California Global Warming Solutions Act of 2006, to address climate change. The law establishes a regulatory program and schedule to gradually reduce greenhouse gas emissions in California to 1990 levels by 2020. By January 1, 2008, this law requires the CARB to determine what the state-wide greenhouse gas emission level was in 1990, approve a statewide greenhouse gas emissions limit, and adopt regulations to require significant greenhouse gas emitters, including utilities and other load-serving entities, to submit annual greenhouse gas emissions reports that have been verified or certified by the CARB. Assembly Bill 32 also authorizes the CARB to monitor and enforce compliance with the greenhouse gas reduction program and to consider implementing market-based mechanisms, including trading of greenhouse gas emissions allowances.

In addition to Assembly Bill 32, California Senate Bill 1368, enacted in September 2006, prohibits any load-serving entity in California, including investor-owned electric utilities, from entering into a long-term financial commitment for baseload electricity generation unless the generation complies with a greenhouse gas emission performance standard. As required by Senate Bill 1368, on January 25, 2007, the CPUC adopted an interim greenhouse gas emissions performance standard of 1,100 pounds of carbon dioxide per MWh that applies to new commitments for baseload electricity procured under contracts with a term of five years or longer or generated by the Utility. After an enforceable state-wide greenhouse gas emissions limit is established and in operation in accordance with Assembly Bill 32, the CPUC will re-evaluate its interim greenhouse gas emissions performance standard and determine whether to continue, modify or rescind it.

The new California legislation, as well as current federal and other state regulatory initiatives relating to emissions of carbon dioxide and other greenhouse gases, particulates and other pollutants, could cause the Utility's compliance costs and capital expenditures to increase. These laws could require the Utility to replace equipment, install additional pollution controls, purchase various emission allowances or curtail operations. Although associated costs and capital expenditures could be material, the Utility expects that it will recover these costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

The CARB also oversees the Periodic Smoke Inspection Program to test and repair heavy-duty diesel vehicles in order to ensure efficient operations and reduce particulate matter emissions. The program applies to approximately 2,000 vehicles owned by the Utility. In July 2006, the CARB requested the Utility's program compliance records. The Utility discovered that its records were incomplete and that some records could not be located. The Utility immediately notified the CARB and began the evaluation and implementation of process improvements to ensure accurate recordkeeping. The CARB is authorized to assess penalties of up to $500 per missing or incomplete record. The Utility continues to work with the CARB and expects to resolve the matter in the first quarter of 2007. The Utility believes that the ultimate outcome of this matter would not result in a material adverse effect on its financial condition or results of operations.

Water Quality

The Utility's Diablo Canyon power plant employs a “once-through” cooling water system that is regulated under a Clean Water Act National Pollutant Discharge Elimination System, or NPDES, permit issued by the Central Coast Regional Water Quality Control Board, or the Central Coast Board. This permit allows the Diablo Canyon power plant to discharge the cooling water at a temperature no more than 22 degrees above the temperature of the ambient receiving water, and requires that the beneficial uses of the

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water be protected. The beneficial uses of water in this region include industrial water supply, marine and wildlife habitat, shellfish harvesting, and preservation of rare and endangered species. In January 2000, the Central Coast Board issued a proposed draft cease and desist order alleging that, although the temperature limit has never been exceeded, the Diablo Canyon power plant's discharge was not protective of beneficial uses.

In October 2000, the Utility and the Central Coast Board reached a tentative settlement under which the Central Coast Board agreed to find that the Utility's discharge of cooling water from the Diablo Canyon power plant protects beneficial uses and that the intake technology reflects the best technology available, as defined in the federal Clean Water Act. As part of the tentative settlement, the Utility agreed to take measures to preserve certain acreage north of the plant and to fund approximately $6 million in environmental projects and future environmental monitoring related to coastal resources. On March 21, 2003, the Central Coast Board voted to accept the settlement agreement. On June 17, 2003, the settlement agreement was executed by the Utility, the Central Coast Board and the California Attorney General's Office. A condition to the effectiveness of the settlement agreement is that the Central Coast Board renew Diablo Canyon's NPDES permit.

At its July 10, 2003 meeting, the Central Coast Board did not renew the NPDES permit and continued the permit renewal hearing indefinitely. Several Central Coast Board members indicated that they no longer supported the settlement agreement, and the Central Coast Board requested a team of independent scientists, as part of a technical working group, to develop additional information on possible mitigation measures for Central Coast Board staff. In January 2005, the Central Coast Board published the scientists' draft report recommending several such mitigation measures. If the Central Coast Board adopts the scientists' recommendations, and if the Utility ultimately is required to implement the projects proposed in the draft report, it could incur costs of up to approximately $30 million. The Utility would seek to recover these costs through rates charged to customers.

In addition, on July 9, 2004, the U.S. Environmental Protection Agency, or the EPA, published regulations under Section 316(b) of the Clean Water Act for cooling water intake structures. The regulations affect existing electricity generation facilities using over 50 million gallons per day, typically including some form of “once-through” cooling. The Diablo Canyon power plant is among an estimated 539 generation facilities nationwide that are affected by this rulemaking. The Utility permanently closed its Hunters Point power plant in May 2006 and the Humboldt Bay power plant will be re-powered without the use of once-through cooling. The EPA regulations establish a set of performance standards that vary with the type of water body and that are intended to reduce impacts to aquatic organisms. Significant capital investment may be required to achieve the standards. The regulations allow site-specific compliance determinations if a facility's cost of compliance is significantly greater than either the benefits achieved or the compliance costs considered by the EPA, and also allow the use of environmental mitigation or restoration to meet compliance requirements in certain cases. Various parties challenged the EPA’s regulations and the cases were consolidated in the U.S. Court of Appeal for the Second Circuit, or Second Circuit.

In June 2006, the California State Water Resources Control Board published a draft policy for California’s implementation of Section 316(b). If adopted, the draft policy would be substantially more stringent than the 2004 EPA regulations as the state policy would eliminate the EPA’s site-specific compliance options based on cost-benefit assessments and essentially requires the installation of cooling towers at once-through cooled power facilities. The draft policy provides that nuclear facilities may use environmental restoration as a compliance option only if the installation of technology would conflict with a nuclear safety requirement. It is uncertain when the state’s final policy will be adopted. If the final policy is adopted without change from the draft policy, the Utility could be required to incur significant capital costs to achieve compliance.

On January 25, 2007, the Second Circuit issued its decision on the appeals of the EPA Section 316(b) regulations. The Second Circuit remanded significant provisions of the regulations to EPA for reconsideration and held that a cost benefit test cannot be used to establish performance standards or to grant variances from the standards. The Second Circuit also ruled that environmental restoration cannot be used to achieve compliance. The parties may seek either en banc review by the Second Circuit or review by the U.S. Supreme Court. Regardless of whether the decision is subject to further judicial review, the EPA will likely require significant time to review and revise the regulations. It is uncertain how the Second Circuit decision will affect development of the state’s proposed implementation policy. The regulatory uncertainty is likely to continue and the Utility’s cost of compliance, while likely to be significant, will remain uncertain as well.

Groundwater at the Utility’s Hinkley and Topock natural gas compressor stations contains hexavalent chromium as a result of the Utility’s past operating practices. The Utility has a comprehensive program to monitor a network of groundwater wells at both the Hinkley and Topock natural gas compressor stations. At Hinkley, the Utility is cooperating with the Regional Water Quality Control Board to evaluate and remediate the chromium groundwater plume. In 2006, the Utility took interim measures to control movement of the Hinkley plume, as well as evaluated options to remediate the plume. At the Topock gas compressor station, located near Needles, California, adjacent to the Colorado River, hexavalent chromium has been detected in samples taken from groundwater monitoring wells located approximately 65 feet from the Colorado River. The Utility is cooperating with the California Department of Toxic Substances Control, other state agencies, appropriate federal agencies and other interested parties, to implement interim

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measures as well as develop a long-term plan to ensure that the hexavalent chromium does not affect the Colorado River. In 2006, the Utility took interim measures to control the chromium plume by extracting impacted groundwater and spent approximately $17 million on these measures. The Utility plans to continue these activities in 2007 and to work toward the development of a final plan to address the plume in 2007. The Utility currently estimates that it will spend at least $20 million in 2007 for remediation activities at Topock and $22 million in 2007 for remediation activities at Hinkley. Although work at the Topock site poses several technical and regulatory obstacles, the Utility’s remediation costs for Topock are subject to the ratemaking mechanism described above. The Utility does not expect the remediation of the Topock and Hinkley gas compressor sites to have a material adverse effect on its results of operations or financial condition. The Utility does not expect that it will incur any material expenditures related to any remediation at its Kettleman natural gas compressor station.

Compressor Station Litigation

Several lawsuits have been filed against the Utility alleging that exposure to chromium at or near the Utility's natural gas compressor stations caused personal injuries, wrongful deaths or other injuries. During 2006, the Utility entered into a settlement agreement to resolve most of these claims. Pursuant to the settlement agreement, in April 2006, the Utility released $295 million from escrow for payment to approximately 1,100 plaintiffs. There are three complaints filed by approximately 125 plaintiffs who did not participate in the settlement that are still pending in the Superior Court for the County of Los Angeles. With respect to the unresolved claims, the Utility will continue to pursue appropriate defenses, including the statute of limitations, the exclusivity of workers’ compensation laws, lack of exposure to chromium and the inability of chromium to cause certain of the illnesses alleged. PG&E Corporation and the Utility do not expect that the outcome with respect to the remaining unresolved claims will have a material adverse effect on their financial condition or results of operations.

Endangered Species

Many of the Utility's facilities and operations are located in or pass through areas that are designated as critical habitats for federal or state-listed endangered, threatened or sensitive species. The Utility may be required to incur additional costs or be subjected to additional restrictions on operations if additional threatened or endangered species are listed or additional critical habitats are designated near the Utility's facilities or operations. The Utility is seeking to secure “habitat conservation plans” to ensure long-term compliance with the state and federal endangered species acts. The Utility expects that it will be able to recover costs of complying with state and federal endangered species acts through rates.

Hazardous Waste Compliance and Remediation

The Utility's facilities are subject to the requirements issued by the EPA under the Resource Conservation and Recovery Act, or RCRA, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or CERCLA, as well as other state hazardous waste laws and other environmental requirements. CERCLA and similar state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a hazardous substance into the environment. These persons include the owner or operator of the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, damages to natural resources and the costs of required health studies. In the ordinary course of the Utility's operations, the Utility generates waste that falls within CERCLA's definition of a hazardous substance and, as a result, has been and may be jointly and severally liable under CERCLA for all or part of the costs required to clean up sites at which these hazardous substances have been released into the environment.

The Utility assesses, on an ongoing basis, measures that may be necessary to comply with federal, state and local laws and regulations related to hazardous materials and hazardous waste compliance and remediation activities. The Utility has a comprehensive program to comply with hazardous waste storage, handling and disposal requirements issued by the EPA under RCRA and CERCLA, state hazardous waste laws and other environmental requirements.

The Utility has been, and may be, required to pay for environmental remediation at sites where the Utility has been, or may be, a potentially responsible party under CERCLA and similar state environmental laws. These sites include former manufactured gas plant sites, power plant sites, gas gathering sites, compressor stations and sites where the Utility stores, recycles and disposes of potentially hazardous materials. Under federal and California laws, the Utility may be responsible for remediation of hazardous substances even if it did not deposit those substances on the site.

Operations at the Utility's current and former generation facilities may have resulted in contaminated soil or groundwater. Although the Utility sold most of its geothermal generation facilities and most of its fossil fuel-fired plants, in many cases the Utility retained pre-closing environmental liability under various environmental laws. The Utility currently is investigating or remediating

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several such sites with the oversight of various governmental agencies.

In addition, the federal Toxic Substances Control Act regulates the use, disposal and clean-up of polychlorinated biphenyls, or PCBs, which are used in certain electrical equipment. The Utility has removed from service all of the distribution capacitors and network transformers containing high concentrations of PCBs, the vast majority of PCBs existing in the Utility's electricity distribution system.

The Utility is assessing whether and to what extent remedial action may be necessary to mitigate potential hazards posed by certain disposal sites and retired manufactured gas plant sites. During their operation from the mid-1800s through the early 1900s, manufactured gas plants produced lampblack and tar residues. The residues that may remain at some sites contain chemical compounds that now are classified as hazardous. The Utility owns all or a portion of 28 manufactured gas plant sites. The Utility has a program, in cooperation with environmental agencies, to evaluate and take appropriate action to mitigate any potential health or environmental hazards at these sites. The Utility spent approximately $3 million in 2006 and expects to spend approximately $6 million in 2007 on these projects. The Utility expects that expenses will increase as remedial actions related to these sites are approved by regulatory agencies. There are approximately 67 other manufactured gas plant sites in the Utility's service territory that are now owned by others which remain a source of potential claims. It is likely that the Utility will incur remediation costs related to some of these sites. Although the Utility has been able to quantify potential liability for many of these sites, the amount of potential liability for all of these sites cannot be quantified.

Under environmental laws such as CERCLA, the Utility has been or may be required to take remedial action at third-party sites used for the disposal of waste from the Utility's facilities, or to pay for associated clean-up costs or natural resource damages. The Utility is currently aware of eight such sites where investigation or clean-up activities are currently underway. At the Geothermal Incorporated site in Lake County, California, the Utility is in the process of completing a three-year closure of the disposal facility which was abandoned by its operator. The Utility was the major responsible party and led this effort on behalf of the responsible parties. In 2006, the Utility completed settlements with the other responsible parties for their share of future costs and assumed ownership of the closed facility. At the Casmalia disposal facility near Santa Maria, California, the Utility and several other generators of waste sent to the site have entered into a court-approved agreement with the EPA that requires the Utility and the other parties to perform certain site investigation and mitigation measures.

In addition, the Utility has been named as a defendant in several civil lawsuits in which plaintiffs allege that the Utility is responsible for performing or paying for remedial action at sites that it no longer owns or never owned. Remedial actions may include investigations, health and ecological assessments, and removal of wastes.

The cost of environmental remediation is difficult to estimate. The Utility records an environmental remediation liability when site assessments indicate remediation is probable and it can estimate a range of reasonably likely clean-up costs. The Utility reviews its remediation liability on a quarterly basis for each site where it may be exposed to remediation responsibilities. The liability is an estimate of costs for site investigations, remediation, operations and maintenance, monitoring and site closure using current technology, enacted laws and regulations, experience gained at similar sites, and an assessment of the probable level of involvement and financial condition of other potentially responsible parties. Unless there is a better estimate within this range of possible costs, the Utility records the costs at the lower end of this range. The Utility estimates the upper end of this cost range using reasonably possible outcomes that are least favorable to the Utility. It is reasonably possible that a change in these estimates may occur in the near term due to uncertainty concerning the Utility's responsibility, the complexity of environmental laws and regulations, and the selection of compliance alternatives.

The Utility had an undiscounted environmental remediation liability of approximately $511 million at December 31, 2006 and approximately $469 million at December 31, 2005. The increase in the undiscounted environmental remediation reflects an increase of $74 million for remediation at the Utility’s gas compressor stations located near Hinkley, California and Topock, Arizona. The portion of the increased liability of $39 million for remediation at the Hinkley facility is attributable to changes in the California Regional Water Quality Control Board’s imposed remediation levels. Costs incurred at this facility are not recoverable from customers and, as a result, the after-tax impact on income was a reduction of approximately $23 million for 2006. Ninety percent of the estimated remediation costs associated with the Utility’s gas compressor station located near Topock, Arizona will be recoverable in rates in accordance with the hazardous waste ratemaking mechanism which permits the Utility to recover ninety percent of hazardous waste remediation costs from customers without a reasonableness review.

For more information about environmental remediation liabilities, see Note 17 of the Notes to the Consolidated Financial Statements in the 2006 Annual Report.

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Nuclear Fuel Disposal

Under the Nuclear Waste Policy Act of 1982, the Department of Energy, or the DOE, is responsible for the transportation and permanent storage and disposal of spent nuclear fuel and high-level radioactive waste. The Utility has contracted with the DOE to provide for the disposal of these materials from Diablo Canyon. Under the contract, if the DOE completes a storage facility by 2010, the earliest that Diablo Canyon's spent fuel would be accepted for storage or disposal is thought to be 2018. Under current operating procedures, the Utility believes that the existing spent fuel pools (which include newly constructed temporary storage racks) have sufficient capacity to enable the Utility to operate Diablo Canyon until approximately 2010 for Unit 1 and 2011 for Unit 2. After receiving a permit from the NRC in March 2004, the Utility began building an on-site dry cask storage facility to store spent fuel through at least 2024. The Utility estimates it could complete the dry cask storage project in 2008. The NRC’s March 2004 decision, however, was appealed by various parties, and the U.S. Court of Appeals for the Ninth Circuit, or Ninth Circuit, issued a decision in 2006 that requires the NRC to consider the environmental consequences of a potential terrorist attack at Diablo Canyon as part of the NRC’s supplemental assessment of the dry cask storage permit. The Utility may incur significant additional expenditures if the NRC decides that the Utility must change the design and construction of the dry cask storage facility. If the Utility is unable to complete the dry cask storage facility, or if construction is delayed beyond 2010, and if the Utility is otherwise unable to increase its on-site storage capacity, it is possible that the operation of Diablo Canyon may have to be curtailed or halted as early as 2010 with respect to Unit 1 and 2011 with respect to Unit 2 and until such time as additional spent fuel can be safely stored.

As a result of the DOE’s failure to develop a permanent storage facility, the Utility has been required to incur substantial costs for planning and developing on-site storage options for spent nuclear fuel as described above at Diablo Canyon as well as at the retired nuclear facility at Humboldt Bay, or Humboldt Bay Unit 3.  The Utility is seeking to recover these costs from the DOE on the basis that the DOE has breached its contractual obligation to move used nuclear fuel from Diablo Canyon and Humboldt Bay Unit 3 to a national repository beginning in 1998.  Any amounts recovered from the DOE will be credited to customers.  In October 2006, the U.S. Court of Federal Claims issued a decision awarding approximately $42.8 million of the $92 million incurred by the Utility through 2004. The Utility will seek recovery of costs incurred after 2004 in future lawsuits against the DOE.  In January 2007, the Utility filed a notice of appeal of the U.S. Court of Federal Claims’ decision in the U.S. Court of Appeals for the Federal Circuit seeking to increase the amount of the award and challenging the court’s finding the Utility would have had to incur some of the costs for the onsite storage facilities even if the DOE had complied with the contract.   If the court’s decision is not overturned or modified on appeal, it is likely that the Utility will be unable to recover all of its future costs for onsite storage facilities from the DOE.  However, reasonably incurred costs related to the onsite storage facilities are, in the case of Diablo Canyon, recoverable through rates and, in the case of Humboldt Bay Unit 3, recoverable through its decommissioning trust fund. 

PG&E Corporation and the Utility are unable to predict the outcome of this appeal or the amount of any additional awards the Utility may receive.

Nuclear Decommissioning

The Utility's nuclear power facilities consist of two units at Diablo Canyon and the retired facility at Humboldt Bay Unit 3. Nuclear decommissioning requires the safe removal of nuclear facilities from service and the reduction of residual radioactivity to a level that permits termination of the NRC license and release of the property for unrestricted use. For ratemaking purposes, the eventual decommissioning of Diablo Canyon Unit 1 is scheduled to begin in 2024 and to be completed in 2044. Decommissioning of Diablo Canyon Unit 2 is scheduled to begin in 2025 and to be completed in 2041, and decommissioning of Humboldt Bay Unit 3 is scheduled to begin in 2009 and to be completed in 2015. The Utility's revenue requirements for estimated nuclear decommissioning costs are recovered from customers through a non-bypassable charge that will continue until those costs are fully recovered. The decommissioning cost estimates are based on the plant location and cost characteristics for the Utility's nuclear power plants. Actual decommissioning costs may vary from these estimates as a result of changes in assumptions such as decommissioning dates, regulatory requirements, technology, and costs of labor, materials and equipment. For more information about nuclear decommissioning, including the estimated decommissioning costs, see Note 13 of the Notes to the Consolidated Financial Statements in the 2006 Annual Report.

Electric and Magnetic Fields

Electric and magnetic fields, or EMFs, naturally result from the generation, transmission, distribution and use of electricity. In November 1993, the CPUC adopted an interim EMF policy for California energy utilities that, among other things, requires California energy utilities to take no-cost and low-cost steps to reduce EMFs from new or upgraded utility facilities. California energy utilities were required to fund an EMF education program and an EMF research program managed by the California Department of Health Services. In October 2002, the California Department of Health Services released its report, based primarily on its review of studies by others, evaluating the possible risks from EMFs, to the CPUC and the public. The report's conclusions contrast with other

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recent reports by authoritative health agencies in that the California Department of Health Services' report has assigned a higher probability to the possibility of a causal connection between EMF exposures and a number of diseases and conditions, including childhood leukemia, adult leukemia, amyotrophic lateral sclerosis and miscarriages.

On January 26, 2006, the CPUC issued a decision which affirms the CPUC’s “low-cost/no-cost, prudent avoidance” policy to reduce EMF exposure for new utility transmission and substation projects. The CPUC ordered the continued use of a 4% of project cost benchmark for EMF reduction measures. The CPUC also reaffirmed that it has exclusive jurisdiction with respect to utility EMF matters.

The Utility currently is not involved in third-party litigation concerning EMFs. In August 1996, the California Supreme Court held that homeowners are barred from suing utilities for alleged property value losses caused by fear of EMFs from power lines. In a case involving allegations of personal injury, a California appeals court held that the CPUC has exclusive jurisdiction over personal injury and wrongful death claims arising from allegations of harmful exposure to EMFs and barred plaintiffs' personal injury claims. The California Supreme Court declined to hear the plaintiffs’ appeal of this decision.

Item 1A. Risk Factors

A discussion of the significant risks associated with investments in the securities of PG&E Corporation and the Utility is set forth under the heading “Risk Factors” in the MD&A in the 2006 Annual Report, which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The Utility owns or has obtained the right to occupy and/or use real property comprising the Utility's electricity and natural gas distribution facilities, natural gas gathering facilities and generation facilities, and natural gas and electricity transmission facilities, all of which are described above under “Electric Utility Operations” and “Natural Gas Utility Operations” above. In total, the Utility occupies 9.8 million square feet of real property, including 8.5 million square feet that the Utility owns. Of the 9.8 million square feet of occupied real property, approximately 1.7 million square feet represent the Utility's corporate headquarters located in several buildings in San Francisco, California. The Utility leases approximately 120,000 square feet of the approximate 1.7 million square feet of office space. The Utility occupies or uses real property that it does not own primarily through various leases, easements, rights-of-way, permits or licenses from private landowners or governmental authorities. The Utility currently owns approximately 167,000 acres of land, approximately 140,000 acres of which it will encumber with conservation easements and/or donate to public agencies or non-profit conservation organizations under the Chapter 11 Settlement Agreement. Approximately 75,000 acres of this land may be donated in fee and encumbered with conservation easements. The remaining land contains the Utility's or a joint licensee's hydroelectric generation facilities and will only be encumbered with conservation easements. As contemplated in the Chapter 11 Settlement Agreement, the Utility formed an entity, the Pacific Forest Watershed Lands Stewardship Council, or the Council, to oversee the development and implementation of a Land Conservation Plan, or LCP, that will articulate the long-term management objectives for the 140,000 acres. The Council is governed by an 18-member Board of Directors that represent a range of diverse interests, including the CPUC, California environmental agencies, organizations representing underserved and minority constituencies, agricultural and business interests, and public officials. The Utility has appointed 1 out of 18 members of the Board of Directors of the Council. While the Council originally contemplated adopting and presenting the LCP to the Utility by April 2007, it currently anticipates approving the LCP in the summer of 2007. The Utility will then seek authorization from the CPUC, the FERC and other approving entities to proceed with the transactions necessary to implement the LCP. If the Council is unable to reach consensus on all or part of the LCP, the Utility will seek regulatory approval of the transactions required to implement its own plan, along with a description of the positions of the disputing board members, before April 2013.

PG&E Corporation also leases approximately 74,000 square feet of office space from a third party in San Francisco, California. This lease expires in 2012.

Item 3. Legal Proceedings

In addition to the following legal proceedings, PG&E Corporation and the Utility are involved in various legal proceedings in the ordinary course of their business.

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Diablo Canyon Power Plant

The Utility's Diablo Canyon power plant employs a “once-through” cooling water system that is regulated under a Clean Water Act National Pollutant Discharge Elimination System, or NPDES, permit issued by the Central Coast Regional Water Quality Control Board, or the Central Coast Board. This permit allows the Diablo Canyon power plant to discharge the cooling water at a temperature no more than 22 degrees above the temperature of the ambient receiving water, and requires that the beneficial uses of the water be protected. The beneficial uses of water in this region include industrial water supply, marine and wildlife habitat, shellfish harvesting, and preservation of rare and endangered species. In January 2000, the Central Coast Board issued a proposed draft cease and desist order alleging that, although the temperature limit has never been exceeded, the Utility's Diablo Canyon power plant's discharge was not protective of beneficial uses.

In October 2000, the Utility and the Central Coast Board reached a tentative settlement under which the Central Coast Board agreed to find that the Utility's discharge of cooling water from the Diablo Canyon power plant protects beneficial uses and that the intake technology reflects the best technology available, as defined in the federal Clean Water Act. As part of the tentative settlement, the Utility agreed to take measures to preserve certain acreage north of the plant and to fund approximately $6 million in environmental projects and future environmental monitoring related to coastal resources. On March 21, 2003, the Central Coast Board voted to accept the settlement agreement. On June 17, 2003, the settlement agreement was executed by the Utility, the Central Coast Board and the California Attorney General's Office. A condition to the effectiveness of the settlement agreement is that the Central Coast Board renew Diablo Canyon's NPDES permit.

At its July 10, 2003 meeting, the Central Coast Board did not renew the NPDES permit and continued the permit renewal hearing indefinitely. Several Central Coast Board members indicated that they no longer supported the settlement agreement, and the Central Coast Board requested a team of independent scientists, as part of a technical working group, to develop additional information on possible mitigation measures for Central Coast Board staff. In January 2005, the Central Coast Board published the scientists' draft report recommending several such mitigation measures. If the Central Coast Board adopts the scientists' recommendations, and if the Utility ultimately is required to implement the projects proposed in the draft report, it could incur costs of up to approximately $30 million. The Utility would seek to recover these costs through rates charged to customers.

PG&E Corporation and the Utility believe that the ultimate outcome of this matter will not have a material adverse impact on their Utility's financial condition or results of operations.

Complaints Filed by the California Attorney General and the City and County of San Francisco

On January 10, 2002, the California Attorney General filed a complaint in the Superior Court for the County of San Francisco, or the Superior Court, against PG&E Corporation and its directors, as well as against directors of the Utility, based on allegations of unfair or fraudulent business acts or practices in violation of California Business and Professions Code Section 17200, or Section 17200. Among other allegations, the California Attorney General alleged that past transfers of funds from the Utility to PG&E Corporation during the period from 1997 through 2000 (primarily in the form of dividends and stock repurchases), and allegedly from PG&E Corporation to other affiliates of PG&E Corporation, violated various conditions established by the CPUC in decisions approving the holding company formation. The California Attorney General alleged that the defendants violated these conditions when PG&E Corporation allegedly failed to provide adequate financial support to the Utility during the California energy crisis.

The complaint seeks injunctive relief, the appointment of a receiver, restitution in an amount according to proof, civil penalties of $2,500 against each defendant for each violation of Section 17200, a total penalty of not less than $500 million and costs of suit. The California Attorney General's complaint also seeks restitution of assets allegedly wrongfully transferred to PG&E Corporation from the Utility.

On February 11, 2002, a complaint entitled City and County of San Francisco; People of the State of California v. PG&E Corporation, and Does 1-150, was filed in the Superior Court. The complaint contains some of the same allegations contained in the California Attorney General's complaint, including allegations of unfair competition in violation of Section 17200. In addition, the complaint alleges causes of action for conversion, claiming that PG&E Corporation “took at least $5.2 billion from the Utility,” and for unjust enrichment. The City and County of San Francisco, or CCSF, seeks injunctive relief, the appointment of a receiver, restitution, disgorgement, the imposition of a constructive trust, civil penalties of $2,500 against each defendant for each violation of Section 17200 and costs of suit.

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The complaints, which have been consolidated in the Superior Court, were filed after the CPUC issued two decisions in its investigative proceeding commenced in April 2001 into whether the California investor-owned electric utilities, including the Utility, complied with past CPUC decisions, rules and orders authorizing their holding company formations and/or governing affiliate transactions, as well as applicable statutes. The order states that the CPUC would, among other matters, investigate the utilities' transfer of money to their holding companies, including during times when their utility subsidiaries were experiencing financial difficulties, the failure of the holding companies to financially assist the utilities when needed, the transfer by the holding companies of assets to unregulated subsidiaries, and the holding companies' actions to “ringfence” their unregulated subsidiaries. In May 2005, the CPUC closed this investigation without making any findings.

PG&E Corporation believes that the intercompany transactions challenged by the California Attorney General and CCSF were in full compliance with applicable law and CPUC conditions. The challenged transactions forming the bulk of the restitution claims were regular quarterly dividends and stock repurchases. As part of its annual cost of capital proceedings, the Utility advised the CPUC in advance of its forecast stock repurchases and dividends. The CPUC did not challenge or question those payments.

In January 2006, the U.S. Court of Appeals for the Ninth Circuit, or the Ninth Circuit, issued a decision on the parties’ appeals of various rulings by the Bankruptcy Court and the U.S. District Court for the Northern District of California, or the District Court, concerning jurisdictional issues. The Ninth Circuit found that the Superior Court had jurisdiction over the California Attorney General’s and CCSF’s restitution claims. (In October 2006, the U.S. Supreme Court declined to grant PG&E Corporation’s request to review the Ninth Circuit’s decision.) The Ninth Circuit did not address the California Attorney General’s and CCSF’s underlying allegations that PG&E Corporation and the other defendants violated Section 17200. The Ninth Circuit also did not decide the issue of who would be entitled to receive the proceeds, if any, of a restitution award, and PG&E Corporation continues to believe that any such proceeds would be the property of the Utility. Pursuant to the Chapter 11 Settlement Agreement, the CPUC released all claims against PG&E Corporation or the Utility arising out of or in any way related to the energy crisis, including the CPUC’s investigation into past PG&E Corporation actions during the energy crisis. Accordingly, PG&E Corporation believes that any claims for such proceeds by the CPUC would be precluded.

While the Ninth Circuit appeal was pending, the Superior Court held a trial in December 2004 to consider the appropriate standard to determine what constitutes a separate violation of Section 17200 in order to determine the magnitude of potential penalties under Section 17200 (up to $2,500 per separate “violation”). The Superior Court did not address the question of whether any violations occurred. In March 2005, the Superior Court issued a decision rejecting the “per victim” and “per [customer] bill” approaches advocated by the plaintiffs, standards that potentially could have resulted in millions of separate “violations.” The Superior Court found that the appropriate standard was each transfer of money from the Utility to PG&E Corporation that plaintiffs allege violated Section 17200. In July 27, 2005, the California Court of Appeal summarily denied a petition filed by the California Attorney General and CCSF seeking to overturn this decision. The California Attorney General and CCSF have resumed discovery in the Superior Court action. The next case management conference is scheduled for April 17, 2007.

PG&E Corporation believes that the California Attorney General’s and CCSF’s allegations have no merit and will continue to vigorously respond to and defend against the litigation. PG&E Corporation believes that the ultimate outcome of this matter would not result in a material adverse effect on PG&E Corporation’s financial condition or results of operations.

The California Air Resources Board

The CARB oversees the Periodic Smoke Inspection Program to test and repair heavy-duty diesel vehicles in order to ensure efficient operations and reduce particulate matter emissions. The program applies to approximately 2,000 vehicles owned by the Utility. In July 2006, the CARB requested the Utility's program compliance records. The Utility discovered that its records were incomplete and that some records could not be located. The Utility immediately notified the CARB and began the evaluation and implementation of process improvements to ensure accurate recordkeeping. The CARB is authorized to assess penalties of up to $500 per missing or incomplete record. The Utility continues to work with the CARB and expects to resolve the matter in the first quarter of 2007. The Utility believes that the ultimate outcome of this matter would not result in a material adverse effect on its financial condition or results of operations.

