PG&E Corporation and the Utility have substantial financial commitments in connection with agreements entered into to support the Utility's operating activities. PG&E Corporation and the Utility also have significant contingencies arising from their operations, including contingencies related to guarantees, regulatory proceedings, nuclear operations, legal matters, environmental remediation, and tax matters.

As part of the ordinary course of business, the Utility enters into various agreements to purchase power and electric capacity. The price of purchased power may be fixed or variable. Variable pricing is generally based on the current market price of either gas or electricity at the date of purchase. The Utility's obligations under a significant portion of these agreements are contingent on the third party's development of new generation facilities to provide the power to be purchased by the Utility under these agreements. The table below excludes expected future payments related to agreements ranging from 10 to 25 years in length that are cancellable if the construction of a new generation facility has not met certain contractual milestones with respect to construction. Based on the Utility's experience with these types of facilities, the Utility has determined that there is more than a remote chance that contracts could be cancelled until the construction of the generating facilities has commenced.

Some of the power purchase agreements that the Utility entered into with independent power producers that are qualifying facilities are treated as capital leases. During the nine months ended September 30, 2012, the Utility terminated several agreements with total minimum lease payments of approximately $136 million. The future minimum lease payments associated with the remaining capital leases were approximately $125 million.

The Utility purchases natural gas directly from producers and marketers in both Canada and the U.S. to serve its core customers and to fuel its owned-generation facilities. The Utility also contracts for natural gas transportation from the points at which the Utility takes delivery (typically in Canada, the U.S. Rocky Mountain supply area, and the southwestern U.S.) to the points at which the Utility's natural gas transportation system begins. In addition, the Utility has contracted for natural gas storage services in northern California in order to better meet core customers' winter peak loads.

The Utility has entered into several purchase agreements for nuclear fuel. These agreements have terms ranging from one to 14 years and are intended to ensure long-term nuclear fuel supply. The contracts for uranium and for conversion and enrichment services provide for 100% coverage of reactor requirements through 2016, while contracts for fuel fabrication services provide for 100% coverage of reactor requirements through 2017. The Utility relies on a number of international producers of nuclear fuel in order to diversify its sources and provide security of supply. Pricing terms are also diversified, ranging from market-based prices to base prices that are escalated using published indices.

PG&E Corporation and the Utility record a provision for a loss when it is both probable that a loss has been incurred and the amount of the loss can be reasonably estimated. PG&E Corporation and the Utility evaluate the range of reasonably estimated losses and record a provision based on the lower end of the range, unless an amount within the range is a better estimate than any other amount. These accruals, and the estimates of any additional reasonably possible losses (or reasonably possible losses in excess of the amounts accrued), are reviewed quarterly and are adjusted to reflect the impacts of negotiations, discovery, settlements and payments, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. In assessing such contingencies, PG&E Corporation's and the Utility's policy is to exclude anticipated legal costs.

The accrued liability associated with claims and litigation, regulatory proceedings, penalties, and other legal matters (other than the third-party claims, litigation, and investigations related to natural gas matters that are discussed below) totaled $32 million at September 30, 2012 and $52 million at December 31, 2011 and are included in PG&E Corporation's and the Utility's current liabilities - other in the Condensed Consolidated Balance Sheets. Except as discussed below, PG&E Corporation and the Utility do not believe that losses associated with legal and regulatory contingencies would have a material impact on their financial condition, results of operations, or cash flows.

On September 9, 2010, an underground 30-inch natural gas transmission pipeline (“Line 132”) owned and operated by the Utility, ruptured in a residential area located in the City of San Bruno, California (the “San Bruno accident”). The ensuing explosion and fire resulted in the deaths of eight people, numerous personal injuries, and extensive property damage. Following the San Bruno accident, various regulatory proceedings, investigations, and lawsuits were commenced.

The CPUC is conducting three investigations pertaining to the Utility's natural gas operations, which are described below. In 2012, the CPUC's Consumer Protection and Safety Division (“CPSD”) issued investigative reports in each of these investigations alleging that the Utility committed numerous violations of applicable laws and regulations and recommending the CPUC impose penalties on the Utility. (See “Penalties Conclusion” below.) The CPUC began hearings in each of the investigations. On September 26, 2012, the CPUC administrative law judges overseeing the investigations issued a joint ruling granting the CPSD's request to file a single coordinated brief regarding potential remedies and penalties in these investigative proceedings, rather than separate briefs in each proceeding. On October 11, 2012, the procedural schedule was suspended until November 1, 2012 to enable the Utility, the CPSD, and other parties to continue to engage in negotiations to reach a stipulated outcome of these proceedings. Any settlement agreement that may be reached would be submitted to the CPUC for its consideration. The CPUC would hold public hearings before issuing a final decision.