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Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANTS

The names, ages and positions of PG&E Corporation “executive officers,” as defined by Rule 3b-7 of the General Rules and Regulations under the Securities and Exchange Act of 1934, or Exchange Act, at February 1, 2007, are as follows:

Name	Age	Position
Peter A. Darbee	54	Chairman of the Board, Chief Executive Officer and President
Leslie H. Everett	56	Senior Vice President, Communications and Public Affairs
Kent M. Harvey	48	Senior Vice President and Chief Risk and Audit Officer
Russell M. Jackson	49	Senior Vice President, Human Resources
Christopher P. Johns	46	Senior Vice President, Chief Financial Officer and Treasurer
Thomas B. King	45	Senior Vice President; Chief Executive Officer, Pacific Gas and Electric Company
Hyun Park	45	Senior Vice President and General Counsel
Rand L. Rosenberg	53	Senior Vice President, Corporate Strategy and Development

All officers of PG&E Corporation serve at the pleasure of the Board of Directors. During the past five years through February 1, 2007, the executive officers of PG&E Corporation had the following business experience. Except as otherwise noted, all positions have been held at PG&E Corporation.

Name	Position	Period Held Office
Peter A. Darbee	Chairman of the Board, Chief Executive Officer and President	January 1, 2006 to present
	Chairman of the Board, Pacific Gas and Electric Company	January 1, 2006 to present
	President and Chief Executive Officer	January 1, 2005 to December 31, 2005
	Senior Vice President and Chief Financial Officer	September 20, 1999 to December 31, 2004
Leslie H. Everett	Senior Vice President, Communications and Public Affairs	January 9, 2006 to present
	Senior Vice President and Assistant to the Chief Executive Officer	January 1, 2005 to January 8, 2006
	Senior Vice President and Assistant to the Chairman	August 2, 2004 to December 31, 2004
	Vice President and Assistant to the Chairman	June 1, 2001 to August 1, 2004
Kent M. Harvey	Senior Vice President and Chief Risk and Audit Officer	October 1, 2005 to present
	Senior Vice President, Chief Financial Officer and Treasurer, Pacific Gas and Electric Company	November 1, 2000 to September 30, 2005
Russell M. Jackson	Senior Vice President, Human Resources, PG&E Corporation and Pacific Gas and Electric Company	August 2, 2004 to present
	Vice President, Human Resources, PG&E Corporation	June 1, 2004 to August 1, 2004
	Vice President, Human Resources, Pacific Gas and Electric Company	June 1, 1999 to August 1, 2004
Christopher P. Johns	Senior Vice President, Chief Financial Officer and Treasurer	October 4, 2005 to present
	Senior Vice President, Chief Financial Officer and Treasurer, Pacific Gas and Electric Company	October 1, 2005 to present
	Senior Vice President, Chief Financial Officer and Controller	January 1, 2005 to October 3, 2005
	Senior Vice President and Controller	September 19, 2001 to December 31, 2004
Thomas B. King	Senior Vice President, PG&E Corporation	January 1, 2006 to present
	Chief Executive Officer, Pacific Gas and Electric Company	August 15, 2006 to present
	President and Chief Executive Officer, Pacific Gas and Electric Company	January 1, 2006 to August 14, 2006
	Executive Vice President and Chief Operating Officer, Pacific Gas and Electric Company	July 1, 2005 to December 31, 2005
	Executive Vice President and Chief of Utility Operations, Pacific Gas and Electric Company	August 2, 2004 to June 30, 2005
	Senior Vice President and Chief of Utility Operations, Pacific Gas and Electric Company	November 1, 2003 to August 1, 2004
	Senior Vice President, PG&E Corporation	January 1, 1999 to October 31, 2003
	President, PG&E National Energy Group, Inc.	November 15, 2002 to July 8, 2003
	President and Chief Operating Officer, PG&E Gas Transmission Corporation	August 27, 2002 to July 8, 2003
	President and Chief Operating Officer, Gas Transmission, PG&E National Energy Group, Inc.	August 9, 2002 to November 14, 2002
	President and Chief Operating Officer, West Region, PG&E National Energy Group, Inc.	July 1, 2000 to August 8, 2002
	President and Chief Operating Officer, PG&E Gas Transmission Corporation	November 23, 1998 to September 10, 2002
Hyun Park	Senior Vice President and General Counsel	November 13, 2006 to present
	Vice President, General Counsel and Secretary, Allegheny Energy, Inc. (an investor-owned utility company headquartered in Pennsylvania)	April 5, 2005 to October 17, 2006
	Senior Vice President, General Counsel and Secretary, Sithe Energies, Inc.	March 2000 to February 2005
Rand L. Rosenberg	Senior Vice President, Corporate Strategy and Development	November 1, 2005 to present
	Executive Vice President and Chief Financial Officer, Infospace, Inc.	September 2000 to January 20, 2001

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The names, ages and positions of the Utility's “executive officers,” as defined by Rule 3b-7 of the General Rules and Regulations under the Exchange Act at February 1, 2007, are as follows:

Name	Age	Position
Peter A. Darbee	54	Chairman of the Board
Thomas B. King	45	Chief Executive Officer
William. T. Morrow	47	President and Chief Operating Officer
Thomas E. Bottorff	53	Senior Vice President, Regulatory Relations
Jeffrey D. Butler	51	Senior Vice President, Energy Delivery
Leslie H. Everett	56	Senior Vice President, Communications and Public Affairs, PG&E Corporation
Russell M. Jackson	49	Senior Vice President, Human Resources
Christopher P. Johns	46	Senior Vice President, Chief Financial Officer and Treasurer
John S. Keenan	58	Senior Vice President, Generation and Chief Nuclear Officer
Hyun Park	45	Senior Vice President and General Counsel, PG&E Corporation
Stewart M. Ramsay	48	Vice President, Asset Management and Electric Transmission
Fong Wan	45	Vice President, Energy Procurement

All officers of the Utility serve at the pleasure of the Board of Directors. During the past five years through February 1, 2007, the executive officers of the Utility had the following business experience. Except as otherwise noted, all positions have been held at Pacific Gas and Electric Company.

Name	Position	Period Held Office
Peter A. Darbee	Chairman of the Board, Pacific Gas and Electric Company	January 1, 2006 to present
	Chairman of the Board, Chief Executive Officer and President, PG&E Corporation	January 1, 2006 to present
	President and Chief Executive Officer, PG&E Corporation	January 1, 2005 to December 31, 2005
	Senior Vice President and Chief Financial Officer, PG&E Corporation	July 9, 2001 to December 31, 2004
Thomas B. King	Chief Executive Officer	August 15, 2006 to present
	President and Chief Executive Officer	January 1, 2006 to August 14, 2006
	Senior Vice President, PG&E Corporation	January 1, 2006 to present
	Executive Vice President and Chief Operating Officer	July 1, 2005 to December 31, 2005
	Executive Vice President and Chief of Utility Operations	August 2, 2004 to June 30, 2005
	Senior Vice President and Chief of Utility Operations	November 1, 2003 to August 1, 2004
	Senior Vice President, PG&E Corporation	January 1, 1999 to October 31, 2003
	President, PG&E National Energy Group, Inc.	November 15, 2002 to July 8, 2003
	President and Chief Operating Officer, PG&E Gas Transmission Corporation	August 27, 2002 to July 8, 2003
	President and Chief Operating Officer, Gas Transmission, PG&E National Energy Group, Inc.	August 9, 2002 to November 14, 2002
	President and Chief Operating Officer, West Region, PG&E National Energy Group, Inc.	July 1, 2000 to August 8, 2002
	President and Chief Operating Officer, PG&E Gas Transmission Corporation	November 23, 1998 to September 10, 2002
William T. Morrow	President and Chief Operating Officer	August 15, 2006 to present
	Chief Executive Officer, Europe, Vodafone Group PLC (a global mobile telecommunications company)	May 1, 2006 to July 31, 2006
	President, Vodafone KK, Japan	April 1, 2005 to April 30, 2006
	Chief Executive Officer, Vodafone UK, Ltd.	February 1, 2004 to March 31, 2005
	President, Japan Telecom Holdings Co., Inc.	December 21, 2001 to January 31, 2004
Thomas E. Bottorff	Senior Vice President, Regulatory Relations	October 14, 2005 to present
	Senior Vice President, Customer Service and Revenue	March 1, 2004 to October 13, 2005
	Vice President, Customer Service	June 1, 1999 to February 29, 2004
Jeffrey D. Butler	Senior Vice President, Energy Delivery	January 9, 2006 to present
	Senior Vice President, Transmission and Distribution	March 1, 2004 to January 8, 2006
	Vice President, Operations, Maintenance and Construction	June 12, 2000 to February 29, 2004
Leslie H. Everett	Senior Vice President, Communications and Public Affairs, PG&E Corporation	January 9, 2006 to present
	Senior Vice President and Assistant to the Chief Executive Officer, PG&E Corporation	January 1, 2005 to January 8, 2006
	Senior Vice President and Assistant to the Chairman, PG&E Corporation	August 2, 2004 to December 31, 2004
	Vice President and Assistant to the Chairman, PG&E Corporation	June 1, 2001 to August 1, 2004
Russell M. Jackson	Senior Vice President, Human Resources, Pacific Gas and Electric Company and PG&E Corporation	August 2, 2004 to present
	Vice President, Human Resources, PG&E Corporation	June 1, 2004 to August 1, 2004
	Vice President, Human Resources	June 1, 1999 to August 1, 2004
Christopher P. Johns	Senior Vice President, Chief Financial Officer and Treasurer	October 1, 2005 to present
	Senior Vice President, Chief Financial Officer and Treasurer, PG&E Corporation	October 4, 2005 to present
	Senior Vice President, Chief Financial Officer and Controller, PG&E Corporation	January 1, 2005 to October 3, 2005
	Senior Vice President and Controller, PG&E Corporation	September 19, 2001 to December 31, 2004
John S. Keenan	Senior Vice President, Generation and Chief Nuclear Officer	December 19, 2005 to present
	Vice President, Fossil Generation, Progress Energy	November 10, 2003 to December 18, 2005
	Vice President, Brunswick Nuclear Plant, Progress Energy	May 1, 1998 to November 9, 2003
Hyun Park	Senior Vice President and General Counsel, PG&E Corporation	November 13, 2006 to present
	Vice President, General Counsel and Secretary, Allegheny Energy, Inc. (an investor-owned utility company headquartered in Pennsylvnia)	April 5, 2005 to October 17, 2006
	Senior Vice President, General Counsel and Secretary, Sithe Energies, Inc.	March 2000 to February 2005
Stewart M. Ramsay	Vice President, Asset Management and Electric Transmission	January 9, 2006 to present
	Vice President, Electric Transmission	July 1, 2005 to January 8, 2006
	Vice President, Distribution Asset Management, American Electric Power	February 1, 2004 to June 30, 2005
	Senior Vice President, Power and Gas, UMS Group, Inc.	October 1, 2001 to January 31, 2004
Fong Wan	Vice President, Energy Procurement	January 9, 2006 to present
	Vice President, Power Contracts and Electric Resource Development	May 1, 2004 to January 8, 2006
	Vice President, Risk Initiatives, PG&E Corporation Support Services, Inc.	November 1, 2000 to April 30, 2004

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of February 1, 2007, there were 92,901 holders of record of PG&E Corporation common stock. PG&E Corporation common stock is listed on the New York Stock Exchange and the Swiss stock exchanges. The high and low sales prices of PG&E Corporation common stock for each quarter of the two most recent fiscal years are set forth under the heading “Quarterly Consolidated Financial Data (Unaudited)” in the 2006 Annual Report, which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report. The discussion of dividends with respect to PG&E Corporation's common stock is hereby incorporated by reference from “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Financial Resources - Dividends” of the 2006 Annual Report.

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As previously disclosed, in connection with its entry into certain credit agreements, in June 2002 and October 2002, PG&E Corporation issued warrants to purchase 5,066,931 shares of PG&E Corporation common stock at an exercise price of $0.01 per share. During the year ended December 31, 2006, warrant holders exercised, on a net exercise basis, warrants to purchase 51,904 shares, and received 51,890 shares of PG&E Corporation common stock in reliance on the exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) of the Act. As of December 31, 2006, warrant holders had exercised, on a net exercise basis, warrants to purchase 5,066,931 shares, and had received 5,065,099 shares of PG&E Corporation common stock since the warrants were issued. There are no more warrants outstanding.

Pacific Gas and Electric Company did not make any sales of unregistered equity securities during the quarter ended December 31, 2006.

Issuer Purchases of Equity Securities

               PG&E Corporation common stock:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(2)
October 1 through October 31, 2006		-	$	-		-	$	500,000,000
November 1 through November 30, 2006		-	$	-		-	$	500,000,000
December 1 through December 31, 2006		-	$	-		-	$	500,000,000
Total		-	$	-		-	$	500,000,000
(1) On October 19, 2005, the PG&E Corporation Board of Directors authorized the repurchase of up to $1.6 billion of shares of PG&E Corporation's common stock from time to time, but no later than December 31, 2006. No purchases were made under this authorization during the quarter ended December 31, 2006. (2) The authority to repurchase shares under this authorization expired on December 31, 2006.

During the fourth quarter of 2006, Pacific Gas and Electric Company did not redeem or repurchase any shares of its various series of preferred stock outstanding.

Item 6. Selected Financial Data

A summary of selected financial information, for each of PG&E Corporation and Pacific Gas and Electric Company for each of the last five fiscal years, is set forth under the heading “Selected Financial Data” in the 2006 Annual Report, which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

A discussion of PG&E Corporation's and Pacific Gas and Electric Company's consolidated financial condition and results of operations is set forth under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the 2006 Annual Report, which discussion is hereby incorporated by reference and filed as part of Exhibit 13 to this report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information responding to Item 7A appears in the 2006 Annual Report under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management Activities,” and under Notes 2 and 12 of the “Notes to the Consolidated Financial Statements” of the 2006 Annual Report, which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report.

Item 8. Financial Statements and Supplementary Data

Information responding to Item 8 appears in the 2006 Annual Report under the following headings for PG&E Corporation: “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows,” and “Consolidated

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Statements of Shareholders' Equity;” under the following headings for Pacific Gas and Electric Company: “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows,” and “Consolidated Statements of Shareholders' Equity;” and under the following headings for PG&E Corporation and Pacific Gas and Electric Company jointly: “Notes to the Consolidated Financial Statements,” “Quarterly Consolidated Financial Data (Unaudited),” and “Report of Independent Registered Public Accounting Firm,” which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Based on an evaluation of PG&E Corporation's and the Utility's disclosure controls and procedures as of December 31, 2006, PG&E Corporation's and the Utility's respective principal executive officers and principal financial officers have concluded that such controls and procedures are effective to ensure that information required to be disclosed by PG&E Corporation and the Utility in reports that the companies file or submit under the Securities Exchange Act of 1934, or the 1934 Act, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. In addition, PG&E Corporation's and the Utility's respective principal executive officers and principal financial officers have concluded that such controls and procedures were effective in ensuring that information required to be disclosed by PG&E Corporation and the Utility in the reports that PG&E Corporation and the Utility file or submit under the 1934 Act is accumulated and communicated to PG&E Corporation’s and the Utility’s management, including PG&E Corporation's and the Utility's respective principal executive officers and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in internal control over financial reporting that occurred during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, PG&E Corporation's or the Utility's internal control over financial reporting.

Management of PG&E Corporation and the Utility have prepared an annual report on internal control over financial reporting. Management's report, together with the report of the independent registered public accounting firm, appears in the 2006 Annual Report under the heading “Management's Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm,” which information is hereby incorporated by reference and filed as part of Exhibit 13 to this report.

Item 9B. Other Information

Officer Appointments

On February 21, 2007, the Utility’s Board of Directors elected William T. Morrow, 47, as President and Chief Executive Officer of the Utility, effective July 1, 2007. Mr. Morrow will continue to report to Thomas B. King, currently Chief Executive Officer of the Utility, who will become President of PG&E Corporation effective July 1, 2007. Peter A. Darbee, currently Chairman of the Board, Chief Executive Officer, and President of PG&E Corporation, will become Chairman of the Board and Chief Executive Officer of PG&E Corporation effective July 1, 2007. Mr. Darbee will continue to serve as Chairman of the Board of the Utility.

Mr. Morrow has been President and Chief Operating Officer of the Utility since August 15, 2006. Before joining the Utility, Mr. Morrow held various executive positions in the telecommunications industry. Most recently Mr. Morrow served as Chief Executive Officer, Europe, of Vodafone Group PLC, a position he held from May 2006 to July 2006. From April 2005 to April 2006, Mr. Morrow served as President of Vodafone K.K. in Japan and from February 2004 to March 2005, he was Chief Executive Officer of Vodafone, U.K., Ltd. From December 2001 through January 2004, Mr. Morrow was President of Japan Telecom Holdings Co., Inc. and Japan Telecom Co., Inc. Previously in 2001, Mr. Morrow was Vice President and Country Manager, Japan for Vodafone Group PLC.

Mr. King has served as Chief Executive Officer of the Utility since August 15, 2006. Prior to that date, Mr. King served as President and Chief Executive Officer of the Utility, a position he held from January 1, 2006 to August 14, 2006. He served as Executive Vice President and Chief Operating Officer of the Utility from July 1, 2005 to December 31, 2005, and as Executive Vice President and Chief of Utility Operations from August 2, 2004 to June 30, 2005. From November 1, 2003 to August 1, 2004, he was Senior Vice President and Chief of Utility Operations of the Utility. Prior to November 1, 2003, Mr. King had been a Senior Vice President of PG&E Corporation from January 1, 1999. Since 2000, Mr. King also held various executive positions at PG&E National

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Energy Group, Inc., a former subsidiary of PG&E Corporation involved in power generation, natural gas transmission, and wholesale energy marketing and trading. Mr. King focused his activities primarily in the natural gas transmission business. From November 15, 2002 to July 8, 2003, Mr. King served as the President and as a director of PG&E National Energy Group, Inc.

Mr. King and Mr. Morrow are entitled to receive equity awards under the PG&E Corporation 2006 Long-Term Incentive Plan and the PG&E Corporation Executive Stock Ownership Program. They are also eligible to receive annual cash incentive awards under an annual Short-Term Incentive Plan adopted by the PG&E Corporation Board of Directors. The Utility provides retirement benefits to all of its employees, including its officers, under a tax-qualified defined benefit pension plan. Officers of PG&E Corporation and the Utility are also entitled to receive pension benefits under the PG&E Corporation Supplemental Executive Retirement Plan, a non-tax qualified defined benefit pension plan. Officers of PG&E Corporation and the Utility may also participate in the PG&E Corporation Retirement Savings Plan, a 401(k) plan available to all eligible employees, and the PG&E Corporation Supplemental Retirement Savings Plan. PG&E Corporation also has adopted an Officer Severance Policy that covers officers of PG&E Corporation and the Utility. These plans, as well as perquisites provided to officers, are described in PG&E Corporation’s and the Utility’s 2006 joint proxy statement filed with the Securities and Exchange Commission.

Neither Mr. Morrow nor Mr. King has any relationship or related transaction with PG&E Corporation or the Utility that would require disclosure pursuant to Item 404(a) of Securities and Exchange Commission Regulation S-K.

2007 Short-Term Incentive Plan 

As previously disclosed, the Nominating, Compensation and Governance Committee of the PG&E Corporation Board of Directors, or the Committee, has approved the structure of the PG&E Corporation 2007 Short-Term Incentive Plan, or STIP, under which officers of PG&E Corporation and the Utility are provided an opportunity to receive annual incentive cash payments. Corporate financial performance, as measured by corporate earnings from operations, will account for 50 percent of the incentive, 20 percent of the incentive will be based on customer satisfaction indices, 20 percent of the incentive will be based on the Utility’s success in implementing its strategy to achieve operational excellence and improved customer service, 5 percent will be based on the results of an employee opinion survey measuring employee engagement, and the remaining 5 percent will be based on achieving safety standards. At its meeting on February 21, 2007, the Committee approved the specific performance scale that will be used to determine the extent to which the corporate financial objective, as measured by earnings from operations, has been met. The Committee used the same methodology to establish the performance scale for the corporate financial performance portion of the 2007 STIP as was used for the 2006 STIP. The corporate financial performance measure is based on PG&E Corporation's budgeted earnings from operations that were previously approved by the Board, consistent with the basis for reporting and guidance to the financial community. As with previous earnings performance scales, unbudgeted items impacting comparability such as changes in accounting methods, workforce restructuring, and one-time occurrences will be excluded.

The Committee also approved the 2007 performance targets for each of the four other measures set forth in the table below. The 2006 performance results for each measure are included for comparative purposes.

2007 STIP Performance Targets (1)

Measure	Relative Weight			2006 Results			2007 Target
Customer Satisfaction (Residential & Business)(2)	20%			100			676
Business Transformation Index (3)		20	%		N/A			1.0
Employee Survey (Premier) Index (4)		5	%		64.0	%		66.0	%
Occupational Safety and Health Administration (OSHA) Recordable Injury Rate (5)		5	%		12.9% reduction			15% reduction

1. As explained above, 50% of the STIP award will be based on achievement of corporate earnings from operations targets.

2.This measure reflects a weighted composite of the overall customer satisfaction indices of the Utility’s residential and business customers as reported by the J.D. Power Residential Survey and the J.D. Power Business Survey. For 2006, the residential customers’ and business customers’ scores were weighted equally. In an effort to enhance the focus on improving residential customer satisfaction, which has been lower than business customer satisfaction, for the 2007 target the weighting of the residential customers’ score will be increased to 60% and the weighting of the business customers’ score will be lowered to 40%. In addition, for 2007, J.D. Power and Associates has changed the scale used to report results from the J.D. Power Survey from a scale that attempted to center the industry average score at approximately 100 to a 1,000-point scale. By way of comparison, results for 2006 would have been 678 under the new 1000-point scale based on equally weighted scores and results for 2006 would have been 673 based on the revised weightings. The 2007 target may be adjusted to reflect changes in the J.D. Power industry average scores, which are expected by mid-year 2007.

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3.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^TM project performance for number of meters installed and activated, and (5) the extent to which core business transformation initiatives are implemented compared to planned schedule and scope of initiatives.

4. The Premier Survey is the primary tool used to measure employee engagement at PG&E Corporation and the Utility. The employee index is designed around 15 key drivers of employee engagement. The average overall employee survey index score provides a comprehensive metric that is derived by adding the percent of favorable responses from all 40 core survey items (all of which fall into one of 15 broader topical areas), and then dividing the total sum by 40.

5. 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. The “OSHA Recordable Rate” is the number of OSHA Recordables for every 200,000 hours worked, or for approximately 100 employees. This metric measures the percentage reduction in the Utility’s OSHA Recordable rate from the prior year.

The Committee has full discretion as to the determination of final officer STIP awards for 2007 performance.

PART III

Item 10. Directors, Executive Officersand Corporate Governance

Information regarding executive officers of PG&E Corporation and Pacific Gas and Electric Company is included above in a separate item captioned “Executive Officers of the Registrants” at the end of Part I of this report. Other information responding to Item 10 is included under the heading “Item No. 1: Election of Directors of PG&E Corporation and Pacific Gas and Electric Company” and under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Joint Proxy Statement relating to the 2007 Annual Meetings of Shareholders, which information is hereby incorporated by reference.

Website Availability of Code of Ethics, Corporate Governance and Other Documents

The following documents are available both on PG&E Corporation's website www.pgecorp.com, and Pacific Gas and Electric Company's website, www.pge.com: (1) the codes of conduct and ethics adopted by PG&E Corporation and Pacific Gas and Electric Company applicable to their respective directors and employees, including their respective Chief Executive Officers, Chief Financial Officers, Controllers and other executive officers, (2) PG&E Corporation's and Pacific Gas and Electric Company's corporate governance guidelines, and (3) key Board Committee charters, including charters for the companies' Audit Committees and the PG&E Corporation Nominating, Compensation, and Governance Committee. Shareholders also may obtain print copies of these documents by submitting a written request to Linda Y.H. Cheng, Vice President, Corporate Governance and Corporate Secretary of PG&E Corporation and Pacific Gas and Electric Company, One Market, Spear Tower, Suite 2400, San Francisco, California 94105.

If any amendments are made to, or any waivers are granted with respect to, provisions of the codes of conduct and ethics adopted by PG&E Corporation and Pacific Gas and Electric Company that apply to their respective Chief Executive Officers, Chief Financial Officers or Controllers, the company whose code is so affected will disclose the nature of such amendment or waiver on its respective website and any waivers to the code will be disclosed in a Current Report on Form 8-K filed within 4 business days of the waiver.

Procedures for Shareholder Recommendations of Nominees to the Boards of Directors

During 2006 there were no material changes to the procedures described in PG&E Corporation’s and the Utility’s joint proxy statement relating to the 2006 Annual Meetings of Shareholders by which security holders may recommend nominees to PG&E Corporation’s or the Utility’s Boards of Directors.

Audit Committees and Audit Committee Financial Expert

Information regarding the Audit Committees of PG&E Corporation and the Utility and the “audit committee financial expert” as defined by the SEC is included under the heading “Information Regarding the Boards of Directors of PG&E Corporation and Pacific Gas and Electric Company - Board Committees- Audit Committees” in the Joint Proxy Statement relating to the 2007 Annual Meetings of Shareholders, which information is hereby incorporated by reference.

Item 11. Executive Compensation

Information responding to Item 11, for each of PG&E Corporation and Pacific Gas and Electric Company, is included under

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the headings“Compensation Discussion and Analysis,”“Compensation Committee Report,” “Summary Compensation Table,” “Grants of Plan-based Awards in 2006,” “Outstanding Equity Awards at Fiscal Year End,” “Option Exercises and Stock Vested During 2006,” “Pension Benefits,” “Nonqualified Deferred Compensation,” and “Compensation of Directors,” and “Potential Payments Upon Resignation, Retirement, Termination, Change in Control, Death, or Disability” in the Joint Proxy Statement relating to the 2007 Annual Meetings of Shareholders, which information is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Information responding to Item 12, for each of PG&E Corporation and Pacific Gas and Electric Company, is included under the heading “Security Ownership of Management” and under the heading “Principal Shareholders” in the Joint Proxy Statement relating to the 2007 Annual Meetings of Shareholders, which information is hereby incorporated by reference.

Equity Compensation Plan Information

The following table provides information as of December 31, 2006 concerning shares of PG&E Corporation common stock authorized for issuance under PG&E Corporation's existing equity compensation plans.

Plan Category	(a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights			(b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a))
Equity compensation plans approved by shareholders		6,477,959(1	)	$	24.16		11,421,085(2	)
Equity compensation plans not approved by shareholders		—		$	—		—
Total equity compensation plans		6,477,959(1	)	$	24.16		11,421,085(2	)

(1) Includes 79,639 phantom stock units and restricted stock units. The weighted average exercise price reported in column (b) does not take these awards into account.

(2) Represents the total number of shares available for issuance under PG&E Corporation's Long-Term Incentive Program, or LTIP, and the PG&E Corporation 2006 Long-Term Incentive Plan, or 2006 LTIP, as of December 31, 2006. Outstanding stock-based awards granted under the LTIP include stock options, restricted stock and phantom stock payable in an equal number of shares upon termination of employment or service as a director. The LTIP expired on December 31, 2005. The 2006 LTIP, which became effective on January 1, 2006 authorizes up to 12 million shares to be issued pursuant to awards granted under the 2006 LTIP. Outstanding stock-based awards granted under the 2006 LTIP include stock options, restricted stock, restricted stock units and phantom stock payable in an equal number of shares upon termination of employment or service as a director. For a description of the LTIP and the 2006 LTIP, see Note 14 of the Notes to the Consolidated Financial Statements in the 2006 Annual Report.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information responding to Item 13, for each of PG&E Corporation and Pacific Gas and Electric Company, is included under the headings “Related Person Transactions,” “Review, Approval, and Ratification of Related Person Transactions” and “Information Regarding the Boards of Directors of PG&E Corporation and Pacific Gas and Electric Company - Director Independence” in the Joint Proxy Statement relating to the 2007 Annual Meetings of Shareholders, which information is hereby incorporated by reference.

Item 14. Principal Accountant Fees and Services

Information responding to Item 14, for each of PG&E Corporation and Pacific Gas and Electric Company, is included under the heading “Information Regarding the Independent Registered Public Accounting Firm of PG&E Corporation and Pacific Gas and Electric Company” in the Joint Proxy Statement relating to the 2007 Annual Meetings of Shareholders, which information is hereby incorporated by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)The following documents are filed as a part of this report:

1.The following consolidated financial statements, supplemental information and report of independent registered public accounting firm are contained in the 2006 Annual Report and are incorporated by reference in this report:

Consolidated Statements of Income for the Years Ended December 31, 2006, 2005, and 2004, for each of PG&E Corporation and Pacific Gas and Electric Company.

Consolidated Balance Sheets at December 31, 2006, and 2005 for each of PG&E Corporation and Pacific Gas and Electric Company.

Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2006, 2005, and 2004, for each of PG&E Corporation and Pacific Gas and Electric Company.

Notes to the Consolidated Financial Statements.

Quarterly Consolidated Financial Data (Unaudited).

Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP).

2.The following financial statement schedules and report of independent registered public accounting firm are filed as part of this report:

Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP).

I - Condensed Financial Information of Parent as of December 31, 2006 and 2005 and for the Years Ended December 31, 2006, 2005, and 2004.

II - Consolidated Valuation and Qualifying Accounts for each of PG&E Corporation and Pacific Gas and Electric Company for the Years Ended December 31, 2006, 2005, and 2004.

Schedules not included are omitted because of the absence of conditions under which they are required or because the required information is provided in the consolidated financial statements, including the notes thereto.

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3.Exhibits required by Item 601 of Regulation S-K:

Exhibit Number	Exhibit Description
2.1	Order of the U.S. Bankruptcy Court for the Northern District of California dated December 22, 2003, Confirming Plan of Reorganization of Pacific Gas and Electric Company, including Plan of Reorganization, dated July 31, 2003 as modified by modifications dated November 6, 2003 and December 19, 2003 (Exhibit B to Confirmation Order and Exhibits B and C to the Plan of Reorganization omitted) (incorporated by reference to Pacific Gas and Electric Company's Registration Statement on Form S-3 No. 333-109994, Exhibit 2.1)
2.2	Order of the U.S. Bankruptcy Court for the Northern District of California dated February 27, 2004 Approving Technical Corrections to Plan of Reorganization of Pacific Gas and Electric Company and Supplementing Confirmation Order to Incorporate such Corrections (incorporated by reference to Pacific Gas and Electric Company's Registration Statement on Form S-3 No. 333-109994, Exhibit 2.2)
3.1	Restated Articles of Incorporation of PG&E Corporation effective as of May 29, 2002 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-12609), Exhibit 3.1)
3.2	Certificate of Determination for PG&E Corporation Series A Preferred Stock filed December 22, 2000 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2000 (File No. 1-12609), Exhibit 3.2)
3.3	Bylaws of PG&E Corporation amended as of December 20, 2006
3.4	Restated Articles of Incorporation of Pacific Gas and Electric Company effective as of April 12, 2004 (incorporated by reference to Pacific Gas and Electric Company's Form 8-K filed April 12, 2004 (File No. 1-2348), Exhibit 3)
3.5	Bylaws of Pacific Gas and Electric Company amended as of December 20, 2006
4.1	Indenture, dated as of April 22, 2005, supplementing, amending and restating the Indenture of Mortgage, dated as of March 11, 2004, as supplemented by a First Supplemental Indenture, dated as of March 23, 2004, and a Second Supplemental Indenture, dated as of April 12, 2004, between Pacific Gas and Electric Company and The Bank of New York Trust Company, N.A. (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 10-Q filed May 4, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 4.1)
4.2	Indenture related to PG&E Corporation's 7.5% Convertible Subordinated Notes due June 2007, dated as of June 25, 2002, between PG&E Corporation and U.S. Bank, N.A., as Trustee (incorporated by reference to PG&E Corporation's Form 8-K filed June 26, 2002 (File No. 1-12609), Exhibit 99.1).
4.3	Supplemental Indenture related to PG&E Corporation's 9.50% Convertible Subordinated Notes due June 2010, dated as of October 18, 2002, between PG&E Corporation and U.S. Bank, N.A., as Trustee (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 1-12609), Exhibit 4.1)
4.4	Warrant Agreement, dated as of October 18, 2002, by and among PG&E Corporation, LB I Group Inc., and each other entity named on the signature pages thereto (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 1-12609), Exhibit 4.2)
10.1	Credit Agreement dated as of April 8, 2005, among Pacific Gas and Electric Company, Citicorp North America, Inc., as administrative agent and a lender, JP Morgan Chase Bank, N.A., as syndication agent and a lender, Barclays Bank PLC, BNP Paribas and Deutsche Bank Securities Inc., as documentation agents and lenders, ABN Amro Bank N.V., Lehman Brothers Bank, FSB, Mellon Bank, N.A., Royal Bank of Canada, The Bank of New York, The Bank of Nova Scotia, UBS Loan Finance LLC, and Union Bank of California, N.A., as senior managing agents, and KBC Bank, NV, Morgan Stanley Bank and William Street Commitment Corporation, as lenders (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 10-Q filed May 4, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 10.3)
10.2	First Amendment, dated as of November 30, 2005, to the Credit Agreement among Pacific Gas and Electric Company, Citicorp North America, Inc., as administrative agent and a lender, JPMorgan Chase Bank, N.A., as syndication agent and a lender, Barclays Bank PLC and BNP Paribas as documentation agents and lenders, Deutsche Bank Securities Inc., as documentation agent, and the following other lenders: Deutsche Bank AG New York Branch, ABN Amro Bank N.V., Lehman Brothers Bank, FSB, Mellon Bank, N.A., Royal Bank of Canada, The Bank of New York, UBS Loan Finance LLC, Union Bank of California, N.A., KBC Bank, N.V., Morgan Stanley Bank and William Street Commitment Corporation. (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 10-K for the year ended December 31, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 10.2)
10.3	Credit Agreement, dated as of December 10, 2004, among PG&E Corporation, BNP Paribas, as administrative agent and a lender, Deutsche Bank Securities, as syndication agent, ABN Amro Bank, N.V., Goldman Sachs Credit Partners L.P., and Union Bank of California, N.A., as documentation agents and lenders, and the following other lenders: Barclays Bank PLC, Citicorp USA, Inc., Deutsche Bank AG New York Branch, JP Morgan Chase Bank, N.A., Lehman Brothers Bank, FSB, Morgan Stanley Bank, Royal Bank of Canada, The Bank of Nova Scotia, and The Bank of New York (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed December 15, 2004 (File No. 1-12609 and File No. 1-2348), Exhibit 99)
10.4	First Amendment, dated as of April 8, 2005, to the Credit Agreement dated as of December 10, 2004, among PG&E Corporation, BNP Paribas, as administrative agent and a lender, Deutsche Bank Securities Inc., as syndication agent and a lender, ABN Amro Bank, N.V., Goldman Sachs Credit Partners L.P., and Union Bank of California, N.A., as documentation agents and lenders, and the following other lenders: Barclays Bank PLC, Citicorp USA, Inc., Deutsche Bank AG New York Branch, JP Morgan Chase Bank, N.A., Lehman Brothers Bank, FSB, Morgan Stanley Bank, Royal Bank of Canada, The Bank of Nova Scotia, KBC Bank N.V., and The Bank of New York (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 10-Q filed May 4, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 10.2)
10.5	Master Confirmation dated November 16, 2005, for accelerated share repurchase arrangements between PG&E Corporation and Goldman, Sachs & Co. (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 10.5)
10.6	Settlement Agreement among California Public Utilities Commission, Pacific Gas and Electric Company and PG&E Corporation, dated as of December 19, 2003, together with appendices (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Form 8-K filed December 22, 2003) (File No. 1-12609 and File No. 1-2348), Exhibit 99)
10.7	Firm Transportation Service Agreement between Pacific Gas and Electric Company and Pacific Gas Transmission Company dated October 26, 1993, Rate Schedule FTS-1, and general terms and conditions (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Form 10-K for the year ended December 31, 2003) (File No. 1-12609 and File No. 1-2348), Exhibit 10.4)
10.8	Operating Agreement between Pacific Gas and Electric Company and Pacific Gas Transmission Company dated July 9, 1996 (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Form 10-K for the year ended December 31, 2003) (File No. 1-12609 and File No. 1-2348), Exhibit 10.5)
10.9	Transmission Control Agreement among the California Independent System Operator (CAISO) and the Participating Transmission Owners, including Pacific Gas and Electric Company, effective as of March 31, 1998, as amended (CAISO, FERC Electric Tariff No. 7) (incorporated by reference to PG&E Corporation’s and Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004 (File No. 1-12609 and File No. 1-2348), Exhibit 10.8)
10.10	Operating Agreement, as amended on November 12, 2004, effective as of December 22, 2004, between the State of California Department of Water Resources and Pacific Gas and Electric Company (incorporated by reference to PG&E Corporation’s and Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004 (File No. 1-12609 and File No. 1-2348), Exhibit 10.9)
*10.11	PG&E Corporation Supplemental Retirement Savings Plan amended effective as of September 19, 2001, and frozen after December 31, 2004 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2004) (File No. 1-12609), Exhibit 10.10)
*10.12	PG&E Corporation Supplemental Retirement Savings Plan effective as of January 1, 2005 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2004) (File No. 1-12609), Exhibit 10.11)
*10.13	Letter regarding Compensation Arrangement between PG&E Corporation and Peter Darbee effective July 1, 2003 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-12609), Exhibit 10.4)
*10.14	Letter regarding Compensation Arrangement between PG&E Corporation and Thomas B. King dated June 18, 2003 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-12609), Exhibit 10.3)
*10.15	Retention Agreement between PG&E Corporation and Thomas B. King dated August 31, 2006 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-12609), Exhibit 10.2)
*10.16	Letter regarding Compensation Arrangement between Pacific Gas and Electric Company and William T. Morrow dated June 20, 2006 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-12609), Exhibit 10.1)
*10.17	Letter regarding Compensation Arrangement between PG&E Corporation and Rand L. Rosenberg dated October 19, 2005 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2005) (File No. 1-12609), Exhibit 10.18)
*10.18	Letter regarding Compensation Arrangement between PG&E Corporation and Hyun Park dated October 10, 2006
*10.19	PG&E Corporation 2005 Deferred Compensation Plan for Non-Employee Directors, effective as of January 1, 2005 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2004) (File No. 1-12609), Exhibit 10.17)
*10.20	Description of Short-Term Incentive Plan for Officers of PG&E Corporation and its subsidiaries, effective January 1, 2007
*10.21	Description of Short-Term Incentive Plan for Officers of PG&E Corporation and its subsidiaries, effective January 1, 2006 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2004 (File No. 1-12609), Exhibit 10.23)
*10.22	Supplemental Executive Retirement Plan of the Pacific Gas and Electric Company amended effective as of December 31, 2004, and frozen as of January 1, 2005 (incorporated by reference to Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004) (File No. 1-2348), Exhibit 10.20)
*10.23	Supplemental Executive Retirement Plan of PG&E Corporation as amended effective as of January 1, 2006 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2005) (File No. 1-2348), Exhibit 10.27)
*10.24	Agreement and Release regarding annuitization of SERP benefits by and between PG&E Corporation and Bruce R. Worthington dated December 20, 2002 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2002 (File No. 1-12609), Exhibit 10.37.2)
*10.25	Agreement and Release regarding annuitization of SERP benefits by and between PG&E Corporation and Bruce R. Worthington dated April 18, 2003 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-12609), Exhibit 10.2.5)
*10.26	Pacific Gas and Electric Company Relocation Assistance Program for Officers (incorporated by reference to Pacific Gas and Electric Company's Form 10-K for fiscal year 1989 (File No. 1-2348), Exhibit 10.16)
*10.27	Postretirement Life Insurance Plan of the Pacific Gas and Electric Company (incorporated by reference to Pacific Gas and Electric Company's Form 10-K for fiscal year 1991 (File No. 1-2348), Exhibit 10.16)
*10.28	PG&E Corporation Non-Employee Director Stock Incentive Plan (a component of the PG&E Corporation Long-Term Incentive Program) as amended effective as of July 1, 2004 (reflecting amendments adopted by the PG&E Corporation Board of Directors on June 16, 2004 set forth in resolutions filed as Exhibit 10.3 to PG&E Corporation's and Pacific Gas and Electric Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004) (incorporated by reference to PG&E Corporation’s and Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004 (File No. 1-12609 and File No. 1-2348), Exhibit 10.27)
*10.29	Resolution of the PG&E Corporation Board of Directors dated June 16, 2004, adopting director compensation arrangement (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File No. 1-12609 and File No. 12348), Exhibit 10.1)
*10.30	Resolution of the Pacific Gas and Electric Company Board of Directors dated June 16, 2004, adopting director compensation arrangement (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File No. 1-12609 and File No. 12348), Exhibit 10.2)
*10.31	Resolution of the PG&E Corporation Board of Directors dated December 20, 2006, adopting director compensation arrangement effective January 1, 2007
*10.32	Resolution of the Pacific Gas and Electric Company Board of Directors dated December 20, 2006, adopting director compensation arrangement effective January 1, 2007
*10.33	PG&E Corporation 2006 Long-Term Incentive Plan, as amended on February 15, 2006 (with respect to change in control provisions) and December 20, 2006 (with respect to Section 7 governing nondiscretionary awards to non-employee directors)
*10.34	PG&E Corporation Long-Term Incentive Program (including the PG&E Corporation Stock Option Plan and Performance Unit Plan), as amended May 16, 2001, (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-12609), Exhibit 10)
*10.35	Form of Restricted Stock Award Agreement for 2003 grants made under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2002 (File No. 1-12609), Exhibit 10.46)
*10.36	Form of Restricted Stock Award Agreement for 2004 grants made under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2003 (File No. 1-12609), Exhibit 10.37)
*10.37	Form of Restricted Stock Agreement for 2005 grants under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 6, 2005 (File No. 12609 and File No. 1-2348), Exhibit 99.3)
*10.38	Form of Restricted Stock Agreement for 2006 grants under the PG&E Corporation 2006 Long-Term Incentive Plan (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 9, 2006, Exhibit 99.1)
*10.39	Form of Restricted Stock Agreement for 2007 grants under the PG&E Corporation 2006 Long-Term Incentive Plan (reflecting amendments to the PG&E Corporation 2006 Long-Term Incentive Plan made on February 15, 2006)
*10.40	Form of Non-Qualified Stock Option Agreement under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 6, 2005 (File No. 12609 and File No. 1-2348), Exhibit 99.1)
*10.41	Form of Performance Share Award Agreement for 2004 grants under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2003 (File No. 1-12609), Exhibit 10.38)
*10.42	Form of Performance Share Agreement for 2005 grants under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 6, 2005 (File No. 12609 and File No. 1-2348), Exhibit 99.2)
*10.43	Form of Performance Share Agreement for 2006 grants under the PG&E Corporation 2006 Long-Term Incentive Plan (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 9, 2006, Exhibit 99.2)
*10.44	Form of Performance Share Agreement for 2007 grants under the PG&E Corporation 2006 Long-Term Incentive Plan (reflecting amendments to the PG&E Corporation 2006 Long-Term Incentive Plan made on February 15, 2006)
*10.45	PG&E Corporation Executive Stock Ownership Program Guidelines dated as of February 19, 2003 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-12609) Exhibit 10.2)
*10.46	PG&E Corporation Executive Stock Ownership Program Guidelines as amended February 15, 2006 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2005 (File No. 1-12609), Exhibit 10.46)
*10.47	PG&E Corporation Officer Severance Policy, as amended effective as of January 1, 2005 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2004 (File No. 1-12609), Exhibit 10.37)
*10.48	PG&E Corporation Officer Severance Policy, as amended effective as of February 15, 2006 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2005 (File No. 1-12609), Exhibit 10.48)
*10.49	PG&E Corporation Golden Parachute Restriction Policy effective as of February 15, 2006 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2005 (File No. 1-12609), Exhibit 10.49)
*10.50	PG&E Corporation Director Grantor Trust Agreement dated April 1, 1998 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-12609), Exhibit 10.1)
*10.51	PG&E Corporation Officer Grantor Trust Agreement dated April 1, 1998, as updated effective January 1, 2005 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2004 (File No. 1-12609), Exhibit 10.39)
*10.52	Resolution of the Board of Directors of PG&E Corporation regarding indemnification of officers and directors dated December 18, 1996 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2004 (File No. 1-12609), Exhibit 10.40)
*10.53	Resolution of the Board of Directors of Pacific Gas and Electric Company regarding indemnification of officers and directors dated July 19, 1995 (incorporated by reference to Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004 (File No. 1-2348), Exhibit 10.41)
11	Computation of Earnings Per Common Share
12.1	Computation of Ratios of Earnings to Fixed Charges for Pacific Gas and Electric Company
12.2	Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends for Pacific Gas and Electric Company
13	The following portions of the 2006 Annual Report to Shareholders of PG&E Corporation and Pacific Gas and Electric Company are included: “Selected Financial Data,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” financial statements of PG&E Corporation entitled “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows,” and “Consolidated Statements of Shareholders' Equity,” financial statements of Pacific Gas and Electric Company entitled “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows,” and “Consolidated Statements of Shareholders' Equity,” “Notes to the Consolidated Financial Statements,” and “Quarterly Consolidated Financial Data (Unaudited),” “Management's Report on Internal Control Over Financial Reporting,” “Report of Independent Registered Public Accounting Firm,” and “Report of Independent Registered Public Accounting Firm.”
21	Subsidiaries of the Registrant
23	Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP)
24.1	Resolutions of the Boards of Directors of PG&E Corporation and Pacific Gas and Electric Company authorizing the execution of the Form 10-K
24.2	Powers of Attorney
31.1	Certifications of the Chief Executive Officer and the Chief Financial Officer of PG&E Corporation required by Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of the Chief Executive Officer and the Chief Financial Officer of Pacific Gas and Electric Company required by Section 302 of the Sarbanes-Oxley Act of 2002
**32.1	Certifications of the Chief Executive Officer and the Chief Financial Officer of PG&E Corporation required by Section 906 of the Sarbanes-Oxley Act of 2002
**32.2	Certifications of the Chief Executive Officer and the Chief Financial Officer of Pacific Gas and Electric Company required by Section 906 of the Sarbanes-Oxley Act of 2002

*Management contract or compensatory agreement.

**Pursuant to Item 601(b) (32) of SEC Regulation S-K, these exhibits are furnished rather than filed with this report.

41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this Annual Report on Form 10-K for the year ended December 31, 2006 to be signed on their behalf by the undersigned, thereunto duly authorized.

	PG&E CORPORATION		PACIFIC GAS AND ELECTRIC COMPANY
	(Registrant) HYUN PARK		(Registrant) HYUN PARK
By:	(Hyun Park, Attorney-in-Fact)	By:	(Hyun Park, Attorney-in-Fact)
Date:	February 22, 2007	Date:	February 22, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the dates indicated.

Signature			Title	Date
A.	Principal Executive Officers
	*PETER A. DARBEE		Chairman of the Board, Chief Executive Officer and President (PG&E Corporation)	February 22, 2007
	*THOMAS B. KING		Chief Executive Officer (Pacific Gas and Electric Company)	February 22, 2007
B.	Principal Financial Officer
	*CHRISTOPHER P. JOHNS		Senior Vice President, Chief Financial Officer and Treasurer (PG&E Corporation and Pacific Gas and Electric Company )	February 22, 2007
C.	Principal Accounting Officer
	*G. ROBERT POWELL		Vice President and Controller (PG&E Corporation and Pacific Gas and Electric Company)	February 22, 2007
D.	Directors
	*DAVID R. ANDREWS *LESLIE S. BILLER *DAVID A. COULTER *C. LEE COX *PETER A. DARBEE *MARYELLEN C. HERRINGER *THOMAS B. KING (Director of Pacific Gas and Electric Company only) *RICHARD A. MESERVE *MARY S. METZ *BARBARA L. RAMBO *BARRY LAWSON WILLIAMS		Directors of PG&E Corporation and Pacific Gas and Electric Company, except as noted	February 22, 2007
*By		HYUN PARK

                                               (Hyun Park, Attorney-in-Fact)

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Boards of Directors and Shareholders of

PG&E Corporation and Pacific Gas and Electric Company

We have audited the consolidated financial statements of PG&E Corporation and subsidiaries (the “Company”) and Pacific Gas and Electric Company and subsidiaries (the “Utility”) as of December 31, 2006 and 2005, and for each of the three years in the period ended December 31, 2006, management’s assessment of the effectiveness of the Company’s and the Utility’s internal control over financial reporting as of December 31, 2006, and the effectiveness of the Company’s and the Utility’s internal control over financial reporting as of December 31, 2006, and have issued our reports thereon dated February 21, 2007; such consolidated financial statements and reports are included in your 2006 Annual Report to Shareholders of the Company and the Utility and are incorporated herein by reference.  Our audits also included the consolidated financial statement schedules of the Company and the Utility listed in Item 15 (a) 2.  These consolidated financial statement schedules are the responsibility of the Company’s and the Utility’s management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

DELOITTE & TOUCHE LLP

San Francisco, California

February 21, 2007

43

PG&E CORPORATION

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF PARENT

CONDENSED BALANCE SHEETS

(in millions)

	Balance at December 31,
	2006			2005
ASSETS
Cash and cash equivalents	$	386		$	250
Advances to affiliates		42			38
Other current assets		3			3
Total current assets		431			291
Equipment		15			15
Accumulated depreciation		(14	)		(14	)
Net equipment		1			1
Investments in subsidiaries		7,959			7,401
Other investments		81			71
Deferred income taxes		132			127
Other		10			15
Total Assets	$	8,614		$	7,906
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable—related parties	$	41		$	27
Accounts payable—other		18			17
Long-term debt, classified as current		280			-
Income taxes payable		122			28
Other		210			193
Total current liabilities		671			265
Noncurrent Liabilities:
Long-term debt		-			280
Other		133			143
Total noncurrent liabilities		133			423
Preferred stock		—			—
Common Shareholders' Equity
Common stock		5,877			5,827
Common stock held by subsidiary		(718	)		(718	)
Unearned compensation		-			(22	)
Reinvested earnings		2,670			2,139
Accumulated other comprehensive loss		(19	)		(8	)
Total common shareholders' equity		7,810			7,218
Total Liabilities and Shareholders' Equity	$	8,614		$	7,906

44

PG&E CORPORATION

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF PARENT — (Continued)

CONDENSED STATEMENTS OF INCOME

(in millions, except per share amounts)

	Year Ended December 31,
	2006			2005			2004
Administrative service revenue	$	110		$	97		$	85
Equity in earnings of subsidiaries		964			918			3,959
Operating expenses		(115	)		(97	)		(110	)
Interest income		15			9			15
Interest expense		(30	)		(35	)		(132	)
Other expense		(1	)		(17	)		(91	)
Income before income taxes		943			875			3,726
Income tax benefit		48			29			94
Income from continuing operations		991			904			3,820
Gain on disposal of NEGT		—			13			684
Net income before intercompany eliminations	$	991		$	917		$	4,504
Weighted average common shares outstanding		346			372			398
Earnings per common share, basic(1)	$	2.78		$	2.40		$	10.80
Earnings per common share, diluted(1)	$	2.76		$	2.37		$	10.57

CONDENSED STATEMENTS OF CASH FLOWS

(in millions)

	Year Ended December 31,
	2006			2005			2004
Cash Flows from Operating Activities:
Net income	$	991		$	917		$	4,504
Gain on disposal of NEGT (net of income tax benefit of $13 million in 2005 and income tax expense of $374 million in 2004)		—			(13	)		(684	)
Net income from continuing operations		991			904			3,820
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings of subsidiaries		(964	)		(918	)		(3,959	)
Deferred taxes		2			(23	)		27
NEGT settlement payment		—			—			(30	)
Other		130			86			160
Net cash provided by operating activities		159			49			18
Cash Flows From Investing Activities:
Capital expenditures		(1	)		(1	)		—
Investment in subsidiaries		—			—			(28	)
Stock repurchase by subsidiary		—			1,910			—
Dividends received from subsidiaries		460			445			—
Restricted cash		—			—			361
Other		—			(38	)		—
Net cash provided by investing activities		459			2,316			333
Cash Flows From Financing Activities(2):
Common stock issued		131			243			162
Common stock repurchased		(114	)		(2,188	)		(350	)
Common stock dividends paid		(456	)		(334	)		—
Long-term debt redeemed		—			(2	)		(652	)
Other		(43	)		(17	)		(1	)
Net cash used by financing activities		(482	)		(2,298	)		(841	)
Net change in cash and cash equivalents		136			67			(490	)
Cash and cash equivalents at January 1		250			183			673
Cash and cash equivalents at December 31		386			250			183

45

⁽¹⁾PG&E Corporation adopted the consensus reached by Emerging Issues Task Force, or EITF, in EITF issue No. 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” or EITF 03-06, as ratified by the Financial Accounting Standards Board on March 31, 2004.

PG&E Corporation currently has outstanding $280 million principal amount of convertible subordinated 9.50% notes due 2010, or Convertible Notes, that are entitled to receive (non-cumulative) dividend payments without exercising the conversion option. These Convertible Notes, which were issued in June 2002, meet the criteria of a participating security in the calculation of earnings per share using the “two-class” method.

Accordingly, the basic and diluted earnings per share calculations for each of the years in the three year period ended December 31, 2006 reflect the allocation of earnings between PG&E Corporation common stock and the participating security.

⁽²⁾On January 16, April 15, July 15, and October 15, 2006, PG&E Corporation paid a quarterly common stock dividend of $0.33 per share, totaling approximately $489 million. Of the total dividend payments made by PG&E Corporation in 2006, approximately $33 million was paid to Elm Power Corporation, a wholly owned subsidiary of PG&E Corporation.

On April 15, July 15 and October 17, 2005, PG&E Corporation paid a quarterly common stock dividend of $0.30 per share, totaling approximately $356 million. Of the total dividend payments made by PG&E Corporation in 2005, approximately $22 million was paid to Elm Power Corporation, a wholly owned subsidiary of PG&E Corporation. PG&E Corporation did not pay any dividends during 2004.

46

PG&E CORPORATION

SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2006, 2005 and 2004

					Additions
					Charged
			Balance		to						Balance
			at		Costs		Charged				at
			Beginning		and		to Other				End of
Description			of Period		Expenses		Accounts		Deductions (3)		Period
(in millions)
Valuation and qualifying accounts deducted from assets:
	2006:
		Allowance for uncollectible accounts (1) (2)	$	77	$	2	$	-	$	29	$	50
	2005:
		Allowance for uncollectible accounts (1) (2)	$	93	$	21	$	-	$	37	$	77
	2004:
		Allowance for uncollectible accounts (1) (2)	$	68	$	85	$	-	$	60	$	93

(1)	Allowance for uncollectible accounts is deducted from “Accounts receivable Customers, net.”
(2)	Allowance for uncollectible accounts does not include NEGT.
(3)	Deductions consist principally of write-offs, net of collections of receivables previously written off.

47

PACIFIC GAS AND ELECTRIC COMPANY

SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2006, 2005 and 2004

					Additions
					Charged
			Balance		to						Balance
			at		Costs		Charged				at
			Beginning		and		to Other				End of
Description			of Period		Expenses		Accounts		Deductions (2)		Period
(in millions)
Valuation and qualifying accounts deducted from assets:
	2006:
		Allowance for uncollectible accounts (1)	$	77	$	2	$	-	$	29	$	50
	2005:
		Allowance for uncollectible accounts (1)	$	93	$	21	$	-	$	37	$	77
	2004:
		Allowance for uncollectible accounts (1)	$	68	$	85	$	-	$	60	$	93

(1)	Allowance for uncollectible accounts is deducted from “Accounts receivable Customers, net.”
(2)	Deductions consist principally of write-offs, net of collections of receivables previously written off.