On February 24, 2011, the CPUC commenced an investigation pertaining to safety recordkeeping for Line 132, as well as for the Utility's entire gas transmission system. Among other matters, the investigation will determine whether the San Bruno accident would have been preventable by the exercise of safe procedures and /or accurate and technical recordkeeping in compliance with the law. In March 2012, the CPSD submitted testimony alleging that the Utility committed numerous violations of applicable laws and regulations based on the findings of the CPSD's records management consultant and an engineering consultant. Among other findings, the consultants' reports concluded that: the Utility's recordkeeping practices have been deficient and have diminished pipeline safety; the San Bruno accident may have been prevented had the Utility managed its records properly over the years; and that the Utility has been operating, and continues to operate, without a functional integrity management program. On June 26, 2012, the Utility submitted testimony to the CPUC that disputed many of the CPSD's findings and allegations, but acknowledged that improvements are needed to its asset management system and recordkeeping practices and outlined the steps being taken in these areas.

On November 10, 2011, the CPUC commenced an investigation pertaining to the Utility's operation of its natural gas transmission pipeline system in or near locations of higher population density. Under federal and state regulations, the class location designation of a pipeline is based on the types of buildings, population density, or level of human activity near the segment of pipeline, and is used to determine the maximum allowable operating pressure (“MAOP”) up to which a pipeline can be operated. In its May 25, 2012 investigative report, the CPSD cited the Utility's admissions in previous reports to the CPUC that it had failed to classify pipeline segments properly and document past patrols of transmission lines and concluded that these failures resulted in numerous violations of state and federal standards. On July 23, 2012, the Utility submitted testimony in response to the CPSD's report that acknowledged deficiencies in the Utility's past class location and patrol processes and described the efforts to improve those processes. The CPUC concluded evidentiary hearings in September 2012.

On January 12, 2012, the CPUC commenced an investigation to determine whether the Utility violated applicable laws and requirements in connection with the San Bruno accident, as alleged by the CPSD. In its January 12, 2012 investigation report, the CPSD had alleged that the San Bruno accident was caused by the Utility's failure to follow accepted industry practice when installing the section of pipe that failed, the Utility's failure to comply with federal pipeline integrity management requirements, the Utility's inadequate record keeping practices, deficiencies in the Utility's data collection and reporting system, inadequate procedures to handle emergencies and abnormal conditions, the Utility's deficient emergency response actions after the incident, and a systemic failure of the Utility's corporate culture that emphasized profits over safety. The CPUC stated that the scope of the investigation will include all past operations, practices and other events or courses of conduct that could have led to or contributed to the San Bruno accident, as well as, the Utility's compliance with CPUC orders and resolutions issued since the date of the San Bruno accident.

On June 26, 2012, the Utility submitted testimony to the CPUC that disputed many of the CPSD's findings and allegations. The Utility acknowledged its liability for the San Bruno accident and, based on testimony from an expert witness, stated that the likely root cause of the pipeline rupture was (1) a missing interior weld on the pipe; (2) a ductile tear on the pipe likely caused by a hydrostatic test performed in 1956 at too low a pressure to cause the defective weld to fail; and (3) a fatigue crack on the pipe that grew over time. However, the Utility stated that many of the findings identified in the CPSD's reports are not deficiencies, or are much less severe than alleged, and do not constitute violations of applicable laws and regulations.

California gas corporations are required to provide notice to the CPUC of any self-identified or self-corrected violations of certain state and federal regulations related to the safety of natural gas facilities and utilities' natural gas operating practices. The CPSD has been delegated authority from the CPUC to enforce compliance with these regulations. As of September 30, 2012, the Utility has submitted 29 self-reports with the CPUC, plus additional follow-up reports. In a self-report filed on October 19, 2012, the Utility reported that it does not have documentation substantiating that approximately 4.5 miles of pipe had undergone integrity assessments prior to December 17, 2007, as required by federal regulations. In April 2012, the CPUC affirmed a $17 million penalty that had been imposed by the CPSD based on the Utility's self-report that it failed to conduct periodic leak surveys because it had not included 16 gas distribution maps in its leak survey schedule. (The Utility has completed all of the missed leak surveys.) The CPSD has not yet taken action with respect to the Utility's other self-reports. The CPSD may issue additional citations and impose penalties on the Utility associated with these or future reports that the Utility may file. (See “Penalties Conclusion” below.)