48

EXHIBIT INDEX

Exhibit Number	Exhibit Description
2.1	Order of the U.S. Bankruptcy Court for the Northern District of California dated December 22, 2003, Confirming Plan of Reorganization of Pacific Gas and Electric Company, including Plan of Reorganization, dated July 31, 2003 as modified by modifications dated November 6, 2003 and December 19, 2003 (Exhibit B to Confirmation Order and Exhibits B and C to the Plan of Reorganization omitted) (incorporated by reference to Pacific Gas and Electric Company's Registration Statement on Form S-3 No. 333-109994, Exhibit 2.1)
2.2	Order of the U.S. Bankruptcy Court for the Northern District of California dated February 27, 2004 Approving Technical Corrections to Plan of Reorganization of Pacific Gas and Electric Company and Supplementing Confirmation Order to Incorporate such Corrections (incorporated by reference to Pacific Gas and Electric Company's Registration Statement on Form S-3 No. 333-109994, Exhibit 2.2)
3.1	Restated Articles of Incorporation of PG&E Corporation effective as of May 29, 2002 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-12609), Exhibit 3.1)
3.2	Certificate of Determination for PG&E Corporation Series A Preferred Stock filed December 22, 2000 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2000 (File No. 1-12609), Exhibit 3.2)
3.3	Bylaws of PG&E Corporation amended as of December 20, 2006
3.4	Restated Articles of Incorporation of Pacific Gas and Electric Company effective as of April 12, 2004 (incorporated by reference to Pacific Gas and Electric Company's Form 8-K filed April 12, 2004 (File No. 1-2348), Exhibit 3)
3.5	Bylaws of Pacific Gas and Electric Company amended as of December 20, 2006
4.1	Indenture, dated as of April 22, 2005, supplementing, amending and restating the Indenture of Mortgage, dated as of March 11, 2004, as supplemented by a First Supplemental Indenture, dated as of March 23, 2004, and a Second Supplemental Indenture, dated as of April 12, 2004, between Pacific Gas and Electric Company and The Bank of New York Trust Company, N.A. (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 10-Q filed May 4, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 4.1)
4.2	Indenture related to PG&E Corporation's 7.5% Convertible Subordinated Notes due June 2007, dated as of June 25, 2002, between PG&E Corporation and U.S. Bank, N.A., as Trustee (incorporated by reference to PG&E Corporation's Form 8-K filed June 26, 2002 (File No. 1-12609), Exhibit 99.1).
4.3	Supplemental Indenture related to PG&E Corporation's 9.50% Convertible Subordinated Notes due June 2010, dated as of October 18, 2002, between PG&E Corporation and U.S. Bank, N.A., as Trustee (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 1-12609), Exhibit 4.1)
4.4	Warrant Agreement, dated as of October 18, 2002, by and among PG&E Corporation, LB I Group Inc., and each other entity named on the signature pages thereto (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 1-12609), Exhibit 4.2)
10.1	Credit Agreement dated as of April 8, 2005, among Pacific Gas and Electric Company, Citicorp North America, Inc., as administrative agent and a lender, JP Morgan Chase Bank, N.A., as syndication agent and a lender, Barclays Bank PLC, BNP Paribas and Deutsche Bank Securities Inc., as documentation agents and lenders, ABN Amro Bank N.V., Lehman Brothers Bank, FSB, Mellon Bank, N.A., Royal Bank of Canada, The Bank of New York, The Bank of Nova Scotia, UBS Loan Finance LLC, and Union Bank of California, N.A., as senior managing agents, and KBC Bank, NV, Morgan Stanley Bank and William Street Commitment Corporation, as lenders (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 10-Q filed May 4, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 10.3)
10.2	First Amendment, dated as of November 30, 2005, to the Credit Agreement among Pacific Gas and Electric Company, Citicorp North America, Inc., as administrative agent and a lender, JPMorgan Chase Bank, N.A., as syndication agent and a lender, Barclays Bank PLC and BNP Paribas as documentation agents and lenders, Deutsche Bank Securities Inc., as documentation agent, and the following other lenders: Deutsche Bank AG New York Branch, ABN Amro Bank N.V., Lehman Brothers Bank, FSB, Mellon Bank, N.A., Royal Bank of Canada, The Bank of New York, UBS Loan Finance LLC, Union Bank of California, N.A., KBC Bank, N.V., Morgan Stanley Bank and William Street Commitment Corporation. (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 10-K for the year ended December 31, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 10.2)
10.3	Credit Agreement, dated as of December 10, 2004, among PG&E Corporation, BNP Paribas, as administrative agent and a lender, Deutsche Bank Securities, as syndication agent, ABN Amro Bank, N.V., Goldman Sachs Credit Partners L.P., and Union Bank of California, N.A., as documentation agents and lenders, and the following other lenders: Barclays Bank PLC, Citicorp USA, Inc., Deutsche Bank AG New York Branch, JP Morgan Chase Bank, N.A., Lehman Brothers Bank, FSB, Morgan Stanley Bank, Royal Bank of Canada, The Bank of Nova Scotia, and The Bank of New York (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed December 15, 2004 (File No. 1-12609 and File No. 1-2348), Exhibit 99)
10.4	First Amendment, dated as of April 8, 2005, to the Credit Agreement dated as of December 10, 2004, among PG&E Corporation, BNP Paribas, as administrative agent and a lender, Deutsche Bank Securities Inc., as syndication agent and a lender, ABN Amro Bank, N.V., Goldman Sachs Credit Partners L.P., and Union Bank of California, N.A., as documentation agents and lenders, and the following other lenders: Barclays Bank PLC, Citicorp USA, Inc., Deutsche Bank AG New York Branch, JP Morgan Chase Bank, N.A., Lehman Brothers Bank, FSB, Morgan Stanley Bank, Royal Bank of Canada, The Bank of Nova Scotia, KBC Bank N.V., and The Bank of New York (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 10-Q filed May 4, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 10.2)
10.5	Master Confirmation dated November 16, 2005, for accelerated share repurchase arrangements between PG&E Corporation and Goldman, Sachs & Co. (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2005 (File No. 1-12609 and File No. 1-2348), Exhibit 10.5)
10.6	Settlement Agreement among California Public Utilities Commission, Pacific Gas and Electric Company and PG&E Corporation, dated as of December 19, 2003, together with appendices (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Form 8-K filed December 22, 2003) (File No. 1-12609 and File No. 1-2348), Exhibit 99)
10.7	Firm Transportation Service Agreement between Pacific Gas and Electric Company and Pacific Gas Transmission Company dated October 26, 1993, Rate Schedule FTS-1, and general terms and conditions (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Form 10-K for the year ended December 31, 2003) (File No. 1-12609 and File No. 1-2348), Exhibit 10.4)
10.8	Operating Agreement between Pacific Gas and Electric Company and Pacific Gas Transmission Company dated July 9, 1996 (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Form 10-K for the year ended December 31, 2003) (File No. 1-12609 and File No. 1-2348), Exhibit 10.5)
10.9	Transmission Control Agreement among the California Independent System Operator (CAISO) and the Participating Transmission Owners, including Pacific Gas and Electric Company, effective as of March 31, 1998, as amended (CAISO, FERC Electric Tariff No. 7) (incorporated by reference to PG&E Corporation’s and Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004 (File No. 1-12609 and File No. 1-2348), Exhibit 10.8)
10.10	Operating Agreement, as amended on November 12, 2004, effective as of December 22, 2004, between the State of California Department of Water Resources and Pacific Gas and Electric Company (incorporated by reference to PG&E Corporation’s and Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004 (File No. 1-12609 and File No. 1-2348), Exhibit 10.9)
*10.11	PG&E Corporation Supplemental Retirement Savings Plan amended effective as of September 19, 2001, and frozen after December 31, 2004 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2004) (File No. 1-12609), Exhibit 10.10)
*10.12	PG&E Corporation Supplemental Retirement Savings Plan effective as of January 1, 2005 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2004) (File No. 1-12609), Exhibit 10.11)
*10.13	Letter regarding Compensation Arrangement between PG&E Corporation and Peter Darbee effective July 1, 2003 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-12609), Exhibit 10.4)
*10.14	Letter regarding Compensation Arrangement between PG&E Corporation and Thomas B. King dated June 18, 2003 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-12609), Exhibit 10.3)
*10.15	Retention Agreement between PG&E Corporation and Thomas B. King dated August 31, 2006 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-12609), Exhibit 10.2)
*10.16	Letter regarding Compensation Arrangement between Pacific Gas and Electric Company and William T. Morrow dated June 20, 2006 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-12609), Exhibit 10.1)
*10.17	Letter regarding Compensation Arrangement between PG&E Corporation and Rand L. Rosenberg dated October 19, 2005 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2005) (File No. 1-12609), Exhibit 10.18)
*10.18	Letter regarding Compensation Arrangement between PG&E Corporation and Hyun Park dated October 10, 2006
*10.19	PG&E Corporation 2005 Deferred Compensation Plan for Non-Employee Directors, effective as of January 1, 2005 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2004) (File No. 1-12609), Exhibit 10.17)
*10.20	Description of Short-Term Incentive Plan for Officers of PG&E Corporation and its subsidiaries, effective January 1, 2007
*10.21	Description of Short-Term Incentive Plan for Officers of PG&E Corporation and its subsidiaries, effective January 1, 2006 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2004 (File No. 1-12609), Exhibit 10.23)
*10.22	Supplemental Executive Retirement Plan of the Pacific Gas and Electric Company amended effective as of December 31, 2004, and frozen as of January 1, 2005 (incorporated by reference to Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004) (File No. 1-2348), Exhibit 10.20)
*10.23	Supplemental Executive Retirement Plan of PG&E Corporation as amended effective as of January 1, 2006 (incorporated by reference to PG&E Corporation’s Form 10-K for the year ended December 31, 2005) (File No. 1-2348), Exhibit 10.27)
*10.24	Agreement and Release regarding annuitization of SERP benefits by and between PG&E Corporation and Bruce R. Worthington dated December 20, 2002 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2002 (File No. 1-12609), Exhibit 10.37.2)
*10.25	Agreement and Release regarding annuitization of SERP benefits by and between PG&E Corporation and Bruce R. Worthington dated April 18, 2003 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-12609), Exhibit 10.2.5)
*10.26	Pacific Gas and Electric Company Relocation Assistance Program for Officers (incorporated by reference to Pacific Gas and Electric Company's Form 10-K for fiscal year 1989 (File No. 1-2348), Exhibit 10.16)
*10.27	Postretirement Life Insurance Plan of the Pacific Gas and Electric Company (incorporated by reference to Pacific Gas and Electric Company's Form 10-K for fiscal year 1991 (File No. 1-2348), Exhibit 10.16)
*10.28	PG&E Corporation Non-Employee Director Stock Incentive Plan (a component of the PG&E Corporation Long-Term Incentive Program) as amended effective as of July 1, 2004 (reflecting amendments adopted by the PG&E Corporation Board of Directors on June 16, 2004 set forth in resolutions filed as Exhibit 10.3 to PG&E Corporation's and Pacific Gas and Electric Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004) (incorporated by reference to PG&E Corporation’s and Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004 (File No. 1-12609 and File No. 1-2348), Exhibit 10.27)
*10.29	Resolution of the PG&E Corporation Board of Directors dated June 16, 2004, adopting director compensation arrangement (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File No. 1-12609 and File No. 12348), Exhibit 10.1)
*10.30	Resolution of the Pacific Gas and Electric Company Board of Directors dated June 16, 2004, adopting director compensation arrangement (incorporated by reference to PG&E Corporation's and Pacific Gas and Electric Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File No. 1-12609 and File No. 12348), Exhibit 10.2)
*10.31	Resolution of the PG&E Corporation Board of Directors dated December 20, 2006, adopting director compensation arrangement effective January 1, 2007
*10.32	Resolution of the Pacific Gas and Electric Company Board of Directors dated December 20, 2006, adopting director compensation arrangement effective January 1, 2007
*10.33	PG&E Corporation 2006 Long-Term Incentive Plan, as amended on February 15, 2006 (with respect to change in control provisions) and December 20, 2006 (with respect to Section 7 governing nondiscretionary awards to non-employee directors)
*10.34	PG&E Corporation Long-Term Incentive Program (including the PG&E Corporation Stock Option Plan and Performance Unit Plan), as amended May 16, 2001, (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-12609), Exhibit 10)
*10.35	Form of Restricted Stock Award Agreement for 2003 grants made under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2002 (File No. 1-12609), Exhibit 10.46)
*10.36	Form of Restricted Stock Award Agreement for 2004 grants made under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2003 (File No. 1-12609), Exhibit 10.37)
*10.37	Form of Restricted Stock Agreement for 2005 grants under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 6, 2005 (File No. 12609 and File No. 1-2348), Exhibit 99.3)
*10.38	Form of Restricted Stock Agreement for 2006 grants under the PG&E Corporation 2006 Long-Term Incentive Plan (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 9, 2006, Exhibit 99.1)
*10.39	Form of Restricted Stock Agreement for 2007 grants under the PG&E Corporation 2006 Long-Term Incentive Plan (reflecting amendments to the PG&E Corporation 2006 Long-Term Incentive Plan made on February 15, 2006)
*10.40	Form of Non-Qualified Stock Option Agreement under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 6, 2005 (File No. 12609 and File No. 1-2348), Exhibit 99.1)
*10.41	Form of Performance Share Award Agreement for 2004 grants under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2003 (File No. 1-12609), Exhibit 10.38)
*10.42	Form of Performance Share Agreement for 2005 grants under the PG&E Corporation Long-Term Incentive Program (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 6, 2005 (File No. 12609 and File No. 1-2348), Exhibit 99.2)
*10.43	Form of Performance Share Agreement for 2006 grants under the PG&E Corporation 2006 Long-Term Incentive Plan (incorporated by reference to PG&E Corporation and Pacific Gas and Electric Company's Form 8-K filed January 9, 2006, Exhibit 99.2)
*10.44	Form of Performance Share Agreement for 2007 grants under the PG&E Corporation 2006 Long-Term Incentive Plan (reflecting amendments to the PG&E Corporation 2006 Long-Term Incentive Plan made on February 15, 2006)
*10.45	PG&E Corporation Executive Stock Ownership Program Guidelines dated as of February 19, 2003 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-12609) Exhibit 10.2)
*10.46	PG&E Corporation Executive Stock Ownership Program Guidelines as amended February 15, 2006 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2005 (File No. 1-12609), Exhibit 10.46)
*10.47	PG&E Corporation Officer Severance Policy, as amended effective as of January 1, 2005 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2004 (File No. 1-12609), Exhibit 10.37)
*10.48	PG&E Corporation Officer Severance Policy, as amended effective as of February 15, 2006 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2005 (File No. 1-12609), Exhibit 10.48)
*10.49	PG&E Corporation Golden Parachute Restriction Policy effective as of February 15, 2006 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2005 (File No. 1-12609), Exhibit 10.49)
*10.50	PG&E Corporation Director Grantor Trust Agreement dated April 1, 1998 (incorporated by reference to PG&E Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-12609), Exhibit 10.1)
*10.51	PG&E Corporation Officer Grantor Trust Agreement dated April 1, 1998, as updated effective January 1, 2005 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2004 (File No. 1-12609), Exhibit 10.39)
*10.52	Resolution of the Board of Directors of PG&E Corporation regarding indemnification of officers and directors dated December 18, 1996 (incorporated by reference to PG&E Corporation's Form 10-K for the year ended December 31, 2004 (File No. 1-12609), Exhibit 10.40)
*10.53	Resolution of the Board of Directors of Pacific Gas and Electric Company regarding indemnification of officers and directors dated July 19, 1995 (incorporated by reference to Pacific Gas and Electric Company’s Form 10-K for the year ended December 31, 2004 (File No. 1-2348), Exhibit 10.41)
11	Computation of Earnings Per Common Share
12.1	Computation of Ratios of Earnings to Fixed Charges for Pacific Gas and Electric Company
12.2	Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends for Pacific Gas and Electric Company
13	The following portions of the 2006 Annual Report to Shareholders of PG&E Corporation and Pacific Gas and Electric Company are included: “Selected Financial Data,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” financial statements of PG&E Corporation entitled “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows,” and “Consolidated Statements of Shareholders' Equity,” financial statements of Pacific Gas and Electric Company entitled “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows,” and “Consolidated Statements of Shareholders' Equity,” “Notes to the Consolidated Financial Statements,” and “Quarterly Consolidated Financial Data (Unaudited),” “Management's Report on Internal Control Over Financial Reporting,” “Report of Independent Registered Public Accounting Firm,” and “Report of Independent Registered Public Accounting Firm.”
21	Subsidiaries of the Registrant
23	Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP)
24.1	Resolutions of the Boards of Directors of PG&E Corporation and Pacific Gas and Electric Company authorizing the execution of the Form 10-K
24.2	Powers of Attorney
31.1	Certifications of the Chief Executive Officer and the Chief Financial Officer of PG&E Corporation required by Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of the Chief Executive Officer and the Chief Financial Officer of Pacific Gas and Electric Company required by Section 302 of the Sarbanes-Oxley Act of 2002
**32.1	Certifications of the Chief Executive Officer and the Chief Financial Officer of PG&E Corporation required by Section 906 of the Sarbanes-Oxley Act of 2002
**32.2	Certifications of the Chief Executive Officer and the Chief Financial Officer of Pacific Gas and Electric Company required by Section 906 of the Sarbanes-Oxley Act of 2002

*Management contract or compensatory agreement.

**Pursuant to Item 601(b) (32) of SEC Regulation S-K, these exhibits are furnished rather than filed with this report.

EX-3.3

Exhibit 3.3

Bylaws

of

PG&E Corporation

amended as of December 20, 2006

Article I.

SHAREHOLDERS.

1.Place of Meeting. All meetings of the shareholders shall be held at the office of the Corporation in the City and County of San Francisco, State of California, or at such other place, within or without the State of California, as may be designated by the Board of Directors.

2.Annual Meetings. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors.

Written notice of the annual meeting shall be given not less than ten (or, if sent by third-class mail, thirty) nor more than sixty days prior to the date of the meeting to each shareholder entitled to vote thereat. The notice shall state the place, day, and hour of such meeting, and those matters which the Board, at the time of mailing, intends to present for action by the shareholders.

Notice of any meeting of the shareholders shall be given by mail or telegraphic or other written communication, postage prepaid, to each holder of record of the stock entitled to vote thereat, at his address, as it appears on the books of the Corporation.

At an annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the annual meeting (or any supplement thereto) given by or at the direction of the Board, or (ii) otherwise properly brought before the annual meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, including the nomination of any person (other than a person nominated by or at the direction of the Board) for election to the Board, the shareholder must have given timely and proper written notice to the Corporate Secretary of the Corporation. To be timely, the shareholder’s written notice must be received at the principal executive office of the Corporation not less than forty-five days before the date corresponding to the mailing date of the notice and proxy materials for the prior year’s annual meeting of shareholders; provided, however, that if the annual meeting to which the shareholder’s written notice relates is to be held on a date that differs by more than thirty days from the date of the last annual meeting of shareholders, the shareholder’s written notice to

be timely must be so received not later than the close of business on the tenth day following the date on which public disclosure of the date of the annual meeting is made or given to shareholders. Any shareholder’s written notice that is delivered after the close of business (5:00 p.m. local time) will be considered received on the following business day. To be proper, the shareholder’s written notice must set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) the name and address of the shareholder as they appear on the Corporation’s books, (c) the class and number of shares of the Corporation that are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. In addition, if the shareholder’s written notice relates to the nomination at the annual meeting of any person for election to the Board, such notice to be proper must also set forth (a) the name, age, business address, and residence address of each person to be so nominated, (b) the principal occupation or employment of each such person, (c) the number of shares of capital stock of the Corporation beneficially owned by each such person, and (d) such other information concerning each such person as would be required under the rules of the Securities and Exchange Commission in a proxy statement soliciting proxies for the election of such person as a Director, and must be accompanied by a consent, signed by each such person, to serve as a Director of the Corporation if elected. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section.

3.Special Meetings. Special meetings of the shareholders shall be called by the Corporate Secretary or an Assistant Corporate Secretary at any time on order of the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, or the President. Special meetings of the shareholders shall also be called by the Corporate Secretary or an Assistant Corporate Secretary upon the written request of holders of shares entitled to cast not less than ten percent of the votes at the meeting. Such request shall state the purposes of the meeting, and shall be delivered to the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President, or the Corporate Secretary.

A special meeting so requested shall be held on the date requested, but not less than thirty-five nor more than sixty days after the date of the original request. Written notice of each special meeting of shareholders, stating the place, day, and hour of such meeting and the business proposed to be transacted thereat, shall be given in the manner stipulated in Article I, Section 2, Paragraph 3 of these Bylaws within twenty days after receipt of the written request.

4.Voting at Meetings. At any meeting of the shareholders, each holder of record of stock shall be entitled to vote in person or by proxy. The authority of proxies must be evidenced by a written document signed by the shareholder and must be delivered to the Corporate Secretary of the Corporation prior to the commencement of the meeting.

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5.Shareholder Action by Written Consent. Subject to Section 603 of the California Corporations Code, any action which, under any provision of the California Corporations Code, may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

Any party seeking to solicit written consent from shareholders to take corporate action must deliver a notice to the Corporate Secretary of the Corporation which requests the Board of Directors to set a record date for determining shareholders entitled to give such consent. Such written request must set forth as to each matter the party proposes for shareholder action by written consents (a) a brief description of the matter and (b) the class and number of shares of the Corporation that are beneficially owned by the requesting party. Within ten days of receiving the request in the proper form, the Board shall set a record date for the taking of such action by written consent in accordance with California Corporations Code Section 701 and Article IV, Section 1 of these Bylaws. If the Board fails to set a record date within such ten-day period, the record date for determining shareholders entitled to give the written consent for the matters specified in the notice shall be the day on which the first written consent is given in accordance with California Corporations Code Section 701.

Each written consent delivered to the Corporation must set forth (a) the action sought to be taken, (b) the name and address of the shareholder as they appear on the Corporation’s books, (c) the class and number of shares of the Corporation that are beneficially owned by the shareholder, (d) the name and address of the proxyholder authorized by the shareholder to give such written consent, if applicable, and (d) any material interest of the shareholder or proxyholder in the action sought to be taken.

Consents to corporate action shall be valid for a maximum of sixty days after the date of the earliest dated consent delivered to the Corporation. Consents may be revoked by written notice (i) to the Corporation, (ii) to the shareholder or shareholders soliciting consents or soliciting revocations in opposition to action by consent proposed by the Corporation (the “Soliciting Shareholders”), or (iii) to a proxy solicitor or other agent designated by the Corporation or the Soliciting Shareholders.

Within three business days after receipt of the earliest dated consent solicited by the Soliciting Shareholders and delivered to the Corporation in the manner provided in California Corporations Code Section 603 or the determination by the Board of Directors of the Corporation that the Corporation should seek corporate action by written consent, as the case may be, the Corporate Secretary shall engage nationally recognized independent inspectors of elections for the purpose of performing a ministerial review of the validity of the consents and revocations. The cost of retaining inspectors of election shall be borne by the Corporation.

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Consents and revocations shall be delivered to the inspectors upon receipt by the Corporation, the Soliciting Shareholders or their proxy solicitors, or other designated agents. As soon as consents and revocations are received, the inspectors shall review the consents and revocations and shall maintain a count of the number of valid and unrevoked consents. The inspectors shall keep such count confidential and shall not reveal the count to the Corporation, the Soliciting Shareholder or their representatives, or any other entity. As soon as practicable after the earlier of (i) sixty days after the date of the earliest dated consent delivered to the Corporation in the manner provided in California Corporations Code Section 603, or (ii) a written request therefor by the Corporation or the Soliciting Shareholders (whichever is soliciting consents), notice of which request shall be given to the party opposing the solicitation of consents, if any, which request shall state that the Corporation or Soliciting Shareholders, as the case may be, have a good faith belief that the requisite number of valid and unrevoked consents to authorize or take the action specified in the consents has been received in accordance with these Bylaws, the inspectors shall issue a preliminary report to the Corporation and the Soliciting Shareholders stating: (a) the number of valid consents, (b) the number of valid revocations, (c) the number of valid and unrevoked consents, (d) the number of invalid consents, (e) the number of invalid revocations, and (f) whether, based on their preliminary count, the requisite number of valid and unrevoked consents has been obtained to authorize or take the action specified in the consents.

Unless the Corporation and the Soliciting Shareholders shall agree to a shorter or longer period, the Corporation and the Soliciting Shareholders shall have forty-eight hours to review the consents and revocations and to advise the inspectors and the opposing party in writing as to whether they intend to challenge the preliminary report of the inspectors. If no written notice of an intention to challenge the preliminary report is received within forty-eight hours after the inspectors’ issuance of the preliminary report, the inspectors shall issue to the Corporation and the Soliciting Shareholders their final report containing the information from the inspectors’ determination with respect to whether the requisite number of valid and unrevoked consents was obtained to authorize and take the action specified in the consents. If the Corporation or the Soliciting Shareholders issue written notice of an intention to challenge the inspectors’ preliminary report within forty-eight hours after the issuance of that report, a challenge session shall be scheduled by the inspectors as promptly as practicable. A transcript of the challenge session shall be recorded by a certified court reporter. Following completion of the challenge session, the inspectors shall as promptly as practicable issue their final report to the Soliciting Shareholders and the Corporation, which report shall contain the information included in the preliminary report, plus all changes in the vote totals as a result of the challenge and a certification of whether the requisite number of valid and unrevoked consents was obtained to authorize or take the action specified in the consents. A copy of the final report of the inspectors shall be included in the book in which the proceedings of meetings of shareholders are recorded.

Unless the consent of all shareholders entitled to vote have been solicited in writing, the Corporation shall give prompt notice to the shareholders in accordance with

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California Corporations Code Section 603 of the results of any consent solicitation or the taking of the corporate action without a meeting and by less than unanimous written consent.

Article II.

DIRECTORS.

1.Number. As stated in paragraph I of Article Third of this Corporation’s Articles of Incorporation, the Board of Directors of this Corporation shall consist of such number of directors, not less than seven (7) nor more than thirteen (13). The exact number of directors shall be ten (10) until changed, within the limits specified above, by an amendment to this Bylaw duly adopted by the Board of Directors or the shareholders.

2.Powers. The Board of Directors shall exercise all the powers of the Corporation except those which are by law, or by the Articles of Incorporation of this Corporation, or by the Bylaws conferred upon or reserved to the shareholders.

3. Committees. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate and appoint one or more committees as the Board deems appropriate, each consisting of two or more directors, to serve at the pleasure of the Board; provided, however, that, as required by this Corporation’s Articles of Incorporation, the members of the Executive Committee (should the Board of Directors designate an Executive Committee) must be appointed by the affirmative vote of two-thirds of the authorized number of directors. Any such committee, including the Executive Committee, shall have the authority to act in the manner and to the extent provided in the resolution of the Board of Directors designating such committee and may have all the authority of the Board of Directors, except with respect to the matters set forth in California Corporations Code Section 311.

4.Time and Place of Directors' Meetings. Regular meetings of the Board of Directors shall be held on such days and at such times and at such locations as shall be fixed by resolution of the Board, or designated by the Chairman of the Board or, in his absence, the Vice Chairman of the Board, or the President of the Corporation and contained in the notice of any such meeting. Notice of meetings shall be delivered personally or sent by mail or telegram at least seven days in advance.

5.Special Meetings. The Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President, or any five directors may call a special meeting of the Board of Directors at any time. Notice of the time and place of special meetings shall be given to each Director by the Corporate Secretary. Such notice shall be delivered personally or by telephone (or other system or technology designed to record and communicate messages, including facsimile,

5

electronic mail, or other such means) to each Director at least four hours in advance of such meeting, or sent by first-class mail or telegram, postage prepaid, at least two days in advance of such meeting.

6.Quorum. A quorum for the transaction of business at any meeting of the Board of Directors or any committee thereof shall consist of one-third of the authorized number of directors or committee members, or two, whichever is larger.

7.Action by Consent. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors.

8.Meetings by Conference Telephone. Any meeting, regular or special, of the Board of Directors or of any committee of the Board of Directors, may be held by conference telephone or similar communication equipment, provided that all Directors participating in the meeting can hear one another.

Article III.

OFFICERS.

1.Officers. The officers of the Corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a Chairman of the Executive Committee (whenever the Board of Directors in its discretion fills these offices), a President, a Chief Financial Officer, a General Counsel, one or more Vice Presidents, a Corporate Secretary and one or more Assistant Corporate Secretaries, a Treasurer and one or more Assistant Treasurers, and a Controller, all of whom shall be elected by the Board of Directors. The Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, and the President shall be members of the Board of Directors.

2.Chairman of the Board. The Chairman of the Board, if that office be filled, shall preside at all meetings of the shareholders and of the Directors, and shall preside at all meetings of the Executive Committee in the absence of the Chairman of that Committee. The Chairman of the Board shall be the chief executive officer of the Corporation if so designated by the Board of Directors. The Chairman of the Board shall have such duties and responsibilities as may be prescribed by the Board of Directors or the Bylaws. The Chairman of the Board shall have authority to sign on behalf of the Corporation agreements and instruments of every character, and, in the absence or disability of the President, shall exercise the President's duties and responsibilities.

3.Vice Chairman of the Board. The Vice Chairman of the Board, if that office be filled, shall have such duties and responsibilities as may be prescribed by the

6

Board of Directors, the Chairman of the Board, or the Bylaws. The Vice Chairman of the Board shall be the chief executive officer of the Corporation if so designated by the Board of Directors. In the absence of the Chairman of the Board, the Vice Chairman of the Board shall preside at all meetings of the Board of Directors and of the shareholders; and, in the absence of the Chairman of the Executive Committee and the Chairman of the Board, the Vice Chairman of the Board shall preside at all meetings of the Executive Committee. The Vice Chairman of the Board shall have authority to sign on behalf of the Corporation agreements and instruments of every character.

4.Chairman of the Executive Committee. The Chairman of the Executive Committee, if that office be filled, shall preside at all meetings of the Executive Committee. The Chairman of the Executive Committee shall aid and assist the other officers in the performance of their duties and shall have such other duties as may be prescribed by the Board of Directors or the Bylaws.

5.President. The President shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, or the Bylaws. The President shall be the chief executive officer of the Corporation if so designated by the Board of Directors. If there be no Chairman of the Board, the President shall also exercise the duties and responsibilities of that office. The President shall have authority to sign on behalf of the Corporation agreements and instruments of every character.

6.Chief Financial Officer. The Chief Financial Officer shall be responsible for the overall management of the financial affairs of the Corporation. The Chief Financial Officer shall render a statement of the Corporation's financial condition and an account of all transactions whenever requested by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, or the President.

The Chief Financial Officer shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws.

7.General Counsel. The General Counsel shall be responsible for handling on behalf of the Corporation all proceedings and matters of a legal nature. The General Counsel shall render advice and legal counsel to the Board of Directors, officers, and employees of the Corporation, as necessary to the proper conduct of the business. The General Counsel shall keep the management of the Corporation informed of all significant developments of a legal nature affecting the interests of the Corporation.

The General Counsel shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws.

8.Vice Presidents. Each Vice President, if those offices are filled, shall have such duties and responsibilities as may be prescribed by the Board of Directors,

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the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. Each Vice President's authority to sign agreements and instruments on behalf of the Corporation shall be as prescribed by the Board of Directors. The Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, or the President may confer a special title upon any Vice President.

9.Corporate Secretary. The Corporate Secretary shall attend all meetings of the Board of Directors and the Executive Committee, and all meetings of the shareholders, and the Corporate Secretary shall record the minutes of all proceedings in books to be kept for that purpose. The Corporate Secretary shall be responsible for maintaining a proper share register and stock transfer books for all classes of shares issued by the Corporation. The Corporate Secretary shall give, or cause to be given, all notices required either by law or the Bylaws. The Corporate Secretary shall keep the seal of the Corporation in safe custody, and shall affix the seal of the Corporation to any instrument requiring it and shall attest the same by the Corporate Secretary’s signature.

The Corporate Secretary shall have such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws.

The Assistant Corporate Secretaries shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Corporate Secretary. In the absence or disability of the Corporate Secretary, the Corporate Secretary’s duties shall be performed by an Assistant Corporate Secretary.

10.Treasurer. The Treasurer shall have custody of all moneys and funds of the Corporation, and shall cause to be kept full and accurate records of receipts and disbursements of the Corporation. The Treasurer shall deposit all moneys and other valuables of the Corporation in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors or any employee of the Corporation designated by the Board of Directors. The Treasurer shall disburse such funds of the Corporation as have been duly approved for disbursement.

The Treasurer shall perform such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, the Chief Financial Officer, or the Bylaws.

The Assistant Treasurers shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, the Chief Financial Officer, or the Treasurer. In the absence or disability of the Treasurer, the Treasurer’s duties shall be performed by an Assistant Treasurer.

11.Controller. The Controller shall be responsible for maintaining the accounting records of the Corporation and for preparing necessary financial reports and

8

statements, and the Controller shall properly account for all moneys and obligations due the Corporation and all properties, assets, and liabilities of the Corporation. The Controller shall render to the officers such periodic reports covering the result of operations of the Corporation as may be required by them or any one of them.

The Controller shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, the Chief Financial Officer, or the Bylaws. The Controller shall be the principal accounting officer of the Corporation, unless another individual shall be so designated by the Board of Directors.

Article IV.

MISCELLANEOUS.

1.Record Date. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty nor less than ten days prior to the date of such meeting nor more than sixty days prior to any other action for the purposes for which it is so fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise the rights, as the case may be.

2.Certificates; Direct Registration System. Shares of the Corporation's capital stock may be certificated or uncertificated, as provided under California law. Any certificates that are issued shall be signed in the name of the Corporation by the Chairman of the Board, the Vice Chairman of the Board, the President, or a Vice President and by the Chief Financial Officer, an Assistant Treasurer, the Corporate Secretary, or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be a facsimile. In case any officer, Transfer Agent, or Registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, Transfer Agent, or Registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, Transfer Agent, or Registrar at the date of issue. Shares of the Corporation’s capital stock may also be evidenced by registration in the holder’s name in uncertificated, book-entry form on the books of the Corporation in accordance with a direct registration system approved by the Securities and Exchange Commission and by the New York Stock Exchange or any securities exchange on which the stock of the Corporation may from time to time be traded.

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3.Transfers of shares of stock of the Corporation shall be made by the Transfer Agent and Registrar on the books of the Corporation after receipt of a request with proper evidence of succession, assignment, or authority to transfer by the record holder of such stock, or by an attorney lawfully constituted in writing, and in the case of stock represented by a certificate, upon surrender of the certificate. Subject to the foregoing, the Board of Directors shall have power and authority to make such rules and regulations as it shall deem necessary or appropriate concerning the issue, transfer, and registration of shares of stock of the Corporation, and to appoint and remove Transfer Agents and Registrars of transfers.

4.Lost Certificates. Any person claiming a certificate of stock to be lost, stolen, mislaid, or destroyed shall make an affidavit or affirmation of that fact and verify the same in such manner as the Board of Directors may require, and shall, if the Board of Directors so requires, give the Corporation, its Transfer Agents, Registrars, and/or other agents a bond of indemnity in form approved by counsel, and in amount and with such sureties as may be satisfactory to the Corporate Secretary of the Corporation, before a new certificate (or uncertificated shares in lieu of a new certificate) may be issued of the same tenor and for the same number of shares as the one alleged to have been lost, stolen, mislaid, or destroyed.

Article V.

AMENDMENTS.

1.Amendment by Shareholders. Except as otherwise provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by the affirmative vote of a majority of the outstanding shares entitled to vote at any regular or special meeting of the shareholders.

2.Amendment by Directors. To the extent provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by resolution adopted by a majority of the members of the Board of Directors.

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EX-3.5

Exhibit 3.5

Bylaws

of

Pacific Gas and Electric Company

amended as of December 20, 2006

Article I.

SHAREHOLDERS.

1.Place of Meeting. All meetings of the shareholders shall be held at the office of the Corporation in the City and County of San Francisco, State of California, or at such other place, within or without the State of California, as may be designated by the Board of Directors.

2. Annual Meetings. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors.

Written notice of the annual meeting shall be given not less than ten (or, if sent by third-class mail, thirty) nor more than sixty days prior to the date of the meeting to each shareholder entitled to vote thereat. The notice shall state the place, day, and hour of such meeting, and those matters which the Board, at the time of mailing, intends to present for action by the shareholders.

Notice of any meeting of the shareholders shall be given by mail or telegraphic or other written communication, postage prepaid, to each holder of record of the stock entitled to vote thereat, at his address, as it appears on the books of the Corporation.

At an annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the annual meeting (or any supplement thereto) given by or at the direction of the Board, or (ii) otherwise properly brought before the annual meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, including the nomination of any person (other than a person nominated by or at the direction of the Board) for election to the Board, the shareholder must have given timely and proper written notice to the Corporate Secretary of the Corporation. To be timely, the shareholder’s written notice must be received at the principal executive office of the Corporation not less than forty-five days before the date corresponding to the mailing date of the notice and proxy materials for the prior year’s annual meeting of shareholders; provided, however, that if the annual meeting to which the shareholder’s written notice relates is to be held on a date that differs by more than thirty days from the date of the last annual meeting of shareholders, the shareholder’s written notice to

be timely must be so received not later than the close of business on the tenth day following the date on which public disclosure of the date of the annual meeting is made or given to shareholders. Any shareholder’s written notice that is delivered after the close of business (5:00 p.m. local time) will be considered received on the following business day. To be proper, the shareholder’s written notice must set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) the name and address of the shareholder as they appear on the Corporation’s books, (c) the class and number of shares of the Corporation that are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. In addition, if the shareholder’s written notice relates to the nomination at the annual meeting of any person for election to the Board, such notice to be proper must also set forth (a) the name, age, business address, and residence address of each person to be so nominated, (b) the principal occupation or employment of each such person, (c) the number of shares of capital stock of the Corporation beneficially owned by each such person, and (d) such other information concerning each such person as would be required under the rules of the Securities and Exchange Commission in a proxy statement soliciting proxies for the election of such person as a Director, and must be accompanied by a consent, signed by each such person, to serve as a Director of the Corporation if elected. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in thisSection.

3.Special Meetings. Special meetings of the shareholders shall be called by the Corporate Secretary or an Assistant Corporate Secretary at any time on order of the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, or the President. Special meetings of the shareholders shall also be called by the Corporate Secretary or an Assistant Corporate Secretary upon the written request of holders of shares entitled to cast not less than ten percent of the votes at the meeting. Such request shall state the purposes of the meeting, and shall be delivered to the Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President or the Corporate Secretary.

A special meeting so requested shall be held on the date requested, but not less than thirty-five nor more than sixty days after the date of the original request. Written notice of each special meeting of shareholders, stating the place, day, and hour of such meeting and the business proposed to be transacted thereat, shall be given in the manner stipulated in Article I, Section 2, Paragraph 3 of these Bylaws within twenty days after receipt of the written request.

4.Voting at Meetings. At any meeting of the shareholders, each holder of record of stock shall be entitled to vote in person or by proxy. The authority of proxies must be evidenced by a written document signed by the shareholder and must be delivered to the Corporate Secretary of the Corporation prior to the commencement of the meeting.

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5.No Cumulative Voting. No shareholder of the Corporation shall be entitled to cumulate his or her voting power.

Article II.

DIRECTORS.

1.Number. The Board of Directors of this Corporation shall consist of such number of directors, not less than nine (9) nor more than seventeen (17). The exact number of directors shall be eleven (11) until changed, within the limits specified above, by an amendment to this Bylaw duly adopted by the Board of Directors or the shareholders.

2.Powers. The Board of Directors shall exercise all the powers of the Corporation except those which are by law, or by the Articles of Incorporation of this Corporation, or by the Bylaws conferred upon or reserved to the shareholders.

3. Committees. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate and appoint one or more committees as the Board deems appropriate, each consisting of two or more directors, to serve at the pleasure of the Board; provided, however, that, as required by this Corporation’s Articles of Incorporation, the members of the Executive Committee (should the Board of Directors designate an Executive Committee) must be appointed by the affirmative vote of two-thirds of the authorized number of directors. Any such committee, including the Executive Committee, shall have the authority to act in the manner and to the extent provided in the resolution of the Board of Directors designating such committee and may have all the authority of the Board of Directors, except with respect to the matters set forth in California Corporations Code Section 311.

4.Time and Place of Directors' Meetings. Regular meetings of the Board of Directors shall be held on such days and at such times and at such locations as shall be fixed by resolution of the Board, or designated by the Chairman of the Board or, in his absence, the Vice Chairman of the Board, or the President of the Corporation and contained in the notice of any such meeting. Notice of meetings shall be delivered personally or sent by mail or telegram at least seven days in advance.

5.Special Meetings. The Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, the President, or any five directors may call a special meeting of the Board of Directors at any time. Notice of the time and place of special meetings shall be given to each Director by the Corporate Secretary. Such notice shall be delivered personally or by telephone (or other system or technology designed to record and communicate messages, including facsimile, electronic mail, or other such means) to each Director at least four hours in advance of such meeting, or sent by first-class mail or telegram, postage prepaid, at least two days in advance of such meeting.

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6. Quorum. A quorum for the transaction of business at any meeting of the Board of Directors or any committee thereof shall consist of one-third of the authorized number of directors or committee members, or two, whichever is larger.

7.Action by Consent. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors.

8.Meetings by Conference Telephone. Any meeting, regular or special, of the Board of Directors or of any committee of the Board of Directors, may be held by conference telephone or similar communication equipment, provided that all Directors participating in the meeting can hear one another.

Article III.

OFFICERS.

1.Officers. The officers of the Corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a Chairman of the Executive Committee (whenever the Board of Directors in its discretion fills these offices), a President, one or more Vice Presidents, a Corporate Secretary and one or more Assistant Corporate Secretaries, a Treasurer and one or more Assistant Treasurers, a General Counsel, a General Attorney (whenever the Board of Directors in its discretion fills this office), and a Controller, all of whom shall be elected by the Board of Directors. The Chairman of the Board, the Vice Chairman of the Board, the Chairman of the Executive Committee, and the President shall be members of the Board of Directors.

2.Chairman of the Board. The Chairman of the Board, if that office be filled, shall preside at all meetings of the shareholders, of the Directors, and of the Executive Committee in the absence of the Chairman of that Committee. The Chairman of the Board shall be the chief executive officer of the Corporation if so designated by the Board of Directors. The Chairman of the Board shall have such duties and responsibilities as may be prescribed by the Board of Directors or the Bylaws. The Chairman of the Board shall have authority to sign on behalf of the Corporation agreements and instruments of every character, and in the absence or disability of the President, shall exercise his duties and responsibilities.

3.Vice Chairman of the Board. The Vice Chairman of the Board, if that office be filled, shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, or the Bylaws. The Vice Chairman of the Board shall be the chief executive officer of the Corporation if so designated by the Board of Directors. In the absence of the Chairman of the Board, the Vice Chairman of the Board shall preside at all meetings of the Board of Directors and of the shareholders; and, in the absence of the Chairman of the Executive Committee and the Chairman of the Board, The Vice Chairman of the Board shall preside at all meetings of

4

the Executive Committee. The Vice Chairman of the Board shall have authority to sign on behalf of the Corporation agreements and instruments of every character.

4.Chairman of the Executive Committee. The Chairman of the Executive Committee, if that office be filled, shall preside at all meetings of the Executive Committee. The Chairman of the Executive Committee shall aid and assist the other officers in the performance of their duties and shall have such other duties as may be prescribed by the Board of Directors or the Bylaws.

5.President. The President shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, or the Bylaws. The President shall be the chief executive officer of the Corporation if so designated by the Board of Directors. If there be no Chairman of the Board, the President shall also exercise the duties and responsibilities of that office. The President shall have authority to sign on behalf of the Corporation agreements and instruments of every character.

6.Vice Presidents. Each Vice President shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. Each Vice President’s authority to sign agreements and instruments on behalf of the Corporation shall be as prescribed by the Board of Directors. The Board of Directors of this company, the Chairman of the Board of this company, the Vice Chairman of the Board of this company, or the Chief Executive Officer of PG&E Corporation may confer a special title upon any Vice President.

7.Corporate Secretary. The Corporate Secretary shall attend all meetings of the Board of Directors and the Executive Committee, and all meetings of the shareholders, and the Corporate Secretary shall record the minutes of all proceedings in books to be kept for that purpose. The Corporate Secretary shall be responsible for maintaining a proper share register and stock transfer books for all classes of shares issued by the Corporation. The Corporate Secretary shall give, or cause to be given, all notices required either by law or the Bylaws. The Corporate Secretary shall keep the seal of the Corporation in safe custody, and shall affix the seal of the Corporation to any instrument requiring it and shall attest the same by the Corporate Secretary’s signature.

The Corporate Secretary shall have such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws.

The Assistant Corporate Secretaries shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Corporate Secretary. In the absence or disability of the Corporate Secretary, the Corporate Secretary’s duties shall be performed by an Assistant Corporate Secretary.

8.Treasurer. The Treasurer shall have custody of all moneys and funds of the Corporation, and shall cause to be kept full and accurate records of receipts and

5

disbursements of the Corporation. The Treasurer shall deposit all moneys and other valuables of the Corporation in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors or any employee of the Corporation designated by the Board of Directors. The Treasurer shall disburse such funds of the Corporation as have been duly approved for disbursement.

The Treasurer shall perform such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws.

The Assistant Treasurer shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Treasurer. In the absence or disability of the Treasurer, the Treasurer’s duties shall be performed by an Assistant Treasurer.

9.General Counsel. The General Counsel shall be responsible for handling on behalf of the Corporation all proceedings and matters of a legal nature. The General Counsel shall render advice and legal counsel to the Board of Directors, officers, and employees of the Corporation, as necessary to the proper conduct of the business. The General Counsel shall keep the management of the Corporation informed of all significant developments of a legal nature affecting the interests of the Corporation.

The General Counsel shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws.

10.Controller. The Controller shall be responsible for maintaining the accounting records of the Corporation and for preparing necessary financial reports and statements, and the Controller shall properly account for all moneys and obligations due the Corporation and all properties, assets, and liabilities of the Corporation. The Controller shall render to the officers such periodic reports covering the result of operations of the Corporation as may be required by them or any one of them.

The Controller shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Bylaws. The Controller shall be the principal accounting officer of the Corporation, unless another individual shall be so designated by the Board of Directors.

Article IV.

MISCELLANEOUS.

1.Record Date. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of

6

shares. The record date so fixed shall be not more than sixty nor less than ten days prior to the date of such meeting nor more than sixty days prior to any other action for the purposes for which it is so fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise the rights, as the case may be.

2.Certificates; Direct Registration System. Shares of the Corporation's stock may be certificated or uncertificated, as provided under California law. Any certificates that are issued shall be signed in the name of the Corporation by the Chairman of the Board, the Vice Chairman of the Board, the President, or a Vice President and by the Chief Financial Officer, an Assistant Treasurer, the Corporate Secretary, or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be a facsimile. In case any officer, Transfer Agent, or Registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, Transfer Agent, or Registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, Transfer Agent, or Registrar at the date of issue. Shares of the Corporation’s capital stock may also be evidenced by registration in the holder’s name in uncertificated, book-entry form on the books of the Corporation in accordance with a direct registration system approved by the Securities and Exchange Commission and by the American Stock Exchange or any securities exchange on which the stock of the Corporation may from time to time be traded.

Transfers of shares of stock of the Corporation shall be made by the Transfer Agent and Registrar on the books of the Corporation only after receipt of a request with proper evidence of succession, assignment, or authority to transfer by the record holder of such stock, or by an attorney lawfully constituted in writing, and in the case of stock represented by a certificate,upon surrender of the certificate. Subject to the foregoing, the Board of Directors shall have power and authority to make such rules and regulations as it shall deem necessary or appropriate concerning the issue, transfer, and registration of certificates for shares of stock of the Corporation, and to appoint and remove Transfer Agents and Registrars of transfers.

3.Lost Certificates. Any person claiming a certificate of stock to be lost, stolen, mislaid, or destroyed shall make an affidavit or affirmation of that fact and verify the same in such manner as the Board of Directors may require, and shall, if the Board of Directors so requires, give the Corporation, its Transfer Agents, Registrars, and/or other agents a bond of indemnity in form approved by counsel, and in amount and with such sureties as may be satisfactory to the Corporate Secretary of the Corporation, before a new certificate (or uncertificated shares in lieu of a new certificate) may be issued of the same tenor and for the same number of shares as the one alleged to have been lost, stolen, mislaid, or destroyed.

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Article V.

AMENDMENTS.

1.Amendment by Shareholders. Except as otherwise provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by the affirmative vote of a majority of the outstanding shares entitled to vote at any regular or special meeting of the shareholders.

2.Amendment by Directors. To the extent provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by resolution adopted by a majority of the members of the Board of Directors.

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EX-10.18

[PG&E Corporation Letterhead]

Exhibit 10.18

October 10, 2006

Mr. Hyun Park

15 Magnolia Drive

Purchase, NY 10577

Dear Hyun:

On behalf of PG&E Corporation, I am pleased to extend a revised invitation to you to join our organization as Senior Vice President and General Counsel, reporting to me.

Your initial total compensation package will consist of the following:

1.An annual base salary of $475,000 ($39,583.33/month) subject to possible increases through our annual salary review plan.

2.A target incentive of $261,250 (55% of your base salary) in an annual short-term incentive plan under which your actual incentive dollars may range from zero to $522,500 based on performance relative to established goals. For 2006, this incentive will be prorated for the number of months worked from your date of hire and will be payable in 2007.

3.A one-time bonus of $225,000 payable within 60 days of your date of hire, subject to normal tax withholdings. Should you voluntarily leave the company (other than for good reason in connection with a change in control) or should your employment be terminated for cause within two years of your date of hire, a prorated amount of this bonus must be refunded to the company.

4.Participation in the PG&E Corporation Long-Term Incentive Plan (LTIP) as a band 2 officer. Grants under the LTIP are currently split equally between restricted stock and performance shares, and are generally made annually on the first business day of the year. Your initial LTIP grant will be made on your date of hire, and will have an estimated value of $1,000,000. This estimated value is used only for the purpose of determining the number of shares for your grant, which will be based on the closing price of PG&E Corporation common stock (PCG) on your date of hire. You will also receive a 2007 LTIP grant with an estimated value of $800,000. That grant will be made on the first business day of January 2007, and will be based on the closing price of PCG on that day. The ultimate value that you realize from these grants will depend upon your employment status and the performance of PG&E Corporation common stock.

5.A payment of $1,500,000 to be credited to an account within the PG&E Corporation Supplemental Retirement Savings Plan (SRSP), a non-qualified deferred compensation plan. The payment will be made in two installments as follows: $1,000,000 on your first service anniversary, and $500,000 on your second service anniversary. Should you terminate prior to the payment of an installment, that installment as well as any remaining installment will be forfeited. The credited funds will be allocated to the PG&E Phantom Stock Fund; will not be eligible for incentive purposes under the PG&E Corporation Executive Stock Ownership Program; and may not be reallocated to other investment funds within the SRSP. Distribution of credited funds will be made in accordance with your elections and the administrative provisions governing the SRSP.

Mr. Park

October 10, 2006

Page 2

6.Participation in the PG&E Corporation Supplemental Executive Retirement Plan (SERP). The basic benefit payable from the SERP at retirement is a monthly annuity equal to the product of 1.7% x [average of the three highest years’ combination of salary and annual incentive for the last ten years of service] x years of credited service x 1/12.

7.Participation in the PG&E Corporation Retirement Savings Plan (RSP), a 401(k) defined contribution plan. You will be eligible to contribute as much as 20% of your salary on either a pre-tax or after-tax basis, subject to legal limits. After your first year of service, we will match contributions you make, up to 3% of your salary, at 75 cents on each dollar contributed for the second and third years of your employment. Thereafter, we will match contributions up to 6% of your salary at 75 cents on each dollar contributed.

8.Participation in the PG&E Corporation Supplemental Retirement Savings Plan (SRSP), a non-qualified deferred compensation plan. You may elect to defer payment of some of your compensation on a pre-tax basis. We will provide you with the full matching contributions that cannot be provided through the RSP due to legal limitations imposed on highly compensated employees.

9.As a result of your officer level (officer band 2), you will become an eligible participant in the Executive Stock Ownership Program effective January 1, 2007. As an ancillary benefit to that program, you will also be eligible to receive financial counseling from The AYCO Company at a subsidized rate to assist you in your understanding of our compensation and benefits programs and how those programs can help you to achieve financial security.

10.You will be assumed to have met the service requirements associated with eligibility for full benefits under the PG&E Corporation Officer Severance Policy.

11.Participation in a cafeteria-style benefits program that permits you to select coverage tailored to your personal needs and circumstances. The benefits you elect will be effective the first of the month 
  following the date of your hire.

12. PG&E Corporation also offers employees an initial allocation of Paid Time Off (PTO) upon hire. Future allocations of PTO are made each year on January 1, and are based on your date of hire and amount worked in the preceding year. For example, by starting work in November and working full-time for the remainder of 2006, you will be eligible for 100 hours of PTO upon hire and 34 hours on January 1, 2007. Thereafter, you will accrue PTO at rate of approximately 17 hours per month (200 hours per year), provided that you work full-time for the month. In addition, PG&E Corporation recognizes 10 paid company holidays annually and provides 3 floating holidays immediately upon hire and at the beginning of each year.

Mr. Park

October 10, 2006

Page 3

13.An annual perquisite allowance of $25,000 to be used in lieu of individual authorizations for cars and memberships in clubs and civic organizations. For 2006, you will receive 50% of this amount ($12,500).

14.A comprehensive executive relocation assistance package, including: (1) the reimbursement of closing costs on the sale of your current residence, contingent upon using a PG&E-designated relocation company and purchasing a new residence within 18 months of your date of hire, subject to any applicable IRS restrictions; (2) the move of your household goods, including 60 days of storage and the movement of the goods out of storage; (3) a lump sum payment of $10,000 payable within 60 days of your date of hire; and (4) up to two exploratory trips for you and your family. In addition, you will be provided with temporary housing and regular return-home trips to New York (business class or in the event of no business class, first class), no more than weekly, through June 2007. The costs of such housing and travel will be grossed-up for applicable taxes.

This offer is contingent upon your passing a comprehensive background verification including a credit check and security clearance assessment, and a standard drug analysis test. We will also need to verify your eligibility to work in the United States based on applicable immigration laws. In addition, your election as an officer of PG&E Corporation is subject to approval by the Board of Directors of PG&E Corporation, and elements of your compensation are subject to approval by the Nominating, Compensation, and Governance Committee of the Board of Directors of PG&E Corporation.

I look forward to your joining our team and believe you will make a strong contribution to the achievement of our being the leading utility in the United States. I would appreciate receiving your written acceptance of this offer as soon as possible. Please call me at any time if you have questions.

Sincerely,

PETER A. DARBEE

PETER A. DARBEE

Chairman of the Board, Chief Executive Officer, and President

This is to confirm my acceptance of PG&E Corporation’s offer as Senior Vice President and General Counsel outlined above.

HYUN PARK                       10/16/06

(Signature and Date)

EX-10.20

Exhibit 10.20  

2007 OFFICER SHORT-TERM INCENTIVE PLAN

On December 20, 2006, the Nominating, Compensation, and Governance Committee (Committee) of the PG&E Corporation Board of Directors established the structure of the PG&E Corporation 2007 Short-Term Incentive Plan (STIP), under which officers of PG&E Corporation and Pacific Gas and Electric Company (Utility) are provided an opportunity to receive annual incentive cash payments. Corporate financial performance, as measured by corporate earnings from operations, will account for 50 percent of the incentive, 20 percent of the incentive will be based on customer satisfaction indices, 20 percent of the incentive will be based on the Utility’s success in implementing its strategy to achieve operational excellence and improved customer service, 5 percent will be based on the results of an employee opinion survey measuring employee engagement, and the remaining 5 percent will be based on achieving safety standards.

At its meeting on February 21, 2007, the Committee approved the specific performance scale that will be used to determine the extent to which the corporate financial objective, as measured by earnings from operations, has been met. The Committee used the same methodology to establish the performance scale for the corporate financial performance portion of the 2007 STIP as was used for the 2006 STIP. The corporate financial performance measure is based on PG&E Corporation's 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. As with previous earnings performance scales, unbudgeted items impacting comparability such as changes in accounting methods, workforce restructuring, and one-time occurrences will be excluded.

The Committee also approved the 2007 performance targets for each of the four other measures set forth in the table below. The 2006 performance results for each measure are included for comparative purposes.

2007 STIP Performance Targets¹

Measure	Relative Weight	2006 Results	2007 Target
Customer Satisfaction (Residential & Business)2	20%	100	676
Business Transformation Index3	20%	N/A	1.0
Employee Survey (Premier) Index4	5%	64.0%	66.0%
Occupational Safety and Health Administration (OSHA) Recordable Injury Rate5	5%	12.9% reduction	15% reduction

1. As explained above, 50% of the STIP award will be based on achievement of corporate earnings from operations targets.

2.     This measure reflects a weighted composite of the overall customer satisfaction indices of the Utility’s residential and business customers as reported by the J.D. Power Residential Survey and the J.D. Power Business Survey. For 2006, the residential customers’ and business customers’ scores were weighted equally. In an effort to enhance the focus on improving residential customer satisfaction, which has been lower than business customer satisfaction, for the 2007 target the weighting of the residential customers’ score will be increased to 60% and the weighting of the business customers’ score will be lowered to 40%. In addition, for 2007, J.D. Power and Associates has changed the scale used to report results from the J.D. Power Survey from a scale that attempted to center the industry average score at approximately 100 to a 1,000 point scale. By way of comparison, results for 2006 would have been 678 under the new 1000 point scale based on equally weighted scores and results for 2006 would have been 673 based on the revised weightings. The 2007 target may be adjusted to reflect changes in the J.D. Power industry average scores, which are expected by mid-year 2007.

3. 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^TM project performance for number of meters installed and activated, and (5) the extent to which core business transformation initiatives are implemented compared to planned schedule and scope of initiatives.

4. The Premier Survey is the primary tool used to measure employee engagement at PG&E Corporation and the Utility. The employee index is designed around 15 key drivers of employee engagement. The average overall employee survey index score provides a comprehensive metric that is derived by adding the percent of favorable responses from all 40 core survey items (all of which fall into one of 15 broader topical areas), and then dividing the total sum by 40.

5. 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. The “OSHA Recordable Rate” is the number of OSHA Recordables for every 200,000 hours worked, or for approximately 100 employees. This metric measures the percentage reduction in the Utility’s OSHA Recordable rate from the prior year.

The Committee has full discretion as to the determination of final officer STIP awards for 2007 performance.

EX-10.31

Exhibit 10.31

Director Compensation

RESOLUTION OF THE

BOARD OF DIRECTORS OF

PG&E CORPORATION

December 20, 2006

BE IT RESOLVED that, effective January 1, 2007, directors who are not employees of this corporation or Pacific Gas and Electric Company (“non-employee directors”) shall be paid a retainer of $12,500 per calendar quarter, which shall be in addition to fees paid for attendance at Board and Board committee meetings; and

BE IT FURTHER RESOLVED that, effective January 1, 2007, the non-employee director who serves as lead director shall be paid an additional retainer of $12,500 per calendar quarter; and

BE IT FURTHER RESOLVED that, effective January 1, 2007, the non-employee directors who are duly appointed to chair the Finance Committee, the Nominating, Compensation, and Governance Committee, and the Public Policy Committee of this Board shall be paid an additional retainer of $1,875 per calendar quarter, and the non-employee directors who are duly appointed to chair the Audit Committee and the Nominating, Compensation, and Governance Committee of this Board shall be paid an additional retainer of $12,500 per calendar quarter; provided, however, that a non-employee director duly appointed to chair one of the foregoing committees shall not be paid an additional retainer for any calendar quarter during which such director also serves as lead director; and

BE IT FURTHER RESOLVED that, effective January 1, 2007, non-employee directors shall be paid a fee of $1,750 for each meeting of the Board and for each meeting of a Board committee attended; provided, however, that non-employee directors who are members of the Audit Committee shall be paid a fee of $2,750 for each meeting of the Audit Committee attended; and

BE IT FURTHER RESOLVED that any non-employee director may participate in a Directors’ Voluntary Stock Purchase Program by instructing the Corporate Secretary to withhold an amount equal to but not less than 20 percent of his or her meeting fees and/or quarterly retainers for the purpose of acquiring shares of this corporation’s common stock on behalf of said director, provided that once a non-employee director has so instructed the Corporate Secretary, said director may not modify or discontinue such instruction for at least 12 calendar months; and

BE IT FURTHER RESOLVED that non-employee directors shall be eligible to participate in the PG&E Corporation 2006 Long-Term Incentive Plan under the terms and conditions of that Plan, as adopted by this Board of Directors and as may be amended from time to time; and

BE IT FURTHER RESOLVED that members of this Board shall be reimbursed for reasonable expenses incurred in attending Board or committee meetings; and

BE IT FURTHER RESOLVED that, effective January 1, 2007, the resolution on this subject adopted by the Board of Directors on June 16, 2004, is hereby superseded.

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EX-10.32

Exhibit 10.32

Director Compensation

RESOLUTION OF THE

BOARD OF DIRECTORS OF

PACIFIC GAS AND ELECTRIC COMPANY

December 20, 2006

BE IT RESOLVED that, effective January 1, 2007, directors who are not employees of this company or PG&E Corporation (“non-employee directors”) shall be paid a retainer of $12,500 per calendar quarter which shall be in addition to any fees paid for attendance at Board and Board committee meetings; provided, however, that a non-employee director shall not be paid a retainer by this company for any calendar quarter during which such director also serves as a director or advisory director of PG&E Corporation; and

BE IT FURTHER RESOLVED that, effective January 1, 2007, the non-employee director who serves as lead director shall be paid an additional retainer of $12,500 per calendar quarter; provided, however, that a non-employee director who serves as lead director shall not be paid an additional retainer by this company for any calendar quarter during which such director also serves as lead director of the PG&E Corporation Board of Directors; and

BE IT FURTHER RESOLVED that, effective January 1, 2007, the non-employee directors who are duly appointed to chair the committees of this Board shall be paid an additional retainer of $1,875 per calendar quarter or, in the case of the chair of the Audit Committee, an additional retainer of $12,500 per calendar quarter; provided, however, that (1) a non-employee director duly appointed to chair a committee of this Board shall not be paid an additional retainer by this company for any calendar quarter during which such director also serves as chair of the corresponding committee of the PG&E Corporation Board of Directors, and (2) a non-employee director duly appointed to chair a committee of this Board shall not be paid an additional retainer for any calendar quarter during which such director also serves as lead director; and

BE IT FURTHER RESOLVED that, effective January 1, 2007, non-employee directors attending any meeting of the Board not held concurrently or sequentially with a meeting of the Board of Directors of PG&E Corporation, or any meeting of a Board committee not held

concurrently or sequentially with a meeting of the corresponding committee of the PG&E Corporation Board, shall be paid a fee of $1,750 for each such meeting attended; provided, however, that non-employee directors attending any meeting of the Audit Committee of this Board which is not held concurrently or sequentially with a meeting of the Audit Committee of the PG&E Corporation Board, shall be paid a fee of $2,750 for each such meeting attended; and

BE IT FURTHER RESOLVED that any non-employee director may participate in a Directors’ Voluntary Stock Purchase Program by instructing the Corporate Secretary to withhold an amount equal to but not less than 20 percent of his or her meeting fees and/or quarterly retainers for the purpose of acquiring shares of PG&E Corporation common stock on behalf of said director, provided that once a non-employee director has so instructed the Corporate Secretary, said director may not modify or discontinue such instruction for at least 12 calendar months; and

BE IT FURTHER RESOLVED that members of this Board shall be reimbursed for reasonable expenses incurred in attending Board or committee meetings; and

BE IT FURTHER RESOLVED that, effective January 1, 2007, the resolution on this subject adopted by the Board of Directors on June 16, 2004, is hereby superseded.

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EX-10.33

Exhibit 10.33

PG&E Corporation

2006 Long-Term Incentive Plan

	TABLE OF CONTENTS		Page
1.	Establishment, Purpose and Term of Plan		1
	1.1	Establishment	1
	1.2	Purpose	1
	1.3	Term of Plan	1
2.	Definitions and Construction		1
	2.1	Definitions	1
	2.2	Construction	7
3.	Administration		7
	3.1	Administration by the Committee	7
	3.2	Authority of Officers	7
	3.3	Administration with Respect to Insiders	8
	3.4	Committee Complying with Section 162(m)	8
	3.5	Powers of the Committee	8
	3.6	Option or SAR Repricing	9
	3.7	Indemnification	9
4.	Shares Subject to Plan		10
	4.1	Maximum Number of Shares Issuable	10
	4.2	Adjustments for Changes in Capital Structure	10
5.	Eligibility and Award Limitations		11
	5.1	Persons Eligible for Awards	11
	5.2	Participation	11
	5.3	Incentive Stock Option Limitations	11
	5.4	Award Limits	12
6.	Terms and Conditions of Options		13
	6.1	Exercise Price	13
	6.2	Exercisability and Term of Options	13
	6.3	Payment of Exercise Price	13
	6.4	Effect of Termination of Service	14
	6.5	Transferability of Options	14
7.	Terms and Conditions of Nonemployee Director Awards		15
	7.1	Automatic Grant of Restricted Stock	15
	7.2	Annual Election to Receive Nonstatutory Stock Option and Restricted Stock Units	15
	7.3	Grant of Nonstatutory Stock Option	15
	7.4	Grant of Restricted Stock Unit	16
	7.5	Effect of Termination of Service as a Nonemployee Director	17
	7.6	Effect of Change in Control on Nonemployee Director Awards	18

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		TABLE OF CONTENTS (continued)		Page
	7.7	Right to Decline Nonemployee Director Awards		18
8.	Terms and Conditions of Stock Appreciation Rights			19
	8.1	Types of SARs Authorized		19
	8.2	Exercise Price		19
	8.3	Exercisability and Term of SARs		19
	8.4	Deemed Exercise of SARs		19
	8.5	Effect of Termination of Service		20
	8.6	Nontransferability of SARs		20
9.	Terms and Conditions of Restricted Stock Awards			20
	9.1	Types of Restricted Stock Awards Authorized		20
	9.2	Purchase Price		20
	9.3	Purchase Period		20
	9.4	Vesting and Restrictions on Transfer		20
	9.5	Voting Rights, Dividends and Distributions		21
	9.6	Effect of Termination of Service		21
	9.7	Nontransferability of Restricted Stock Award Rights		21
10.	Terms and Conditions of Performance Awards			21
	10.1	Types of Performance Awards Authorized	22
	10.2	Initial Value of Performance Shares and Performance Units	22
	10.3	Establishment of Performance Period, Performance Goals and Performance Award Formula	22
	10.4	Measurement of Performance Goals	22
	10.5	Settlement of Performance Awards	23
	10.6	Voting Rights, Dividend Equivalent Rights and Distributions	24
	10.7	Effect of Termination of Service	24
	10.8	Nontransferability of Performance Awards	25
11.	Terms and Conditions of Restricted Stock Unit Awards		25
	11.1	Grant of Restricted Stock Unit Awards	25
	11.2	Vesting	25
	11.3	Voting Rights, Dividend Equivalent Rights and Distributions	25
	11.4	Effect of Termination of Service	26
	11.5	Settlement of Restricted Stock Unit Awards	26
	11.6	Nontransferability of Restricted Stock Unit Awards	26
12.	Deferred Compensation Awards		27
	12.1	Establishment of Deferred Compensation Award Programs	27
	12.2	Terms and Conditions of Deferred Compensation Awards	27

ii

	TABLE OF CONTENTS (continued)		Page
13.	Other Stock-Based Awards		28
14.	Change in Control		28
	14.1	Effect of Change in Control on Options and SARs	28
	14.2	Effect of Change in Control on Restricted Stock and Other Awards	29
	14.3	Nonemployee Director Awards	29
15.	Compliance with Securities Law		29
16.	Tax Withholding		29
	16.1	Tax Withholding in General	29
	16.2	Withholding in Shares	30
17.	Amendment or Termination of Plan		30
18.	Miscellaneous Provisions		30
	18.1	Repurchase Rights	30
	18.2	Provision of Information	30
	18.3	Rights as Employee, Consultant or Director	30
	18.4	Rights as a Shareholder	31
	18.5	Fractional Shares	31
	18.6	Severability	31
	18.7	Beneficiary Designation	31
	18.8	Unfunded Obligation	31
	18.9	Choice of Law	32

iii

PG&E Corporation

2006 Long-Term Incentive Plan

1.Establishment, Purpose and Term of Plan.

1.1Establishment. The PG&E Corporation 2006 Long-Term Incentive Plan (the “Plan”) is hereby established effective as of January 1, 2006 (the “Effective Date”), provided it has been approved by the shareholders of the Company.

1.2Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its shareholders by providing an incentive to attract and retain the best qualified personnel to perform services for the Participating Company Group, by motivating such persons to contribute to the growth and profitability of the Participating Company Group, by aligning their interests with interests of the Company’s shareholders, and by rewarding such persons for their services by tying a significant portion of their total compensation package to the success of the Company. The Plan seeks to achieve this purpose by providing for Awards in the form of Options, Stock Appreciation Rights, Restricted Stock Awards, Performance Shares, Performance Units, Restricted Stock Units, Deferred Compensation Awards and other Stock-Based Awards as described below.

1.3Term of Plan. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Awards granted under the Plan have lapsed. However, all Awards shall be granted, if at all, within ten (10) years from the Effective Date. Moreover, Incentive Stock Options shall not be granted later than ten (10) years from the date of shareholder approval of the Plan.

2.Definitions and Construction.

2.1Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a)“Affiliate” means (i) an entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) an entity, other than a Subsidiary Corporation, that is controlled by the Company directly, or indirectly through one or more intermediary entities. For this purpose, the term “control” (including the term “controlled by”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the relevant entity, whether through the ownership of voting securities, by contract or otherwise; or shall have such other meaning assigned such term for the purposes of registration on Form S-8 under the Securities Act.

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(b)“Award” means any Option, SAR, Restricted Stock Award, Performance Share, Performance Unit, Restricted Stock Unit or Deferred Compensation Award or other Stock-Based Award granted under the Plan.

(c)“Award Agreement” means a written agreement between the Company and a Participant setting forth the terms, conditions and restrictions of the Award granted to the Participant.

(d)“Board” means the Board of Directors of the Company.

(e)“Change in Control” means, unless otherwise defined by the Participant’s Award Agreement or contract of employment or service, the occurrence of any of the following:

(i)any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, but excluding any benefit plan for Employees or any trustee, agent or other fiduciary for any such plan acting in such person’s capacity as such fiduciary), directly or indirectly, becomes the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Exchange Act), of stock of the Company representing twenty percent (20%) or more of the combined voting power of the Company’s then outstanding voting stock; or

(ii)during any two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority of the Board, unless the election, or the nomination for election by the shareholders of the Company, of each new Director was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who were Directors at the beginning of the period; or

(iii)the consummation of any consolidation or merger of the Company other than a merger or consolidation which would result in the voting stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting stock of the surviving entity or any parent of such surviving entity) at least seventy percent (70%) of the Combined Voting Power of the Company, such surviving entity or the parent of such surviving entity outstanding immediately after the merger or consolidation; or

(iv)the approval of the Shareholders of the Company of any (1) sale, lease, exchange or other transfer (in one or a series of related transactions) of all or substantially all of the assets of the Company, or (2) any plan or proposal for the liquidation or dissolution of the Company.

For purposes of paragraph (iii), the term “Combined Voting Power” shall mean the combined voting power of the Company’s or other relevant entity’s then outstanding voting stock.

(f)“Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(g)“Committee” means the Nominating, Compensation, and Governance Committee or other committee of the Board duly appointed to administer the Plan and having

2

such powers as shall be specified by the Board. If no committee of the Board has been appointed to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.

(h)“Company” means PG&E Corporation, a California corporation, or any successor corporation thereto.

(i)“Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or a member of the Board) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on registration on a Form S-8 Registration Statement under the Securities Act.

(j)“Deferred Compensation Award” means an award of Stock Units granted to a Participant pursuant to Section 12 of the Plan.

(k)“Director” means a member of the Board.

(l)“Disability” means the permanent and total disability of the Participant, within the meaning of Section 22(e)(3) of the Code.

(m)“Dividend Equivalent” means a credit, made at the discretion of the Committee or as otherwise provided by the Plan, to the account of a Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award held by such Participant.

(n)“Employee” means any person treated as an employee (including an Officer or a member of the Board who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a member of the Board nor payment of a director’s fee shall be sufficient to constitute employment for purposes of the Plan. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual’s employment or termination of employment, as the case may be. For purposes of an individual’s rights, if any, under the Plan as of the time of the Company’s determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary determination.

(o)“Exchange Act” means the Securities Exchange Act of 1934, as amended.

(p)“Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:

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(i)Except as otherwise determined by the Committee, if, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock as quoted on the New York Stock Exchange or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.

(ii)Notwithstanding the foregoing, the Committee may, in its discretion, determine the Fair Market Value on the basis of the opening, closing, high, low or average sale price of a share of Stock or the actual sale price of a share of Stock received by a Participant, on such date, the preceding trading day, the next succeeding trading day or an average determined over a period of trading days. The Committee may vary its method of determination of the Fair Market Value as provided in this Section for different purposes under the Plan.

(iii)If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse.

(q)“Incentive Stock Option” means an Option intended to be (as set forth in the Award Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.

(r)“Insider” means an Officer, a Director or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act.

(s)“Mandatory Retirement” means retirement as a Director at age 70 or at such other age as may be specified in the retirement policy for the Board in effect at the time of a Nonemployee Director’s termination of Service as a Director.

(t)“Net-Exercise” means a procedure by which the Participant will be issued a number of shares of Stock determined in accordance with the following formula:

X = Y(A-B)/A, where

X = the number of shares of Stock to be issued to the Participant upon exercise of the Option;

Y = the total number of shares with respect to which the Participant has elected to exercise the Option;

A = the Fair Market Value of one (1) share of Stock;

B = the exercise price per share (as defined in the Participant’s Award Agreement).

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(u)“Nonemployee Director” means a Director who is not an Employee.

(v)“Nonemployee Director Award” means an Award granted to a Nonemployee Director pursuant to Section 7 of the Plan.

(w)“Nonstatutory Stock Option” means an Option not intended to be (as set forth in the Award Agreement) an incentive stock option within the meaning of Section 422(b) of the Code.

(x)“Officer” means any person designated by the Board as an officer of the Company.

(y)“Option” means the right to purchase Stock at a stated price for a specified period of time granted to a Participant pursuant to Section 6 or Section 7 of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.

(z)“Option Expiration Date” means the date of expiration of the Option’s term as set forth in the Award Agreement.

(aa)“Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(bb)“Participant” means any eligible person who has been granted one or more Awards.

(cc)“Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

(dd)“Participating Company Group” means, at any point in time, all entities collectively which are then Participating Companies.

(ee)“Performance Award” means an Award of Performance Shares or Performance Units.

(ff)“Performance Award Formula” means, for any Performance Award, a formula or table established by the Committee pursuant to Section 10.3 of the Plan which provides the basis for computing the value of a Performance Award at one or more threshold levels of attainment of the applicable Performance Goal(s) measured as of the end of the applicable Performance Period.

(gg)“Performance Goal” means a performance goal established by the Committee pursuant to Section 10.3 of the Plan.

(hh)“Performance Period” means a period established by the Committee pursuant to Section 10.3 of the Plan at the end of which one or more Performance Goals are to be measured.

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(jj)“Performance Share” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 10 of the Plan to receive a payment equal to the value of a Performance Share, as determined by the Committee, based on performance.

(jj)“Performance Unit” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 10 of the Plan to receive a payment equal to the value of a Performance Unit, as determined by the Committee, based upon performance.

(kk)“Restricted Stock Award” means an Award of Restricted Stock.

(ll)“Restricted Stock Unit” or “Stock Unit” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 11 or Section 12 of the Plan, respectively, to receive a share of Stock on a date determined in accordance with the provisions of Section 11 or Section 12, as applicable, and the Participant’s Award Agreement.

(mm)“Restriction Period” means the period established in accordance with Section 9.4 of the Plan during which shares subject to a Restricted Stock Award are subject to Vesting Conditions.

(nn)“Retirement” means termination as an Employee of a Participating Company at age 55 or older, provided that the Participant was an Employee for at least five consecutive years prior to the date of such termination.

(oo)“Rule 16b-3” means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.

(pp)“SAR” or “Stock Appreciation Right” means a bookkeeping entry representing, for each share of Stock subject to such SAR, a right granted to a Participant pursuant to Section 8 of the Plan to receive payment in any combination of shares of Stock or cash of an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price.

(qq)“Section 162(m)” means Section 162(m) of the Code.

(rr)“Securities Act” means the Securities Act of 1933, as amended.

(ss)“Service” means a Participant’s employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. A Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders such Service or a change in the Participating Company for which the Participant renders such Service, provided that there is no interruption or termination of the Participant’s Service. Furthermore, a Participant’s Service shall not be deemed to have terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company. However, if any such leave taken by a Participant exceeds ninety (90) days, then on the one hundred eighty-first (181st) day following the commencement of such leave any Incentive Stock Option held by the Participant shall cease to be treated as an Incentive Stock Option and instead shall be treated thereafter as a Nonstatutory Stock Option, unless the Participant’s right to return to Service with the

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Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Participant’s Award Agreement. A Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the entity for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of such termination.

(tt)Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2 of the Plan.

(uu)“Stock-Based Awards” means any award that is valued in whole or in part by reference to, or is otherwise based on, the Stock, including dividends on the Stock, but not limited to those Awards described in Sections 6 through 12 of the Plan.

(vv)“Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

(ww)“Ten Percent Owner” means a Participant who, at the time an Option is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company (other than an Affiliate) within the meaning of Section 422(b)(6) of the Code.

(xx)“Vesting Conditions” mean those conditions established in accordance with Section 9.4 or Section 11.2 of the Plan prior to the satisfaction of which shares subject to a Restricted Stock Award or Restricted Stock Unit Award, respectively, remain subject to forfeiture or a repurchase option in favor of the Company upon the Participant’s termination of Service.

2.2Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

3.Administration.

3.1Administration by the Committee. The Plan shall be administered by the Committee. All questions of interpretation of the Plan or of any Award shall be determined by the Committee, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Award.

3.2Authority of Officers. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, determination or election. In addition, to the extent specified in a resolution adopted by the Board, the Chief Executive Officer of the

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Company shall have the authority to grant Awards to an Employee who is not an Insider and who is receiving a salary below the level which requires approval by the Committee; provided that the terms of such Awards conform to guidelines established by the Committee and provided further that at the time of making such Awards the Chief Executive Officer also is a Director.

3.3Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3.

3.4Committee Complying with Section 162(m). While the Company is a “publicly held corporation” within the meaning of Section 162(m), the Board may establish a Committee of “outside directors” within the meaning of Section 162(m) to approve the grant of any Award which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m).

3.5Powers of the Committee. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Committee shall have the full and final power and authority, in its discretion:

(a)to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of Stock or units to be subject to each Award based on the recommendation of the Chief Executive Officer of the Company (except that Awards to the Chief Executive Officer shall be based on the recommendation of the independent members of the Board in compliance with applicable stock exchange rules and Awards to Nonemployee Directors shall be granted automatically pursuant to Section 7 of the Plan);

(b)to determine the type of Award granted and to designate Options as Incentive Stock Options or Nonstatutory Stock Options;

(c)to determine the Fair Market Value of shares of Stock or other property;

(d)to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the exercise or purchase price of shares purchased pursuant to any Award, (ii) the method of payment for shares purchased pursuant to any Award, (iii) the method for satisfaction of any tax withholding obligation arising in connection with Award, including by the withholding or delivery of shares of Stock, (iv) the timing, terms and conditions of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Award Formula and Performance Goals applicable to any Award and the extent to which such Performance Goals have been attained, (vi) the time of the expiration of any Award, (vii) the effect of the Participant’s termination of Service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to any Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan;

(e)to determine whether an Award will be settled in shares of Stock, cash, or in any combination thereof;

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(f)to approve one or more forms of Award Agreement;

(g)to amend, modify, extend, cancel or renew any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired pursuant thereto;

(h)to accelerate, continue, extend or defer the exercisability or vesting of any Award or any shares acquired pursuant thereto, including with respect to the period following a Participant’s termination of Service;

(i)without the consent of the affected Participant and notwithstanding the provisions of any Award Agreement to the contrary, to unilaterally substitute at any time a Stock Appreciation Right providing for settlement solely in shares of Stock in place of any outstanding Option, provided that such Stock Appreciation Right covers the same number of shares of Stock and provides for the same exercise price (subject in each case to adjustment in accordance with Section 4.2) as the replaced Option and otherwise provides substantially equivalent terms and conditions as the replaced Option, as determined by the Committee;

(j)to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt sub-plans or supplements to, or alternative versions of, the Plan, including, without limitation, as the Committee deems necessary or desirable to comply with the laws or regulations of or to accommodate the tax policy, accounting principles or custom of, foreign jurisdictions whose citizens may be granted Awards;

(k)to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement and to make all other determinations and take such other actions with respect to the Plan or any Award as the Committee may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law; and

(l)to delegate to the Chief Executive Officer or the Senior Vice President of Human Resources the authority with respect to ministerial matters regarding the Plan and Awards made under the Plan.

3.6Option or SAR Repricing. Without the affirmative vote of holders of a majority of the shares of Stock cast in person or by proxy at a meeting of the shareholders of the Company at which a quorum representing a majority of all outstanding shares of Stock is present or represented by proxy, the Board shall not approve a program providing for either (a) the cancellation of outstanding Options or SARs and the grant in substitution therefore of new Options or SARs having a lower exercise price or (b) the amendment of outstanding Options or SARs to reduce the exercise price thereof. This paragraph shall not be construed to apply to “issuing or assuming a stock option in a transaction to which section 424(a) applies,” within the meaning of Section 424 of the Code.

3.7Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee or as officers or employees of the Participating Company Group, members of the Board or the Committee and any officers or employees of the Participating Company Group to whom authority to act for the Board, the Committee or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any

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action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.

4.Shares Subject to Plan.

4.1Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be twelve million (12,000,000) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Award for any reason expires or is terminated or canceled without having been exercised or settled in full, or if shares of Stock acquired pursuant to an Award subject to forfeiture or repurchase are forfeited or repurchased by the Company, the shares of Stock allocable to the terminated portion of such Award or such forfeited or repurchased shares of Stock shall again be available for issuance under the Plan. Shares of Stock shall not be deemed to have been issued pursuant to the Plan (a) with respect to any portion of an Award that is settled in cash or (b) to the extent such shares are withheld or reacquired by the Company in satisfaction of tax withholding obligations pursuant to Section 16.2. Upon payment in shares of Stock pursuant to the exercise of an SAR, the number of shares available for issuance under the Plan shall be reduced only by the number of shares actually issued in such payment. If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant, or by means of a Net-Exercise, the number of shares available for issuance under the Plan shall be reduced only by the net number of shares for which the Option is exercised.

4.2Adjustments for Changes in Capital Structure. Subject to any required action by the shareholders of the Company, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the shareholders of the Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate adjustments shall be made in the number and kind of shares subject to the Plan and to any outstanding Awards, in the Award limits set forth in Section 5.4, in the Nonemployee Director Awards to be granted automatically pursuant to Section 7, and in the exercise or purchase price per share under any outstanding Award in order to prevent dilution or enlargement of Participants’ rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” Any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number. The Committee in its sole discretion, may also make such

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adjustments in the terms of any Award to reflect, or related to, such changes in the capital structure of the Company or distributions as it deems appropriate, including modification of Performance Goals, Performance Award Formulas and Performance Periods. The adjustments determined by the Committee pursuant to this Section 4.2 shall be final, binding and conclusive.

5.Eligibility and Award Limitations.

5.1Persons Eligible for Awards. Awards may be granted only to Employees, Consultants and Directors. For purposes of the foregoing sentence, “Employees,” “Consultants”and “Directors” shall include prospective Employees, prospective Consultants and prospective Directors to whom Awards are granted in connection with written offers of an employment or other service relationship with the Participating Company Group; provided, however, that no Stock subject to any such Award shall vest, become exercisable or be issued prior to the date on which such person commences Service. A Nonemployee Director Award may be granted only to a person who, at the time of grant, is a Nonemployee Director.

5.2Participation. Awards other than Nonemployee Director Awards are granted solely at the discretion of the Committee. Eligible persons may be granted more than one Award. However, excepting Nonemployee Director Awards, eligibility in accordance with this Section shall not entitle any person to be granted an Award, or, having been granted an Award, to be granted an additional Award.

5.3Incentive Stock Option Limitations.

(a)Persons Eligible. An Incentive Stock Option may be granted only to a person who, on the effective date of grant, is an Employee of the Company, a Parent Corporation or a Subsidiary Corporation (each being an “ISO-Qualifying Corporation”). Any person who is not an Employee of an ISO-Qualifying Corporation on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee of an ISO-Qualifying Corporation shall be deemed granted effective on the date such person commences Service with an ISO-Qualifying Corporation, with an exercise price determined as of such date in accordance with Section 6.1.

(b)Fair Market Value Limitation. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a limitation different from that set forth in this Section, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section, the Participant may designate which portion of such

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Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Upon exercise, shares issued pursuant to each such portion shall be separately identified.

5.4Award Limits.

(a)Maximum Number of Shares Issuable Pursuant to Incentive Stock Options. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to the exercise of Incentive Stock Options shall not exceed twelve million (12,000,000) shares. The maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to all Awards other than Incentive Stock Options shall be the number of shares determined in accordance with Section 4.1, subject to adjustment as provided in Section 4.2 and further subject to the limitation set forth in Section 5.4(b) below.

(b)Aggregate Limit on Full Value Awards. Subject to adjustment as provided in Section 4.2, in no event shall more than twelve million (12,000,000) shares in the aggregate be issued under the Plan pursuant to the exercise or settlement of Restricted Stock Awards, Restricted Stock Unit Awards and Performance Awards (“Full Value Awards”). Except with respect to a maximum of five percent (5%) of the shares of Stock authorized in this Section 5.4(b), any Full Value Awards which vest on the basis of the Participant’s continued Service shall not provide for vesting which is any more rapid than annual pro rata vesting over a three (3) year period and any Full Value Awards which vest upon the attainment of Performance Goals shall provide for a Performance Period of at least twelve (12) months.

(c)Section 162(m) Award Limits. The following limits shall apply to the grant of any Award if, at the time of grant, the Company is a “publicly held corporation” within the meaning of Section 162(m).

(i)Options and SARs. Subject to adjustment as provided in Section 4.2, no Employee shall be granted within any fiscal year of the Company one or more Options or Freestanding SARs which in the aggregate are for more than 400,000 shares of Stock reserved for issuance under the Plan.

(ii)Restricted Stock and Restricted Stock Unit Awards. Subject to adjustment as provided in Section 4.2, no Employee shall be granted within any fiscal year of the Company one or more Restricted Stock Awards or Restricted Stock Unit Awards, subject to Vesting Conditions based on the attainment of Performance Goals, for more than 400,000 shares of Stock reserved for issuance under the Plan.

(iii)Performance Awards. Subject to adjustment as provided in Section 4.2, no Employee shall be granted (1) Performance Shares which could result in such Employee receiving more than 400,000 shares of Stock reserved for issuance under the Plan for each full fiscal year of the Company contained in the Performance Period for such Award, or (2) Performance Units which could result in such Employee receiving more than two million dollars ($2 million) for each full fiscal year of the Company contained in the Performance Period

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for such Award. No Participant may be granted more than one Performance Award for the same Performance Period.

6.Terms and Conditions of Options.

Options shall be evidenced by Award Agreements specifying the number of shares of Stock covered thereby, in such form as the Committee shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Options may incorporate all or any of the terms of the Plan by reference and, except as otherwise set forth in Section 7 with respect to Nonemployee Director Options, shall comply with and be subject to the following terms and conditions:

6.1Exercise Price. The exercise price for each Option shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option and (b) no Incentive Stock Option granted to a Ten Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code.

6.2Exercisability and Term of Options. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service. Subject to the foregoing, unless otherwise specified by the Committee in the grant of an Option, any Option granted hereunder shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.

6.3Payment of Exercise Price.

(a)Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or in cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant having a ,Fair Market Value not less than the exercise price, (iii) by delivery of a properly executed notice of exercise together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise

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complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a “Cashless Exercise”), (iv) by delivery of a properly executed notice of exercise electing a Net-Exercise, (v) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Committee may at any time or from time to time grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration.

(b)Limitations on Forms of Consideration.

(i)Tender of Stock. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.

(ii)Cashless Exercise. The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise, including with respect to one or more Participants specified by the Company notwithstanding that such program or procedures may be available to other Participants.

6.4Effect of Termination of Service.

(a)Option Exercisability. Subject to earlier termination of the Option as otherwise provided herein and unless otherwise provided by the Committee, an Option shall be exercisable after a Participant’s termination of Service only during the applicable time periods provided in the Award Agreement.

(b)Extension if Exercise Prevented by Law. Notwithstanding the foregoing, unless the Committee provides otherwise in the Award Agreement, if the exercise of an Option within the applicable time periods is prevented by the provisions of Section 14.1 below, the Option shall remain exercisable until three (3) months (or such longer period of time as determined by the Committee, in its discretion) after the date the Participant is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date.

(c)Extension if Participant Subject to Section 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods of shares acquired upon the exercise of the Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Participant’s termination of Service, or (iii) the Option Expiration Date.

6.5Transferability of Options. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant’s guardian or legal representative. Prior to the issuance of shares of Stock upon the exercise of an Option, the Option shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge,

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encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Option, a Nonstatutory Stock Option shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 Registration Statement under the Securities Act.

7.Terms and Conditions of Nonemployee Director Awards.

Nonemployee Director Awards shall be evidenced by Award Agreements in such form as the Board shall from time to time establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference, shall be automatic and non-discretionary and shall comply with and be subject to the following terms and conditions:

7.1Automatic Grant of Restricted Stock.

(a)Timing and Amount of Grant. On the first business day of each calendar year beginning on January 1, 2006, and continuing for the term of the Plan, each person who is a Nonemployee Director on such date shall be granted a Restricted Stock Award to purchase a number of shares of Stock determined by dividing thirty thousand dollars ($30,000) (or $40,000 for grants made on or after January, 1, 2007) by the Fair Market Value of the Stock on the first business day of the applicable calendar year, and rounding down to the nearest whole number.

(b)Vesting The shares subject to the Restricted Stock Award granted pursuant to Section 7.1(a) shall vest in equal annual installments of twenty percent (20%) on each anniversary of the date of grant, with one hundred percent (100%) of the shares vested on the fifth anniversary of the date of grant.

7.2Annual Election to Receive Nonstatutory Stock Option and Restricted Stock Units. On a date no later than December 31 of each calendar year during the term of the Plan, each person who is then a Nonemployee Director shall deliver to the Board a written election to receive either Nonstatutory Stock Options or Restricted Stock Units, or both, with an aggregate value of $30,000 (or $40,000 for grants made on or after January, 1, 2007), on the first business day of the following calendar year, provided the person continues to be a Nonemployee Director on the date of grant. A Nonemployee Director may allocate between Nonstatutory Stock Options and Restricted Stock Units in minimum increments with a value equal to $5,000, as determined in accordance with Sections 7.3 and 7.4. All awards of Nonstatutory Stock Options and Restricted Stock Units made to Nonemployee Directors shall comply with the provisions of Sections 7.3 and 7.4, respectively. A Nonemployee Director who fails to make a timely election or who first becomes a Nonemployee Director after December 31 shall be awarded Nonstatutory Stock Options and Restricted Stock Units each with a value of $15,000 (or $20,000 for grants made on or after January, 1, 2007), as determined in accordance with Sections 7.3 and 7.4, provided the Nonemployee Director continues to be a Nonemployee Director on the first business day of the following calendar year.

7.3Grant of Nonstatutory Stock Option.

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(a)Timing and Amount of Grant. Unless a Nonemployee Director made an election to decline the award of a Nonstatutory Stock Option in accordance with Section 7.2 above, on the first business day of each calendar year beginning on January 1, 2006, and continuing for the term of the Plan, each person who is a Nonemployee Director on such date shall receive a grant of a Nonstatutory Stock Option with an aggregate value equal to $5,000, $10,000, $15,000, $20,000, $25,000 or $30,000 (grants made after January 1, 2007 also may have an aggregate value of $35,000 or $40,000) as previously elected by the Nonemployee Director (or $15,000 (or $20,000 for grants made on or after January, 1, 2007) in the case of a Nonemployee Director who failed to make a timely election or who became a Nonemployee Director after December 31) (the “Elected Option Value”). The number of shares subject to the Nonstatutory Stock Option shall be determined by dividing the Elected Option Value by the value of a Nonstatutory Stock Option to purchase a single share of Stock as of the first business day of the applicable calendar year. The per share option value shall be calculated in accordance with the Black-Scholes stock option valuation method using the average preceding November closing price of Stock and reducing the per option value by twenty percent (20%). The resulting number of shares subject to the Nonstatutory Stock Option shall be rounded down to the nearest whole share. No person shall receive more than one grant of Nonstatutory Stock Options pursuant to this Section 7.3(a) during any calendar year.

(b)Exercise Price and Payment. The exercise price of each Nonstatutory Stock Option granted pursuant to Section 7.3(a) shall be the Fair Market Value of the Stock on the date of grant. The payment of the exercise price for the number of share of Stock being purchased pursuant to the Nonstatutory Stock Option shall be made in accordance with the provisions of Section 6.3.

(c)Vesting and Exercisability. The Nonstatutory Stock Option granted in accordance with this Section shall become vested and exercisable as to one third (1/3) of the shares subject to the Nonstatutory Stock Option on the second, third and fourth anniversaries of the date of grant, respectively. The Nonstatutory Stock Option shall terminate ten (10) years after the date of grant, unless earlier terminated in accordance with its provisions.

7.4Grant of Restricted Stock Unit.

(a)Timing and Amount of Grant. Unless a Nonemployee Director made an election to decline the award of a Restricted Stock Unit in accordance with Section 7.2 above, on the first business day of each calendar year beginning on January 1, 2006, and continuing for the term of the Plan, each person who is a Nonemployee Director on such date shall receive a grant of a Restricted Stock Unit Award with an aggregate value (as determined by the Fair Market Value of the Stock on the first business day of the applicable calendar year) equal to $5,000, $10,000, $15,000, $20,000, $25,000 or $30,000, (grants made after January 1, 2007 also may have an aggregate value of $35,000 or $40,000) as previously elected by the Nonemployee Director (or $15,000 (or $20,000 for grants made on or after January, 1, 2007) in the case of a Nonemployee Director who failed to make a timely election or who became a Nonemployee Director after December 31) (the “Elected Stock Unit Value”). The number of shares subject to the Restricted Stock Unit Award shall be determined by dividing the Elected Stock Unit Value by the Fair Market Value of the Stock as of the first business day of the applicable calendar year (including fractions computed to three decimal places). The Restricted Stock Units awarded to a

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Nonemployee Director shall be credited to a newly established Restricted Stock Unit account. Each Restricted Stock Unit awarded to a Nonemployee Director in accordance with this Section 7.4(a) shall be deemed to be equal to one (1) (or fraction thereof) share of Stock on the date of grant, and shall thereafter fluctuate in value in accordance with the Fair Market Value of the Stock. No person shall receive more than one grant of Restricted Stock Units pursuant to this Section 7.4(a) during any calendar year.

(b)Dividend Rights. Each Nonemployee Director’s Restricted Stock Unit account shall be credited quarterly on each dividend payment date with additional shares of Restricted Stock Units (including fractions computed to three decimal places) determined by dividing (1) the amount of cash dividends paid on such date with respect to the number of shares of Stock represented by the Restricted Stock Units previously credited to the account by (2) the Fair Market Value per share of Stock on such date. Such additional Restricted Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time as the Restricted Stock Units originally subject to the Restricted Stock Unit Award.

(c)Settlement of Restricted Stock Unit Award. Settlement of the shares credited to a Nonemployee Director’s Restricted Stock Unit account shall only be made after the Nonemployee Director’s Retirement or Mandatory Retirement from the Board or as provided in Section 7.5 below. Settlement shall be made only in the form of shares of Stock equal to the number of Restricted Stock Units credited to the Nonemployee Director’s account on the date of distribution, rounded down to the nearest whole share. The Nonemployee Director may elect to receive the Stock in a lump sum distribution or in a series of ten or less approximately equal annual installments, provided that distribution shall commence no later than January of the year following the year in which the Nonemployee Director’s Retirement or Mandatory Retirement occurred.

7.5Effect of Termination of Service as a Nonemployee Director.

(a)Status of Award. Subject to earlier termination of the Nonemployee Director Award as otherwise provided herein, the status of a Nonemployee Director Award shall be determined as follows:

(i)Death or Disability. If the Nonemployee Director’s Service terminates due to death or Disability (1) all shares subject to the Restricted Stock Award shall become fully vested, and the Participant (or the Participant’s legal representative or other person who acquired the rights to the Restricted Stock by reason of the Participant’s death) shall have the right to resell or transfer such shares at any time; (2) all Nonstatutory Stock Options held by the Participant shall become fully vested and exercisable, and the Participant (or the Participant’s legal representative or other person who acquired the rights to the Nonstatutory Stock Option by reason of the Participant’s death) shall have the right to exercise the Nonstatutory Stock Options until the earlier of (a) the date that is twelve (12) months after the date on which the Participant’s Service terminated, or (b) the Option Expiration Date and (3) all Restricted Stock Units credited to the Nonemployee Director’s account shall immediately become payable to the Participant (or the Participant’s legal representative or other person who acquired the rights to the Restricted Stock Units by reason of the Participant’s death) in the form of a number of shares of Stock

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equal to the number of Restricted Stock Units credited to the Restricted Stock Unit account, rounded down to the nearest whole share.

(ii)Mandatory Retirement. If the Participant’s Service terminates because of the Mandatory Retirement of the Participant (1) all shares subject to the Restricted Stock Award shall become fully vested, and the Participant shall have the right to resell or transfer such shares at any time; (2) all Nonstatutory Stock Options held by the Participant shall become fully vested and exercisable and the Participant shall have the right to exercise the Nonstatutory Stock Options until the earlier of (a) the date that is five (5) years after the date on which the Participant’s Service terminated, or (b) the Option Expiration Date and (3) all Restricted Stock Units credited to the Nonemployee Director’s account shall immediately become payable to the Participant in accordance with Section 7.4(c) above.

(iii)her Termination of Service. If the Participant’s Service terminates for any reason other than those enumerated in Sections 7.5(a)(i) and 7.5(a)(ii), (1) any unvested shares of Restricted Stock shall be forfeited to the Company and from and after the date of such termination, the Participant shall cease to be a shareholder with respect to such forfeited shares and shall have no dividend, voting or other rights with respect thereto, (2) the unvested portion of any Nonstatutory Stock Option shall terminate, and any portion of the Nonstatutory Stock Option exercisable by the Participant on the date on which the Participant’s Service terminated may be exercised until the earlier of (a) the date that is three (3) months after the date on which the Participant’s Service terminated, or (b) the Option Expiration Date and (3) except as provided in Section 7.4(c), all Restricted Stock Units credited to the Participant’s account shall be forfeited on the date of termination.

(iv)Notwithstanding the provisions of Section 7.5(i) through 7.5(iii) above, the Board, in its sole discretion, may establish different terms and conditions pertaining to Nonemployee Director Awards.

(b)Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of a Nonstatutory Stock Option within the applicable time periods set forth in Section 7.5(a) is prevented by the provisions of Section 14.1 below, the Nonstatutory Stock Option shall remain exercisable until three (3) months after the date the Participant is notified by the Company that the Nonstatutory Stock Option is exercisable, but in any event no later than the Option Expiration Date.

(c)Extension if Participant Subject to Section 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.5(a) of shares acquired upon the exercise of the Nonstatutory Stock Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Nonstatutory Stock Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which asale of such shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Participant’s termination of Service, or (iii) the Option Expiration Date.

7.6Effect of Change in Control on Nonemployee Director Awards. Upon the occurrence of a Change in Control, (i) the vesting of all shares of Restricted Stock granted

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pursuant to Section 7.1(a) shall be accelerated so that all such shares become fully vested, (ii) the vesting of Nonstatutory Stock Options granted pursuant to Section 7.3(a) shall be accelerated and such Nonstatutory Stock Options shall remain fully exercisable until the Option Expiration Date, and (iii) all Restricted Stock Units shall be settled in accordance with Section 7.4(c) as if the Change of Control constituted Retirement.

7.7Right to Decline Nonemployee Director Awards. Notwithstanding the foregoing, any person may elect not to receive a Nonemployee Director Award by delivering written notice of such election to the Board no later than the day prior to the date such Nonemployee Director Award would otherwise be granted. A person so declining a Nonemployee Director Award shall receive no payment or other consideration in lieu of such declined Nonemployee Director Award. A person who has declined a Nonemployee Director Award may revoke such election by delivering written notice of such revocation to the Board no later than the day prior to the date such Nonemployee Director Award would be granted.

8.Terms and Conditions of Stock Appreciation Rights.

Stock Appreciation Rights shall be evidenced by Award Agreements specifying the number of shares of Stock subject to the Award, in such form as the Committee shall from time to time establish. No SAR or purported SAR shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing SARs may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

8.1Types of SARs Authorized. SARs may be granted in tandem with all or any portion of a related Option (a “Tandem SAR”) or may be granted independently of any Option (a “Freestanding SAR”). A Tandem SAR may be granted either concurrently with the grant of the related Option or at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such related Option.

8.2Exercise Price. The exercise price for each SAR shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share subject to a Tandem SAR shall be the exercise price per share under the related Option and (b) the exercise price per share subject to a Freestanding SAR shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the SAR.

8.3Exercisability and Term of SARs.

(a)Tandem SARs. Tandem SARs shall be exercisable only at the time and to the extent, and only to the extent, that the related Option is exercisable, subject to such provisions as the Committee may specify where the Tandem SAR is granted with respect to less than the full number of shares of Stock subject to the related Option.

(b)Freestanding SARs. Freestanding SARs shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such SAR; provided, however, that no Freestanding SAR shall be exercisable after the expiration of ten (10) years after the effective date of grant of such SAR.

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8.4Deemed Exercise of SARs. If, on the date on which an SAR would otherwise terminate or expire, the SAR by its terms remains exercisable immediately prior to such termination or expiration and, if so exercised, would result in a payment to the holder of such SAR, then any portion of such SAR which has not previously been exercised shall automatically be deemed to be exercised as of such date with respect to such portion.

8.5Effect of Termination of Service. Subject to earlier termination of the SAR as otherwise provided herein and unless otherwise provided by the Committee in the grant of an SAR and set forth in the Award Agreement, an SAR shall be exercisable after a Participant’s termination of Service only as provided in the Award Agreement.

8.6Nontransferability of SARs. During the lifetime of the Participant, an SAR shall be exercisable only by the Participant or the Participant’s guardian or legal representative. Prior to the exercise of an SAR, the SAR shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution.

9.Terms and Conditions of Restricted Stock Awards.

Restricted Stock Awards shall be evidenced by Award Agreements specifying the number of shares of Stock subject to the Award, in such form as the Committee shall from time to time establish. No Restricted Stock Award or purported Restricted Stock Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Restricted Stock Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

9.1Types of Restricted Stock Awards Authorized. Restricted Stock Awards may or may not require the payment of cash compensation for the stock. Restricted Stock Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the grant of a Restricted Stock Award or the lapsing of the Restriction Period is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).

9.2Purchase Price. The purchase price, if any, for shares of Stock issuable under each Restricted Stock Award and the means of payment shall be established by the Committee in its discretion.

9.3Purchase Period. A Restricted Stock Award requiring the payment of cash consideration shall be exercisable within a period established by the Committee; provided, however, that no Restricted Stock Award granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service.

9.4Vesting and Restrictions on Transfer. Shares issued pursuant to any Restricted Stock Award may or may not be made subject to Vesting Conditions based upon the satisfaction

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of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. During any Restriction Period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of other than as provided in the Award Agreement or as provided in Section 9.7. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

9.5Voting Rights, Dividends and Distributions. Except as provided in this Section, Section 9.4 and any Award Agreement, during the Restriction Period applicable to shares subject to a Restricted Stock Award, the Participant shall have all of the rights of a shareholder of the Company holding shares of Stock, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares. However, in the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant is entitled by reason of the Participant’s Restricted Stock Award shall be immediately subject to the same Vesting Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or distributions were paid or adjustments were made.

9.6Effect of Termination of Service. Unless otherwise provided by the Committee in the grant of a Restricted Stock Award and set forth in the Award Agreement, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then the Participant shall forfeit to the Company any shares acquired by the Participant pursuant to a Restricted Stock Award which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service in exchange for the payment of the purchase price, if any, paid by the Participant. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company.

9.7Nontransferability of Restricted Stock Award Rights. Prior to the issuance of shares of Stock pursuant to a Restricted Stock Award, rights to acquire such shares shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or the laws of descent and distribution. All rights with respect to aRestricted Stock Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

10.Terms and Conditions of Performance Awards.

Performance Awards shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish. No Performance Award or purported

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Performance Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Performance Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

10.1Types of Performance Awards Authorized. Performance Awards may be in the form of either Performance Shares or Performance Units. Each Award Agreement evidencing a Performance Award shall specify the number of Performance Shares or Performance Units subject thereto, the Performance Award Formula, the Performance Goal(s) and Performance Period applicable to the Award, and the other terms, conditions and restrictions of the Award.

10.2Initial Value of Performance Shares and Performance Units. Unless otherwise provided by the Committee in granting a Performance Award, each Performance Share shall have an initial value equal to the Fair Market Value of one (1) share of Stock, subject to adjustment as provided in Section 4.2, on the effective date of grant of the Performance Share. Each Performance Unit shall have an initial value determined by the Committee. The final value payable to the Participant in settlement of a Performance Award determined on the basis of the applicable Performance Award Formula will depend on the extent to which Performance Goals established by the Committee are attained within the applicable Performance Period established by the Committee.

10.3Establishment of Performance Period, Performance Goals and Performance Award Formula. In granting each Performance Award, the Committee shall establish in writing the applicable Performance Period, Performance Award Formula and one or more Performance Goals which, when measured at the end of the Performance Period, shall determine on the basis of the Performance Award Formula the final value of the Performance Award to be paid to the Participant. To the extent compliance with the requirements under Section 162(m) with respect to “performance-based compensation” is desired, the Committee shall establish the Performance Goal(s) and Performance Award Formula applicable to each Performance Award no later than the earlier of (a) the date ninety (90) days after the commencement of the applicable Performance Period or (b) the date on which 25% of the Performance Period has elapsed, and, in any event, at a time when the outcome of the Performance Goals remains substantially uncertain. Once established, the Performance Goals and Performance Award Formula shall not be changed during the Performance Period. The Company shall notify each Participant granted a Performance Award of the terms of such Award, including the Performance Period, Performance Goal(s) and Performance Award Formula.

10.4Measurement of Performance Goals. Performance Goals shall be established by the Committee on the basis of targets to be attained (“Performance Targets”) with respect to one or more measures of business or financial performance (each, a “Performance Measure”), subject to the following:

(a)Performance Measures. Performance Measures shall have the same meanings as used in the Company’s financial statements, or, if such terms are not used in the Company’s financial statements, they shall have the meaning applied pursuant to generally accepted accounting principles, or as used generally in the Company’s industry. Performance Measures shall be calculated with respect to the Company and each Subsidiary Corporation

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consolidated therewith for financial reporting purposes or such division or other business unit as may be selected by the Committee. For purposes of the Plan, the Performance Measures applicable to a Performance Award shall be calculated in accordance with generally accepted accounting principles, but prior to the accrual or payment of any Performance Award for the same Performance Period and excluding the effect (whether positive or negative) of any change in accounting standards or any extraordinary, unusual or nonrecurring item, as determined by the Committee, occurring after the establishment of the Performance Goals applicable to the Performance Award. Each such adjustment, if any, shall be made solely for the purpose of providing a consistent basis from period to period for the calculation of Performance Measures in order to prevent the dilution or enlargement of the Participant’s rights with respect to a Performance Award. Performance Measures may be one or more of the following, as determined by the Committee: (i) sales revenue; (ii) gross margin; (iii) operating margin; (iv) operating income; (v) pre-tax profit; (vi) earnings before interest, taxes and depreciation and amortization; (vii) net income; (viii) expenses; (ix) the market price of the Stock; (x) earnings per share; (xi) return on shareholder equity; (xii) return on capital; (xiii) return on net assets; (xiv) economic value added; and (xv) market share; (xvi) customer service; (xvii) customer satisfaction; (xviii) safety; (xix) total shareholder return; or (xx) such other measures as determined by the Committee consistent with this Section 10.4(a).

(b)Performance Targets. Performance Targets may include a minimum, maximum, target level and intermediate levels of performance, with the final value of a Performance Award determined under the applicable Performance Award Formula by the level attained during the applicable Performance Period. A Performance Target may be stated as an absolute value or as a value determined relative to a standard selected by the Committee.

10.5Settlement of Performance Awards.

(a)Determination of Final Value. As soon as practicable following the completion of the Performance Period applicable to a Performance Award, the Committee shall certify in writing the extent to which the applicable Performance Goals have been attained and the resulting final value of the Award earned by the Participant and to be paid upon its settlement in accordance with the applicable Performance Award Formula.

(b)Discretionary Adjustment of Award Formula. In its discretion, the Committee may, either at the time it grants a Performance Award or at any time thereafter, provide for the positive or negative adjustment of the Performance Award Formula applicable to a Performance Award that is not intended to constitute “qualified performance based compensation” to a “covered employee” within the meaning of Section 162(m) (a “Covered Employee”) to reflect such Participant’s individual performance in his or her position with the Company or such other factors as the Committee may determine. With respect to a Performance Award intended to constitute qualified performance-based compensation to a Covered Employee, the Committee shall have the discretion to reduce some or all of the value of the Performance Award that would otherwise be paid to the Covered Employee upon its settlement notwithstanding the attainment of any Performance Goal and the resulting value of the Performance Award determined in accordance with the Performance Award Formula.

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(c)Payment in Settlement of Performance Awards. As soon as practicable following the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), payment shall be made to each eligible Participant (or such Participant’s legal representative or other person who acquired the right to receive such payment by reason of the Participant’s death) of the final value of the Participant’s Performance Award. Payment of such amount shall be made in cash, shares of Stock, or a combination thereof as determined by the Committee.

10.6Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Performance Share Awards until the date of the issuance of such shares, if any (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to receive Dividend Equivalents with respect to the payment of cash dividends on Stock having a record date prior to the date on which the Performance Shares are settled or forfeited. Such Dividend Equivalents, if any, shall be credited to the Participant in the form of additional whole Performance Shares as of the date of payment of such cash dividends on Stock. The number of additional Performance Shares (rounded to the nearest whole number) to be so credited shall be determined by dividing (a) the amount of cash dividends paid on such date with respect to the number of shares of Stock represented by the Performance Shares previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Dividend Equivalents may be paid currently or may be accumulated and paid to the extent that Performance Shares become nonforfeitable, as determined by the Committee. Settlement of Dividend Equivalents may be made in cash, shares of Stock, or a combination thereof as determined by the Committee, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 10.5. Dividend Equivalents shall not be paid with respect to Performance Units. In the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Performance Share Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Performance Share Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Performance Goals as are applicable to the Award.

10.7Effect of Termination of Service. Unless otherwise provided by the Committee in the grant of a Performance Award and set forth in the Award Agreement, the effect of a Participant’s termination of Service on the Performance Award shall be as follows:

(a)Death or Disability. If the Participant’s Service terminates because of the death or Disability of the Participant before the completion of the Performance Period applicable to the Performance Award, the final value of the Participant’s Performance Award shall be determined by the extent to which the applicable Performance Goals have been attained with respect to the entire Performance Period and shall be prorated based on the number of months of the Participant’s Service during the Performance Period. Payment shall be made following the end of the Performance Period in any manner permitted by Section 10.5.

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(b)Other Termination of Service. If the Participant’s Service terminates for any reason except death or Disability before the completion of the Performance Period applicable to the Performance Award, such Award shall be forfeited in its entirety; provided, however, that in the event of an involuntary termination of the Participant’s Service, the Committee, in its sole discretion, may waive the automatic forfeiture of all or any portion of any such Award.

10.8Nontransferability of Performance Awards. Prior to settlement in accordance with the provisions of the Plan, no Performance Award shall be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Performance Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

11.Terms and Conditions of Restricted Stock Unit Awards.

Restricted Stock Unit Awards shall be evidenced by Award Agreements specifying the number of Restricted Stock Units subject to the Award, in such form as the Committee shall from time to time establish. No Restricted Stock Unit Award or purported Restricted Stock Unit Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Restricted Stock Units may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

11.1Grant of Restricted Stock Unit Awards. Restricted Stock Unit Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the grant of a Restricted Stock Unit Award or the Vesting Conditions with respect to such Award is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).

11.2Vesting. Restricted Stock Units may or may not be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award.

11.3Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Restricted Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Restricted Stock Unit Award that the Participant shall be entitled to receive Dividend Equivalents with respect to the payment of cash dividends on Stock having a record date prior to the date on which Restricted Stock Units held by such Participant are settled. Such Dividend Equivalents, if any, shall be paid by crediting the Participant with additional whole Restricted Stock Units as of the

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date of payment of such cash dividends on Stock. The number of additional Restricted Stock Units (rounded to the nearest whole number) to be so credited shall be determined by dividing (a) the amount of cash dividends paid on such date with respect to the number of shares of Stock represented by the Restricted Stock Units previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Such additional Restricted Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time (or as soon thereafter as practicable) as the Restricted Stock Units originally subject to the Restricted Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Restricted Stock Unit Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Vesting Conditions as are applicable to the Award.

11.4Effect of Termination of Service. Unless otherwise provided by the Committee in the grant of a Restricted Stock Unit Award and set forth in the Award Agreement, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then the Participant shall forfeit to the Company any Restricted Stock Units pursuant to the Award which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service.

11.5Settlement of Restricted Stock Unit Awards. The Company shall issue to a Participant on the date on which Restricted Stock Units subject to the Participant’s Restricted Stock Unit Award vest or on such other date determined by the Committee, in its discretion, and set forth in the Award Agreement one (1) share of Stock (and/or any other new, substituted or additional securities or other property pursuant to an adjustment described in Section 11.3) for each Restricted Stock Unit then becoming vested or otherwise to be settled on such date, subject to the withholding of applicable taxes. Notwithstanding the foregoing, if permitted by the Committee and set forth in the Award Agreement, the Participant may elect in accordance with terms specified in the Award Agreement to defer receipt of all or any portion of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section.

11.6Nontransferability of Restricted Stock Unit Awards. Prior to the issuance of shares of Stock in settlement of a Restricted Stock Unit Award, the Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Restricted Stock Unit Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

12.Deferred Compensation Awards.

12.1Establishment of Deferred Compensation Award Programs. This Section 12 shall not be effective unless and until the Committee determines to establish a program pursuant

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to this Section. The Committee, in its discretion and upon such terms and conditions as it may determine, may establish one or more programs pursuant to the Plan under which:

(a)Participants designated by the Committee who are Insiders or otherwise among a select group of highly compensated Employees may irrevocably elect, prior to a date specified by the Committee, to reduce such Participant’s compensation otherwise payable in cash (subject to any minimum or maximum reductions imposed by the Committee) and to be granted automatically at such time or times as specified by the Committee one or more Awards of Stock Units with respect to such numbers of shares of Stock as determined in accordance with the rules of the program established by the Committee and having such other terms and conditions as established by the Committee.

(b)Participants designated by the Committee who are Insiders or otherwise among a select group of highly compensated Employees may irrevocably elect, prior to a date specified by the Committee, to be granted automatically an Award of Stock Units with respect to such number of shares of Stock and upon such other terms and conditions as established by the Committee in lieu of:

(i)shares of Stock otherwise issuable to such Participant upon the exercise of an Option;

(ii)cash or shares of Stock otherwise issuable to such Participant upon the exercise of an SAR; or

(iii)cash or shares of Stock otherwise issuable to such Participant upon the settlement of a Performance Award or Performance Unit.

12.2Terms and Conditions of Deferred Compensation Awards. Deferred Compensation Awards granted pursuant to this Section 12 shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish. No such Deferred Compensation Award or purported Deferred Compensation Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Deferred Compensation Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

(a)Vesting Conditions. Deferred Compensation Awards shall not be subject to any vesting conditions.

(b)Terms and Conditions of Stock Units.

(i)Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, a Participant shall be entitled to receive Dividend Equivalents with respect to the payment of cash dividends on Stock having a record date prior to the date on which Stock Units held by such Participant are settled. Such Dividend Equivalents shall be paid by crediting the Participant with

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additional whole and/or fractional Stock Units as of the date of payment of such cash dividends on Stock. The method of determining the number of additional Stock Units to be so credited shall be specified by the Committee and set forth in the Award Agreement. Such additional Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time (or as soon thereafter as practicable) as the Stock Units originally subject to the Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Stock Unit Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Award.

(ii)Settlement of Stock Unit Awards. A Participant electing to receive an Award of Stock Units pursuant to this Section 12, shall specify at the time of such election a settlement date with respect to such Award. The Company shall issue to the Participant as soon as practicable following the earlier of the settlement date elected by the Participant or the date of termination of the Participant’s Service, a number of whole shares of Stock equal to the number of whole Stock Units subject to the Stock Unit Award. Such shares of Stock shall be fully vested, and the Participant shall not be required to pay any additional consideration (other than applicable tax withholding) to acquire such shares. Any fractional Stock Unit subject to the Stock Unit Award shall be settled by the Company by payment in cash of an amount equal to the Fair Market Value as of the payment date of such fractional share.

(iii)Nontransferability of Stock Unit Awards. Prior to their settlement in accordance with the provision of the Plan, no Stock Unit Award shall be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Stock Unit Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

13.Other Stock-Based Awards.

In addition to the Awards set forth in Sections 6 through 12 above, the Committee, in its sole discretion, may carry out the purpose of this Plan by awarding Stock-Based Awards as it determines to be in the best interests of the Company and subject to such other terms and conditions as it deems necessary and appropriate.

14.Change in Control.

14.1Effect of Change in Control on Options and SARs. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the “Acquiror”), may, without the consent of any Participant, either assume or continue the Company’s rights and obligations under outstanding Options or SARs or substitute for outstanding Options or SARs substantially equivalent options or SARs covering the Acquiror’s stock. Any Options or SARs which are neither assumed or

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continued by the Acquiror in connection with the Change in Control nor exercised as of the Change in Control shall, contingent on the Change in Control, become fully vested and exercisable immediately prior to the Change in Control. Options and SARs which are assumed or continued in connection with a Change in Control shall be subject to such additional accelerated vesting and/or exercisability in connection with the Participant’s subsequent termination of Service as the Board may determine.

14.2Effect of Change in Control on Other Awards. In the event of a Change in Control, the Acquiror may, without the consent of any Participant, either assume or continue the Company’s rights and obligations under outstanding Awards other than Options or SARs or substitute for such Awards substantially equivalent Awards covering the Acquiror’s stock. Any such Awards which are neither assumed or continued by the Acquiror in connection with the Change in Control shall, contingent on the Change in Control, become fully vested and all restrictions shall be released immediately prior to the Change in Control. Awards which are assumed or continued in connection with a Change in Control shall be subject to such additional accelerated vesting or lapse of restrictions in connection with the Participant’s subsequent termination of Service as the Board may determine.

14.3Nonemployee Director Awards. Notwithstanding the foregoing, Nonemployee Director Awards shall be subject to the terms of Section 7, and not this Section 14.

15.Compliance with Securities Law.

The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities and the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (a) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award or (b) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to issuance of any Stock, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

16.Tax Withholding.

16.1Tax Withholding in General. The Company shall have the right to deduct from any and all payments made under the Plan, or to require the Participant, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise or Net Exercise of an Option, to make adequate provision for, the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to an

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Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver shares of Stock, to release shares of Stock from an escrow established pursuant to an Award Agreement, or to make any payment in cash under the Plan until the Participating Company Group’s tax withholding obligations have been satisfied by the Participant.

16.2Withholding in Shares. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise or settlement of an Award, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the tax withholding obligations of the Participating Company Group. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates.

17.Amendment or Termination of Plan.

The Board or the Committee may amend, suspend or terminate the Plan at any time. However, without the approval of the Company’s shareholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c)  no other amendment of the Plan that would require approval of the Company’s shareholders under any applicable law, regulation or rule. Notwithstanding the foregoing, only the Board may amend Section 7. No amendment, suspension or termination of the Plan shall affect any then outstanding Award unless expressly provided by the Board or the Committee. In any event, no amendment, suspension or termination of the Plan may adversely affect any then outstanding Award without the consent of the Participant unless necessary to comply with any applicable law, regulation or rule.

18.Miscellaneous Provisions.

18.1Repurchase Rights. Shares issued under the Plan may be subject to one or more repurchase options, or other conditions and restrictions as determined by the Committee in its discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

18.2Provision of Information. Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company’s common shareholders.

18.3Rights as Employee, Consultant or Director. No person, even though eligible pursuant to Section 5, shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a right to remain an Employee, Consultant or Director or

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interfere with or limit in any way any right of a Participating Company to terminate the Participant’s Service at any time. To the extent that an Employee of a Participating Company other than the Company receives an Award under the Plan, that Award shall in no event be understood or interpreted to mean that the Company is the Employee’s employer or that the Employee has an employment relationship with the Company.

18.4Rights as a Shareholder. A Participant shall have no rights as a shareholder with respect to any shares covered by an Award until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 4.2 or another provision of the Plan.

18.5Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise or settlement of any Award.

18.6Severability. If any one or more of the provisions (or any part thereof) of this Plan shall be held invalid, illegal or unenforceable in any respect, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions (or any part thereof) of the Plan shall not in any way be affected or impaired thereby.

18.7Beneficiary Designation. Subject to local laws and procedures, each Participant may file with the Company a written designation of a beneficiary who is to receive any benefit under the Plan to which the Participant is entitled in the event of such Participant’s death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation may be subject to the consent of the Participant’s spouse. If a Participant dies without an effective designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining unpaid benefits to the Participant’s legal representative.

18.8Unfunded Obligation. Participants shall have the status of general unsecured creditors of the Company. Any amounts payable to Participants pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974. No Participating Company shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Committee or any Participating Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors in any assets of any Participating Company. The Participants shall have no claim against any Participating Company for any changes in the value of any assets which may be invested or reinvested by the Company

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with respect to the Plan. Each Participating Company shall be responsible for making benefit payments pursuant to the Plan on behalf of its Participants or for reimbursing the Company for the cost of such payments, as determined by the Company in its sole discretion. In the event the respective Participating Company fails to make such payment or reimbursement, a Participant’s (or other individual’s) sole recourse shall be against the respective Participating Company, and not against the Company. A Participant’s acceptance of an Award pursuant to the Plan shall constitute agreement with this provision.

18.9Choice of Law. Except to the extent governed by applicable federal law, the validity, interpretation, construction and performance of the Plan and each Award Agreement shall be governed by the laws of the State of California, without regard to its conflict of law rules.

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PLAN HISTORY AND NOTES TO COMPANY

December 15, 2004	Board adopts Plan with a reserve of 12 million shares.
April 20, 2005	Shareholders approve Plan.
January 1, 2006	Plan Effective Date
February 15, 2006	Change in control provisions are amended
December 20, 2006	Board amends Section 7 containing the terms for automatic awards for Non-Employee Directors, effective January 1, 2007

EX-10.39

Exhibit 10.39

PG&E CORPORATION

2006 LONG-TERM INCENTIVE PLAN

RESTRICTED STOCK GRANT

PG&E CORPORATION, a California corporation, hereby grants shares of Restricted Stock to the Recipient named below. The shares of Restricted Stock have been granted under the PG&E Corporation 2006 Long-Term Incentive Plan, as amended on February 15, 2006 and December 20, 2006 (the “LTIP”). The terms and conditions of the Restricted Stock are set forth in this cover sheet and in the attached Restricted Stock Agreement (the “Agreement”).

Date of Grant: January 3, 2007¹

Name of Recipient:

Last Four Digits of Recipient’s Social Security Number:

Number of Shares of Restricted Stock Granted:

By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement. You and PG&E Corporation agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of the attached Agreement. You are also acknowledging receipt of this Grant, the attached Agreement, and a copy of the prospectus describing the LTIP and the Restricted Stock dated January 1, 2007.

Recipient:                                                                                                                          0;                 

 (Signature)

Attachment

Please sign and return to PG&E Corporation, Human Resources,

One Market, Spear Tower, Suite 400, San Francisco, California 94105

¹ Due to the death of former President Gerald Ford on December 26, 2006, the federal government declared January 2, 2007 as a national day of mourning. All federal offices and the New York Stock Exchange were closed that day. Thus, the date of grant for the Restricted Stock is January 3, 2007.

PG&E CORPORATION

2006 LONG-TERM INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

The LTIP and Other Agreements	This Agreement constitutes the entire understanding between you and PG&E Corporation regarding the Restricted Stock, subject to the terms of the LTIP. Any prior agreements, commitments or negotiations are superseded. In the event of any conflict or inconsistency between the provisions of this Agreement and the LTIP, the LTIP shall govern. Capitalized terms that are not defined in this Agreement are defined in the LTIP. For purposes of this Agreement, employment with PG&E Corporation shall mean employment with any member of the Participating Company Group.
Grant of Restricted Stock	PG&E Corporation grants you the number of shares of Restricted Stock shown on the cover sheet of this Agreement. The shares of Restricted Stock are subject to the terms and conditions of this Agreement and the LTIP.
Lapse of Restrictions	As long as you remain employed with PG&E Corporation, the restrictions will lapse as to 20 percent of the total number of shares of Restricted Stock originally subject to this Agreement, as shown above on the cover sheet, on the first business day of January of each of the first, second and third years following the Date of Grant. The restrictions will lapse as to an additional 40 percent of the total number of shares of Restricted Stock on the first business day of January of the fifth year following the Date of Grant; provided, however, that the restrictions will lapse as to this 40 percent on the first business day of January of the third year following the Date of Grant if PG&E Corporation’s performance in total shareholder return (“TSR”) is at or above the 75th percentile for the prior three calendar years as compared with the comparator group established from time to time by PG&E Corporation. (Each lapse day is an “Annual Lapse Date”). Except as described below, all shares of Restricted Stock subject to this Agreement as to which the restrictions have not lapsed shall be forfeited upon termination of your employment. To the extent this Agreement provides for the continued lapse of restrictions following the termination of employment, such continued lapse shall be subject to your continued compliance with certain post-employment restrictions.
Voluntary Termination	In the event that you terminate your employment with PG&E Corporation voluntarily, you will automatically forfeit to PG&E Corporation all of the shares of Restricted Stock as to which the restrictions have not lapsed subject to this Agreement as of the date of such Termination.

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Termination for Cause	If your employment with PG&E Corporation is terminated by PG&E Corporation for cause, you will automatically forfeit to PG&E Corporation all shares of Restricted Stock as to which the restrictions have not lapsed subject to this Agreement as of the date of such termination. In general, termination for “cause” means termination of employment because of dishonesty, a criminal offense or violation of a work rule, and will be determined by and in the sole discretion of PG&E Corporation.
Termination other than for Cause	If your employment with PG&E Corporation is terminated by PG&E Corporation other than for cause before the restrictions on your Restricted Stock lapse, and you are an officer in Bands 1-5, the restrictions on your outstanding shares of Restricted Stock that would have lapsed during the period of the “Severance Multiple” under the applicable severance policy shall continue to lapse pursuant to the regular lapse schedule (or sooner, to the extent described below in connection with a Change in Control during such period). In the event of your involuntary termination other than for cause, if you are not an officer in Bands 1-5, the restrictions on your outstanding shares of Restricted Stock that would have lapsed within 12 months following such termination will continue to lapse pursuant to the regular lapse schedule (or sooner, in the event of a Change in Control during such period). All other outstanding shares of Restricted Stock shall automatically be forfeited to PG&E Corporation upon such termination.
Retirement	In the event of your Retirement, the restrictions on your outstanding shares of Restricted Stock will continue to lapse as though your employment had continued. You will be considered to have retired if you are age 55 or older on the date of termination and if you were employed by PG&E Corporation for at least five consecutive years ending on the date of termination of your employment.
Death/Disability	If your employment terminates due to your death or disability, the restrictions on all of your shares of Restricted Stock shall lapse on the next Annual Lapse Date. In the event of a Change in Control after such termination and before such next Annual Lapse Date, the restrictions as to all shares of Restricted Stock shall immediately lapse to the extent described below under “Change in Control.”

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Termination Due to Disposition of Subsidiary	(1) If your employment is terminated (other than for cause or your voluntary termination) by reason of a divestiture or change in control of a subsidiary of PG&E Corporation, which divestiture or change in control results in such subsidiary no longer qualifying as a subsidiary corporation under Section 424(f) of the Internal Revenue Code of 1986, as amended (the “Code”), or (2) if your employment is terminated (other than for cause or your voluntary termination) coincident with the sale of all or substantially all of the assets of a subsidiary of PG&E Corporation, the restrictions on all shares of Restricted Stock shall lapse in the same manner as for a “Termination other than for cause” described above.
Change in Control	In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the “Acquiror”), may, without your consent, either assume or continue PG&E Corporation’s rights and obligations under this Agreement or provide substantially equivalent awards associated with the Acquiror’s stock. If this Award is neither assumed nor continued by the Acquiror or if the Acquiror does not provide a substantially equivalent award, the restrictions on all of your outstanding shares of Restricted Stock shall automatically lapse and become nonforfeitable immediately preceding, and contingent on, the Change in Control of PG&E Corporation. If the Acquiror assumes or continues PG&E Corporation’s rights and obligations under this Agreement or substitutes a substantially equivalent award, TSR shall be calculated by aggregating (a) the TSR of PG&E Corporation for the period from January 1 of the year of the grant to the date of the Change in Control, and (b) the TSR of the Acquiror from the date of the Change in Control to the end of the calendar year preceding the third Annual Lapse Date.
Termination In Connection with a Change in Control	If your employment is terminated in connection with a Change in Control within three months before the Change in Control occurs or within two years following the Change in Control, the restrictions on all of your outstanding shares of Restricted Stock (to the extent the restrictions did not previously lapse upon failure of the Acquiror to assume or continue this Award) shall lapse and become nonforfeitable on the date of termination of your employment. PG&E Corporation shall have the sole discretion to determine whether termination of your employment was made in connection with a Change in Control.

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Escrow

The certificates for the Restricted Stock shall be deposited in escrow with the Corporate Secretary of PG&E Corporation to be held in accordance with the provisions of this paragraph. Each deposited certificate shall be accompanied by any assignment documents PG&E Corporation may require you to execute. The deposited certificates shall remain in escrow until such time as the certificates are to be released or otherwise surrendered for cancellation as discussed below. All dividends, if any, on the Restricted Stock shall be held in escrow and subject to the same restrictions as the shares to which they relate.

Release of Shares and Withholding Taxes

The shares of Restricted Stock held in escrow hereunder shall be subject to the following terms and conditions relating to their release from escrow or their surrender to PG&E Corporation: ·When the restrictions as to your shares of Restricted Stock lapse as described above, the certificates for such shares shall be released from escrow and delivered to you, at your request within thirty (30) days of the applicable Annual Lapse Date. ·Upon termination of your employment, any shares of Restricted Stock as to which the restrictions have not lapsed shall be forfeited and automatically surrendered to PG&E Corporation as provided herein. Note that you must make arrangements acceptable to PG&E Corporation to satisfy withholding or other taxes that may be due before your shares will be released to you. If you so elect, PG&E Corporation will assist you in selling your shares through a broker so that you can use the sales proceeds to satisfy applicable taxes. You will receive the remaining proceeds in cash. However, if you wish to receive the stock certificates in lieu of selling your shares, you will need to make arrangements to pay the applicable taxes either by check or through payroll deduction. PG&E Corporation will notify you about how to instruct PG&E Corporation to sell your shares when the restrictions lapse or make other arrangements.

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Code Section 83(b) Election	Under Section 83(a) of the Code, the Fair Market Value of the Restricted Stock on the date any forfeiture restrictions applicable to such Restricted Stock lapse will be reportable as ordinary income at that time. For this purpose, “forfeiture restrictions” include surrender to PG&E Corporation of Restricted Stock as described above. You may elect to be taxed at the time the Restricted Stock is granted to you, rather than when the restrictions lapse by filing an election under Section 83(b) of the Code with the Internal Revenue Service within thirty (30) days after the Date of Grant. Failure to make this filing within the thirty (30) day period will result in the recognition of ordinary income by you (in the event the Fair Market Value of the Restricted Stock increases after the date of purchase) as the forfeiture restrictions lapse. YOU ACKNOWLEDGE THAT IT IS YOUR SOLE RESPONSIBILITY, AND NOT PG&E CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b). YOU ARE RELYING SOLELY ON YOUR OWN ADVISORS WITH RESPECT TO THE DECISION AS TO WHETHER OR NOT TO FILE A CODE SECTION 83(b) ELECTION.
Leaves of Absence	For purposes of this Agreement, if you are on an approved leave of absence from PG&E Corporation, or a recipient of PG&E Corporation sponsored disability benefits, you will continue to be considered as employed. If you do not return to active employment upon the expiration of your leave of absence or the expiration of your PG&E Corporation sponsored disability benefits, you will be considered to have voluntarily terminated your employment. See above under “Voluntary Termination.” PG&E Corporation reserves the right to determine which leaves of absence will be considered as continuing employment and when your employment terminates for all purposes under this Agreement.
Voting and Other Rights	Subject to the terms of this Agreement, you shall have all the rights and privileges of a shareholder of PG&E Corporation while the Restricted Stock is held in escrow, including the right to vote. As described above, all dividends, if any, on the Restricted Stock shall be held in escrow and subject to the same restrictions as the shares to which they relate.
Restrictions on Issuance	PG&E Corporation will not issue any Restricted Stock if the issuance of such Restricted Stock at that time would violate any law or regulation.

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Restrictions on Resale and Hedge Transactions

By signing this Agreement, you agree not to sell any Restricted Stock before the restrictions lapse or sell any shares acquired under this grant at a time when applicable laws, regulations or Company or underwriter trading policies prohibit sale. In particular, in connection with any underwritten public offering by PG&E Corporation of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, you shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or agree to engage in any of the foregoing transactions with respect to any shares acquired under this grant without the prior written consent of PG&E Corporation or its underwriters, for such period of time after the effective date of such registration statement as may be requested by PG&E Corporation or the underwriters. If the sale of shares acquired under this grant is not registered under the Securities Act of 1933, but an exemption is available which requires an investment or other representation and warranty, you shall represent and agree that the Shares being acquired are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations and warranties as are deemed necessary or appropriate by PG&E Corporation and its counsel. By your acceptance of the grant, you agree that while the Restricted Stock is subject to restrictions, you will not enter into a corresponding hedging transaction relating to PG&E Corporation’s stock nor engage in any short sale of PG&E Corporation’s stock. This prohibition shall not apply to transactions effected through PG&E Corporation’s benefit plans that provide an opportunity to invest in Company stock or which provide compensation based on the price of Company stock.

No Retention Rights

This Agreement is not an employment agreement and does not give you the right to be retained by PG&E Corporation. Except as otherwise provided in an applicable employment agreement, PG&E Corporation reserves the right to terminate your employment at any time and for any reason.

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Legends

All certificates that may be issued to represent the Restricted Stock issued under this grant shall, where applicable, have endorsed thereon the following legends: “THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN AN AGREEMENT BETWEEN PG&E CORPORATION AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF PG&E CORPORATION AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE CORPORATE SECRETARY OF PG&E CORPORATION BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE.”

Applicable Law

This Agreement will be interpreted and enforced under the laws of the State of California.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the LTIP.

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EX-10.44

Exhibit 10.44

PG&E CORPORATION

2006 LONG-TERM INCENTIVE PLAN

PERFORMANCE SHARE GRANT

PG&E CORPORATION, a California corporation, hereby grants Performance Shares to the Recipient named below. The Performance Shares have been granted under the PG&E Corporation 2006 Long-Term Incentive Plan, as amended on February 15, 2006 and December 20, 2006 (the “LTIP”). The terms and conditions of the Performance Shares are set forth in this cover sheet and the attached Performance Share Agreement (the “Agreement”).

Date of Grant: January 3, 2007¹

Name of Recipient:                                                                                                             

Last Four Digits of Recipient’s Social Security Number:                                            

Number of Performance Shares:                                                                                    

By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement. You and PG&E Corporation agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of the attached Agreement. You are also acknowledging receipt of this Grant, the attached Agreement, and a copy of the prospectus describing the LTIP and the Performance Shares dated January 1, 2007.

Recipient:                                                                                                                                        0;         

(Signature)

Attachment

Please sign and return to PG&E Corporation, Human Resources,

One Market, Spear Tower, Suite 400, San Francisco, California 94105

¹ Due to the death of former President Gerald Ford on December 26, 2006, the federal government declared January 2, 2007 as a national day of mourning. All federal offices and the New York Stock Exchange were closed that day. Thus, the date of grant for the Performance Shares is January 3, 2007.

PG&E CORPORATION 2006 LONG-TERM INCENTIVE PLAN

PERFORMANCE SHARE AGREEMENT

The LTIP and Other Agreements	This Agreement constitutes the entire understanding between you and PG&E Corporation regarding the Performance Shares, subject to the terms of the LTIP. Any prior agreements, commitments or negotiations are superseded. In the event of any conflict or inconsistency between the provisions of this Agreement and the LTIP, the LTIP shall govern. Capitalized terms that are not defined in this Agreement are defined in the LTIP. For purposes of this Agreement, employment with PG&E Corporation shall mean employment with any member of the Participating Company Group.
Grant of Performance Shares	PG&E Corporation grants you the number of Performance Shares shown on the cover sheet of this Agreement. The Performance Shares are subject to the terms and conditions of this Agreement and the LTIP.
Vesting of Performance Shares	As long as you remain employed with PG&E Corporation, the Performance Shares will vest on the first business day of January (the “Vesting Date”) of the third year following the date of grant specified in the cover sheet. Except as described below, all Performance Shares subject to this Agreement that have not vested shall be forfeited upon termination of your employment.

A-1

Payment of Performance Shares	Upon the Vesting Date, PG&E Corporation’s total shareholder return (TSR) will be compared to the TSR of the twelve other companies in PG&E Corporation’s comparator group2 for the prior three calendar years (the “Performance Period”). Subject to rounding considerations, there will be no payout for TSR below the 25th percentile of the comparator group; TSR at the 25th percentile will result in a 25% payout of Performance Shares; TSR at the 75th percentile will result in a 100% payout of Performance Shares; and TSR in the top rank will result in a 200% payout of Performance Shares. The following table sets forth the payout percentages for the various TSR rankings that could be achieved:                                                  Number of Companies in Total (Including PG&E)                                                                                                   13                                                                                                         Performance                    Rounded         Rank                Percentile                        Payout                                             1                        100%                             200%                                   2                          92%                             170%                                   3                          83%                             130%                                   4                          75%                             100%                                   5                          67%                              90%                                   6                          58%                              75%                                   7                          50%                              65%                                   8                          42%                              50%                                   9                          33%                              35%                                 10                          25%                              25%                                 11                          17%                                0%                                 12                           8%                                0%                                 13                           0%                                0% The payment will equal the product of the number of vested Performance Shares, the applicable payout percentage, and the average closing price of a share of PG&E Corporation common stock for the last 30 calendar days of the year preceding the Vesting Date as reported on the New York Stock Exchange. Payments, if any, will be made as soon as practicable following the date that the Nominating, Compensation, and Governance Committee of the PG&E Corporation Board of Directors certifies the TSR percentile rank over the Performance Period pursuant to Section 10.5(a) of the LTIP.
Dividends	Each time that PG&E Corporation declares a dividend on its shares of common stock, an amount equal to the dividend multiplied by the number of Performance Shares granted to you by this Agreement shall be accrued on your behalf. If you receive a Performance Share payout in accordance with the preceding paragraph, you shall also receive a cash payment equal to the amount of any dividends accrued over the Performance Period multiplied by the same payout percentage used to determine the amount of the Performance Share payout.
Voluntary Termination	If you terminate your employment with PG&E Corporation voluntarily before the Vesting Date, all of the Performance Shares shall be cancelled as of the date of such termination and any dividends accrued with respect to your Performance Shares shall be forfeited.
Termination for Cause	If your employment with PG&E Corporation is terminated by PG&E Corporation for cause before the Vesting Date, all of the Performance Shares shall be cancelled as of the date of such termination and any dividends accrued with respect to your Performance Shares shall be forfeited. In general, termination for “cause” means termination of employment because of dishonesty, a criminal offense or violation of a work rule, and will be determined by and in the sole discretion of PG&E Corporation.

² The identities of the companies currently comprising the comparator group are included in the prospectus. PG&E Corporation reserves the right to change the companies comprising the comparator group at any time.

A-2

Termination other than for Cause	If your employment with PG&E Corporation is terminated by PG&E Corporation other than for cause before the Vesting Date, your unvested Performance Shares will vest proportionally based on the number of months during the Performance Period that you were employed (rounded down) divided by the number of months in the Performance Period (36 months). All other outstanding Performance Shares (and any associated accrued dividends) shall automatically be cancelled upon such termination. Your vested Performance Shares will be payable, if at all, after the completion of the Performance Period based on the same formula applied to active employees. You shall also receive a cash payment, if any, equal to the amount of dividends accrued over the Performance Period with respect to your vested Performance Shares multiplied by the same payout percentage used to determine the amount, if any, of the Performance Share payout.
Retirement	If you retire before the Vesting Date, your outstanding Performance Shares will continue to vest as though your employment had continued and will be payable, if at all, as soon as practicable following the Vesting Date. You shall also receive a cash payment, if any, equal to the amount of dividends accrued over the Performance Period with respect to your Performance Shares multiplied by the same payout percentage used to determine the amount, if any, of the Performance Share payout. You will be considered to have retired if you are age 55 or older on the date of termination and if you were employed by PG&E Corporation for at least five consecutive years ending on the date of termination of your employment.
Death/Disability	If your employment terminates due to your death or disability before the Vesting Date, all of your Performance Shares shall immediately vest and will be payable, if at all, as soon as practicable after the completion of the Performance Period based on the same formula applied to active employees. You shall also receive a cash payment, if any, equal to the amount of dividends accrued over the Performance Period with respect to your Performance Shares multiplied by the same payout percentage used to determine the amount, if any, of the Performance Share payout.
Termination Due to Disposition of Subsidiary	(1) If your employment is terminated (other than for cause or your voluntary termination) by reason of a divestiture or change in control of a subsidiary of PG&E Corporation, which divestiture or change in control results in such subsidiary no longer qualifying as a subsidiary corporation under Section 424(f) of the Internal Revenue Code of 1986, as amended, or (2) if your employment is terminated (other than for cause or your voluntary termination) coincident with the sale of all or substantially all of the assets of a subsidiary of PG&E Corporation, all Performance Shares shall vest proportionally based on the number of months during the Performance Period that you were employed (rounded down) divided by the number of months in the Performance Period (36 months). All other outstanding Performance Shares (and any associated accrued dividends) shall automatically be cancelled upon such termination. Your vested Performance Shares will be payable, if at all, after the completion of the Performance Period based on the same formula applied to active employees. You shall also receive a cash payment, if any, equal to the amount of dividends accrued over the Performance Period with respect to your vested Performance Shares multiplied by the same payout percentage used to determine the amount, if any, of the Performance Share payout.
Change in Control	In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the “Acquiror”), may, without your consent, either assume or continue PG&E Corporation’s rights and obligations under this Agreement or provide a substantially equivalent award in substitution for the Performance Shares subject to this Agreement. If the Acquiror assumes or continues PG&E Corporation’s rights and obligations under this Agreement or substitutes a substantially equivalent award, TSR shall be calculated by aggregating (a) the TSR of PG&E Corporation for the period from January 1 of the year of grant to the date of the Change in Control, and (b) the TSR of the Acquiror from the date of the Change in Control to the Vesting Date. The payout percentage reflected in the table set forth above for the highest percentile TSR performance met or exceeded when calculated on that basis, and considering any adjustments to the comparator group, will be used to determine the amount of the payout, if any, upon settlement of the assumed, continued or substituted award. You shall also receive a cash payment, if any, equal to the amount of dividends accrued with respect to your Performance Shares to the first business day of the year following the Change in Control multiplied by the same payout percentage used to determine the amount, if any, of the Performance Share payout. If this Award is neither assumed nor continued by the Acquiror or if the Acquiror does not provide a substantially equivalent award in substitution for the Performance Shares subject to this Agreement, all of your outstanding Performance Shares shall automatically vest and become nonforfeitable when the Change in Control of PG&E Corporation occurs before the Vesting Date. Such vested Performance Shares will become payable on the first business day of the year following the Change in Control. The payment, if any, will be based on PG&E Corporation’s TSR for the period from January 1 of the year of grant to the date of the Change in Control compared to the TSR of the other companies in PG&E Corporation’s comparator group3 for the same period. The payment will be calculated by multiplying the number of vested Performance Shares by the payout percentage. The resulting number of Performance Shares will be multiplied by the average closing price of a share of PG&E Corporation common stock for the last 30 calendar days preceding the Change in Control as reported on the New York Stock Exchange. You shall also receive a cash payment, if any, equal to the amount of dividends accrued with respect to your Performance Shares to the first business day of the year following the Change in Control multiplied by the same payout percentage used to determine the amount, if any, of the Performance Share payout.

³ The identities of the companies currently comprising the comparator group are included in the prospectus. PG&E Corporation reserves the right to change the companies comprising the comparator group at any time.

A-3

Termination In Connection with a Change in Control	If your employment is terminated in connection with a Change in Control within three months before the Change in Control occurs or within two years following the Change in Control, all of your outstanding Performance Shares (to the extent they did not previously vest upon failure of the Acquiror to assume or continue this Award) shall automatically vest and become nonforfeitable on the date of termination of your employment. Your vested Performance Shares will be payable, if at all, on the first business day of the following year following the completion of the Performance Period and will be based on the same formula applied to active employees. You shall also receive a cash payment, if any, equal to the amount of dividends accrued over the Performance Period with respect to your vested Performance Shares multiplied by the same payout percentage used to determine the amount, if any, of the Performance Share payout. PG&E Corporation shall have the sole discretion to determine whether termination of your employment was made in connection with a Change in Control.
Withholding Taxes	PG&E Corporation will withhold amounts necessary to satisfy applicable taxes from the payment to be made with respect to your Performance Shares. You will receive the remaining proceeds in cash.
Leaves of Absence	For purposes of this Agreement, if you are on an approved leave of absence from PG&E Corporation, or a recipient of PG&E Corporation sponsored disability benefits, you will continue to be considered as employed. If you do not return to active employment upon the expiration of your leave of absence or the expiration of your PG&E Corporation sponsored disability benefits, you will be considered to have voluntarily terminated your employment. See above under “Voluntary Termination.” PG&E Corporation reserves the right to determine which leaves of absence will be considered as continuing employment and when your employment terminates for all purposes under this Agreement.
No Retention Rights	This Agreement is not an employment agreement and does not give you the right to be retained by PG&E Corporation. Except as otherwise provided in an applicable employment agreement, PG&E Corporation reserves the right to terminate your employment at any time and for any reason.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of California.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the LTIP.

A-4

EX-11

EXHIBIT 11

PG&E CORPORATION

COMPUTATION OF EARNINGS PER COMMON SHARE

	Year Ended December 31,
	2006		2005		2004
(in millions, except per share amounts)
Net Income	$	991	$	917	$	4,504
Less: distributed earnings to common shareholders		460		449		-
Undistributed earnings		531		468		4,504
Less: undistributed earnings from discontinued operations		-		13		684
Undistributed earnings from continuing operations	$	531	$	455	$	3,820
Common shareholder earnings
Basic
Distributed earnings to common shareholders	$	460	$	449	$	-
Undistributed earnings allocated to common shareholders - continuing operations		503		433		3,646
Undistributed earnings allocated to common shareholders - discontinued operations		-		12		653
Total common shareholders earnings, basic	$	963	$	894	$	4,299
Diluted
Distributed earnings to common shareholders	$	460	$	449	$	-
Undistributed earnings allocated to common shareholders - continuing operations		504		433		3,650
Undistributed earnings allocated to common shareholders - discontinued operations		-		12		653
Total common shareholders earnings, diluted	$	964	$	894	$	4,303
Weighted average common shares outstanding, basic		346		372		398
9.50% Convertible Subordinated Notes		19		19		19
Weighted average common shares outstanding and participating securities, basic		365		391		417
Weighted average common shares outstanding, basic		346		372		398
Employee stock-based compensation and accelerated share repurchases (1)		3		6		7
PG&E Corporation warrants		-		-		2
Weighted average common shares outstanding, diluted		349		378		407
9.50% Convertible Subordinated Notes		19		19		19
Weighted average common shares outstanding and participating securities, diluted		368		397		426
Net earnings per common share, basic
Distributed earnings, basic (2)	$	1.33	$	1.21	$	-
Undistributed earnings - continuing operations, basic		1.45		1.16		9.16
Undistributed earnings - discontinued operations, basic		-		0.03		1.64
Total	$	2.78	$	2.40	$	10.80
Net earnings per common share, diluted
Distributed earnings, diluted	$	1.32	$	1.19	$	-
Undistributed earnings - continuing operations, diluted		1.44		1.15		8.97
Undistributed earnings - discontinued operations, diluted		-		0.03		1.60
Total	$	2.76	$	2.37	$	10.57
(1) Includes approximately 1 million, 2 million and 222,000 shares, respectively, of PG&E Corporation common stock treated as outstanding in connection with accelerated share repurchases for the year ended December 31, 2006, December 31, 2005 and December 31, 2004, respectively. The remaining shares of approximately 2 million at December 31, 2006, 4 million at December 31, 2005 and 6.8 million at December 31, 2004, relate to share-based compensation and are deemed to be outstanding per SFAS No. 128 for the purpose of calculating EPS.
(2)“Distributed earnings, basic” differs from actual per share amounts paid as dividends as the EPS computation under GAAP requires the use of the weighted average, rather than the actual number of shares outstanding.

EX-12.1

EXHIBIT 12.1

PACIFIC GAS AND ELECTRIC COMPANY

COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

	Year ended December 31,
		2006		2005		2004			2003		2002
Earnings:
Net income	$	985	$	934	$	3,982		$	923	$	1,819
Adjustments for minority interest in losses of less than 100% owned affiliates and the Company's equity in undistributed income (losses) of less than 50% owned affiliates		-		-		-			-		-
Income taxes provision		602		574		2,561			528		1,178
Net fixed charges		801		589		671			964		1,029
Total Earnings	$	2,388	$	2,097	$	7,214		$	2,415	$	4,026
Fixed Charges:
Interest on short-term borrowings and long-term debt, net	$	770	$	573	$	682		$	947	$	996
Interest on capital leases		11		1		1			1		2
AFUDC debt		20		15		(12	)		16		21
Earnings required to cover the preferred stock dividend and preferred security distribution requirements of majority owned trust		-		-		-			-		10
Total Fixed Charges	$	801	$	589	$	671		$	964	$	1,029
Ratios of Earnings to Fixed Charges		2.98		3.56		10.75			2.51		3.91

Note:

For the purpose of computing Pacific Gas and Electric Company's ratios of earnings to fixed charges, "earnings" represent net income adjusted for the minority interest in losses of less than 100% owned affiliates, equity in undistributed income or losses of less than 50% owned affiliates, income taxes and fixed charges (excluding capitalized interest). "Fixed charges" include interest on long-term debt and short-term borrowings (including a representative portion of rental expense), amortization of bond premium, discount and expense, interest on capital leases, AFUDC debt, and earnings required to cover the preferred stock dividend requirements and preferred security distribution requirements of majority-owned trust.

EX-12.2

EXHIBIT 12.2

PACIFIC GAS AND ELECTRIC COMPANY

COMPUTATION OF RATIOS OF EARNINGS TO COMBINED

FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

	Year ended December 31,
Earnings:		2006		2005		2004			2003		2002
Net income	$	985	$	934	$	3,982		$	923	$	1,819
Adjustments for minority interest in losses of less than 100% owned affiliates and the Company's equity in undistributed income (losses) of less than 50% owned affiliates		-		-		-			-		-
Income taxes provision		602		574		2,561			528		1,178
Net fixed charges		801		589		671			964		1,029
Total Earnings	$	2,388	$	2,097	$	7,214		$	2,415	$	4,026
Fixed Charges:
Interest on short-term borrowings and long-term debt, net	$	770	$	573	$	682		$	947	$	996
Interest on capital leases		11		1		1			1		2
AFUDC debt		20		15		(12	)		16		21
Earnings required to cover the preferred stock dividend and preferred security distribution requirements of majority owned trust		-		-		-			-		10
Total Fixed Charges		801		589		671			964		1,029
Preferred Stock Dividends:
Tax deductible dividends		12		12		9			9		9
Pre-tax earnings required to cover non-tax deductible preferred stock dividend requirements		3		13		34			27		28
Total Preferred Stock Dividends		15		25		43			36		37
Total Combined Fixed Charges and Preferred Stock Dividends	$	816	$	614	$	714		$	1,000	$	1,066
Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends		2.93		3.42		10.10			2.42		3.78

Note:

For the purpose of computing Pacific Gas and Electric Company's ratios of earnings to combined fixed charges and preferred stock dividends, "earnings" represent net income adjusted for the minority interest in losses of less than 100% owned affiliates, equity in undistributed income or losses of less than 50% owned affiliates, income taxes and fixed charges (excluding capitalized interest). "Fixed charges" include interest on long-term debt and short-term borrowings (including a representative portion of rental expense), amortization of bond premium, discount and expense, interest on capital leases, AFUDC debt, and earnings required to cover the preferred stock dividend requirements and preferred security distribution requirements of majority-owned trust. "Preferred stock dividends" represent tax deductible dividends and pre-tax earnings that are required to pay the dividends on outstanding preferred securities.

EX-13

  
    
      Annual Report






  
    

EX-21

Exhibit 21

Subsidiaries

Parent of Subsidiary	Name of Subsidiary	Jurisdiction of Formation of Subsidiary	Names under which Subsidiary does business
PG&E Corporation	Pacific Gas and Electric Company	CA	Pacific Gas and Electric Company PG&E
Pacific Gas and Electric Company	PG&E Energy Recovery Funding LLC	DE	PG&E Energy Recovery Funding LLC

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-121518 on Form S-3 and 333-16253, 333-117930, 333-46772, 333-77149, 333-73054, and 333-129422 on Form S-8 of PG&E Corporation and Registration Statements No. 33-62488 and 333-109994 on Form S-3 of Pacific Gas and Electric Company of our reports dated February 21, 2007, relating to the financial statements and financial statement schedules of PG&E Corporation and Pacific Gas and Electric Company and management’s report on the effectiveness of internal control over financial reporting, appearing in and incorporated by reference in this Annual Report on Form 10-K of PG&E Corporation and Pacific Gas and Electric Company for the year ended December 31, 2006.

DELOITTE & TOUCHE LLP

San Francisco, California

February 21, 2007

EX-24.1

Exhibit 24.1

RESOLUTION OF THE

BOARD OF DIRECTORS OF

PG&E CORPORATION

February 21, 2007

WHEREAS, the Audit Committee of this Board of Directors has reviewed the audited consolidated financial statements for this corporation for the year ended December 31, 2006, and has recommended to the Board that such financial statements be included in the corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, to be filed with the Securities and Exchange Commission;

BE IT RESOLVED that each of HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES is hereby authorized to sign on behalf of this corporation and as attorneys in fact for the Chairman, Chief Executive Officer, and President, the Senior Vice President, Chief Financial Officer, and Treasurer, and the Vice President and Controller of this corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and all amendments and other filings or documents related thereto to be filed with the Securities and Exchange Commission, and to do any and all acts necessary to satisfy the requirements of the Securities Exchange Act of 1934 and the regulations of the Securities and Exchange Commission adopted thereunder with regard to said Form 10-K Annual Report.

I, LINDA Y.H. CHENG, do hereby certify that I am Vice President, Corporate Governance and Corporate Secretary of PG&E Corporation, a corporation organized and existing under the laws of the State of California; that the above and foregoing is a full, true, and correct copy of a resolution which was duly adopted by the Board of Directors of said corporation at a meeting of said Board which was duly and regularly called and held on February 21, 2007; and that this resolution has never been amended, revoked, or repealed, but is still in full force and effect.

WITNESS my hand and the seal of said corporation hereunto affixed this 21st day of February, 2007.

LINDA Y.H. CHENG

Linda Y.H. Cheng

Vice President, Corporate Governance and Corporate Secretary

PG&E Corporation

C O R P O R A T E

          S E A L

RESOLUTION OF THE

BOARD OF DIRECTORS OF

PACIFIC GAS AND ELECTRIC COMPANY

February 21, 2007

WHEREAS, the Audit Committee of this Board of Directors has reviewed the audited consolidated financial statements for this company for the year ended December 31, 2006, and has recommended to the Board that such financial statements be included in the company’s Annual Report on Form 10-K for the year ended December 31, 2006, to be filed with the Securities and Exchange Commission;

BE IT RESOLVED that each of HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES is hereby authorized to sign on behalf of this company and as attorneys in fact for the President and Chief Executive Officer, the Senior Vice President, Chief Financial Officer, and Treasurer, and the Vice President and Controller of this company the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and all amendments and other filings or documents related thereto to be filed with the Securities and Exchange Commission, and to do any and all acts necessary to satisfy the requirements of the Securities Exchange Act of 1934 and the regulations of the Securities and Exchange Commission adopted thereunder with regard to said Form 10-K Annual Report.

I, LINDA Y.H. CHENG, do hereby certify that I am Vice President, Corporate Governance and Corporate Secretary of PACIFIC GAS AND ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of California; that the above and foregoing is a full, true, and correct copy of a resolution which was duly adopted by the Board of Directors of said corporation at a meeting of said Board which was duly and regularly called and held on February 21, 2007; and that this resolution has never been amended, revoked, or repealed, but is still in full force and effect.

WITNESS my hand and the seal of said corporation hereunto affixed this 21st day of February, 2007.

LINDA Y.H. CHENG

Linda Y.H. Cheng

Vice President, Corporate Governance and Corporate Secretary

PG&E Corporation

C O R P O R A T E

        S E A L

EX-24.2

Exhibit 24.2

POWER OF ATTORNEY

Each of the undersigned Directors of PG&E Corporation hereby constitutes and appoints HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his or her attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his or her capacity as such Director of said corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, we have signed these presents this 21st day of February, 2007.

DAVID R. ANDREWS	MARYELLEN C. HERRINGER
David R. Andrews LESLIE S. BILLER	Maryellen C. Herringer RICHARD A. MESERVE
Leslie S. Biller DAVID A. COULTER	Richard A. Meserve MARY S. METZ
David A. Coulter C. LEE COX	Mary S. Metz BARBARA L. RAMBO
C. Lee Cox PETER A. DARBEE	Barbara L. Rambo BARRY LAWSON WILLIAMS
Peter A. Darbee	Barry Lawson Williams

POWER OF ATTORNEY

PETER A. DARBEE, the undersigned, Chairman of the Board, Chief Executive Officer, and President of PG&E Corporation, hereby constitutes and appoints HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Chairman of the Board, Chief Executive Officer, and President (principal executive officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 21st day of February, 2007.

PETER A. DARBEE

Peter A. Darbee

POWER OF ATTORNEY

CHRISTOPHER P. JOHNS, the undersigned, Senior Vice President, Chief Financial Officer, and Treasurer of PG&E Corporation, hereby constitutes and appoints HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Senior Vice President, Chief Financial Officer, and Treasurer (principal financial officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 21st day of February, 2007.

CHRISTOPHER P. JOHNS

Christopher P. Johns

POWER OF ATTORNEY

G. ROBERT POWELL, the undersigned, Vice President and Controller of PG&E Corporation, hereby constitutes and appoints HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Vice President and Controller (principal accounting officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 21st day of February, 2007.

G. ROBERT POWELL

G. Robert Powell

POWER OF ATTORNEY

Each of the undersigned Directors of Pacific Gas and Electric Company hereby constitutes and appoints HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his or her attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his or her capacity as such Director of said corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, we have signed these presents this 21st day of February, 2007.

DAVID R. ANDREWS	THOMAS B. KING
David R. Andrews LESLIE S. BILLER	Thomas B. King RICHARD A. MESERVE
Leslie S. Biller DAVID A. COULTER	Richard A. Meserve MARY S. METZ
David A. Coulter C. LEE COX	Mary S. Metz BARBARA L. RAMBO
C. Lee Cox PETER A. DARBEE	Barbara L. Rambo BARRY LAWSON WILLIAMS
Peter A. Darbee MARYELLEN C. HERRINGER	Barry Lawson Williams
Maryellen C. Herringer

POWER OF ATTORNEY

THOMAS B. KING, the undersigned, Chief Executive Officer of Pacific Gas and Electric Company, hereby constitutes and appoints HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity Chief Executive Officer (principal executive officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 21st day of February, 2007.

THOMAS B. KING

Thomas B. King

POWER OF ATTORNEY

CHRISTOPHER P. JOHNS, the undersigned, Senior Vice President, Chief Financial Officer, and Treasurer of Pacific Gas and Electric Company, hereby constitutes and appoints HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Senior Vice President, Chief Financial Officer, and Treasurer (principal financial officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 21st day of February, 2007.

CHRISTOPHER P. JOHNS

Christopher P. Johns

POWER OF ATTORNEY

G. ROBERT POWELL, the undersigned, Vice President and Controller of Pacific Gas and Electric Company, hereby constitutes and appoints HYUN PARK, LINDA Y.H. CHENG, EILEEN O. CHAN, WONDY S. LEE, ERIC MONTIZAMBERT, GARY P. ENCINAS, and KATHLEEN HAYES, and each of them, as his attorneys in fact with full power of substitution to sign and file with the Securities and Exchange Commission in his capacity as Vice President and Controller (principal accounting officer) of said corporation the Form 10-K Annual Report for the year ended December 31, 2006, required by Section 13 or 15(d) of the Securities Exchange Act of 1934 and any and all amendments and other filings or documents related thereto, and hereby ratifies all that said attorneys in fact or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 21st day of February, 2007.

G. ROBERT POWELL

G. Robert Powell

EX-31.01

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 13a-14(a)

I, Peter A. Darbee, certify that:

1.   I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of PG&E Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 22, 2007                                         PETER A. DARBEE                                                  

                                                                                  Peter A. Darbee

                                                                                  Chairman, Chief Executive Officer and President

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 13a-14(a)

I, Christopher P. Johns, certify that:

1.   I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of PG&E Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 22, 2007                                        CHRISTOPHER P. JOHNS                                       

                                                                                 Christopher P. Johns

                                                                                 Senior Vice President,

                                                                                 Chief Financial Officer and Treasurer 

EX-31.02

Exhibit 31.2

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 13a-14(a)

I, Thomas B. King, certify that:

1.   I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Pacific Gas and Electric Company;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 22, 2007                                                                                THOMAS B. KING              

                                                                                                                        Thomas B. King

                                                                                                                        Chief Executive Officer

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 13a-14(a)

I, Christopher P. Johns, certify that:

1.   I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Pacific Gas and Electric Company;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 22, 2007                                                                                CHRISTOPHER P. JOHNS              

                                                                                                                        Christopher P. Johns

                                                                                                                        Senior vice President, Chief Financial Officer and Treasurer

EX-32.01

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

          In connection with the accompanying Annual Report on Form 10-K of PG&E Corporation for the year ended December 31, 2006, I, Peter A. Darbee, Chairman, Chief Executive Officer and President of PG&E Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1)	such Annual Report on Form 10-K of PG&E Corporation for the year ended December 31, 2006, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Annual Report on Form 10-K of PG&E Corporation for the year ended December 31, 2006, fairly presents, in all material respects, the financial condition and results of operations of PG&E Corporation.

PETER A. DARBEE

PETER A. DARBEE.

Chairman, Chief Executive Officer and President

February 22, 2007

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

          In connection with the accompanying Annual Report on Form 10-K of PG&E Corporation for the year ended December 31, 2005, I, Christopher P. Johns, Senior Vice President, Chief Financial Officer and Treasurer of PG&E Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1)	such Annual Report on Form 10-K of PG&E Corporation for the year ended December 31, 2006, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Annual Report on Form 10-K of PG&E Corporation for the year ended December 31, 2006, fairly presents, in all material respects, the financial condition and results of operations of PG&E Corporation.

CHRISTOPHER P. JOHNS

CHRISTOPHER P. JOHNS

Senior Vice President,

Chief Financial Officer and Treasurer

February 22, 2007

EX-32.02

Exhibit 32.2

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

          In connection with the accompanying Annual Report on Form 10-K of Pacific Gas and Electric Company for the year ended December 31, 2006, I, Thomas B. King, Chief Executive Officer of Pacific Gas and Electric Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1)	such Annual Report on Form 10-K of Pacific Gas and Electric Company for the year ended December 31, 2006, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Annual Report on Form 10-K of Pacific Gas and Electric Company for the year ended December 31, 2006, fairly presents, in all material respects, the financial condition and results of operations of Pacific Gas and Electric Company.

THOMAS B. KING           

THOMAS B. KING

Chief Executive Officer

February 22, 2007

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

          In connection with the accompanying Annual Report on Form 10-K of Pacific Gas and Electric Company for the year ended December 31, 2006, I, Christopher P. Johns, Senior Vice President, Chief Financial Officer and Treasurer of Pacific Gas and Electric Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1)	such Annual Report on Form 10-K of Pacific Gas and Electric Company for the year ended December 31, 2006, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Annual Report on Form 10-K of Pacific Gas and Electric Company for the year ended December 31, 2006, fairly presents, in all material respects, the financial condition and results of operations of Pacific Gas and Electric Company.

CHRISTOPHER P. JOHNS                

CHRISTOPHER P. JOHNS

Senior Vice President, Chief Financial Officer

and Treasurer

February 22, 2007