In July 2012, the Utility reported to the CPUC that it had discovered that its access to some pipelines has been limited by vegetation overgrowth or building structures that encroach upon some of the Utility's gas pipeline property easements and that the Utility plans to undertake a multi-year effort to clear these encroachments. PG&E Corporation and the Utility are uncertain how this matter will affect the investigative proceedings related to natural gas operations, or whether additional proceedings or investigations will be commenced by the CPUC.

The CPUC can impose significant penalties for violations of applicable laws, rules, and orders in connection with the pending investigations and enforcement matters described above. The CPUC and the CPSD have wide discretion to determine the number of violations and the length of time the violations existed. The calculation of penalties is generally based on the totality of the circumstances, including such factors as the severity of the violations; the type of harm caused by the violations and the number of persons affected; conduct taken to prevent, detect, disclose or rectify the violations; and the financial resources of the regulated entity.

PG&E Corporation and the Utility continue to believe it is probable that the Utility will incur total penalties of at least $200 million in connection with these investigations and enforcement matters. PG&E Corporation and the Utility have not recorded any additional charges during the nine months ended September 30, 2012 and are unable to estimate the reasonably possible amount of penalties in excess of the amount accrued, and such amounts could be material. These estimates, and the assumptions on which they are based, are subject to change based on many factors, including developments that may occur during the settlement negotiations, the terms of any proposed settlement agreement that may be reached, whether and when the CPUC approves the proposed settlement agreement, and rulings and decisions by the CPUC and the administrative law judges presiding over these proceedings. Future changes in these estimates or assumptions could have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, and cash flows.

The CPUC is conducting a rulemaking proceeding to adopt new safety and reliability regulations for natural gas transmission and distribution pipelines in California and the related ratemaking mechanisms. The CPUC is considering proposed implementation plans that were filed in August 2011 by the Utility and other California natural gas pipeline operators. The Utility forecasted its total plan-related capital expenditures over a four-year period (2011 through 2014) would be approximately $1.4 billion and requested that the CPUC authorize the Utility to recover these expenditures through rates. On October 12, 2012, the administrative law judge overseeing the proceeding issued a proposed decision that recommended disallowing rate recovery for $401 million of the $1.4 billion requested. At September 30, 2012, PG&E Corporation's and the Utility's Condensed Consolidated Balance Sheets include capitalized expenditures of approximately $187 million that the Utility incurred under its proposed plan. If the proposed decision is adopted by the CPUC, disallowed capital investments would be charged to net income in the period in which the CPUC orders such a disallowance.

The U.S. Department of Justice, the California Attorney General's Office, and the San Mateo County District Attorney's Office are conducting an investigation of the San Bruno accident and have indicated that the Utility is a target of the investigation. The Utility is cooperating with the investigation. PG&E Corporation and the Utility are uncertain whether any criminal charges will be brought against either company or any of their current or former employees. PG&E Corporation and the Utility are unable to estimate the amount (or range of amounts) of reasonably possible losses associated with any civil or criminal penalties that could be imposed on the Utility.

In addition to the investigations and proceedings discussed above, at September 30, 2012, approximately 130 lawsuits involving third-party claims for personal injury and property damage, including two class action lawsuits, had been filed against PG&E Corporation and the Utility in connection with the San Bruno accident on behalf of approximately 420 plaintiffs. The lawsuits seek compensation for personal injury and property damage, and other relief, including punitive damages. These cases have been coordinated and assigned to one judge in the San Mateo County Superior Court. As of October 26, 2012, approximately 70 plaintiffs have settled their claims. The trial date for the first group of the remaining plaintiffs is currently scheduled for January 2, 2013. PG&E Corporation and the Utility have filed a motion to dismiss the remaining plaintiffs' claims for punitive damages based upon a lack of evidence to support such claims. The court has set a hearing date for October 29, 2012 to consider the motion.

At September 30, 2012, the Utility has recorded a cumulative charge of $455 million for estimated third-party claims related to the San Bruno accident, including an $80 million charge made during the second quarter of 2012, primarily to reflect settlements and information exchanged by the parties during the settlement and discovery process. The Utility estimates it is reasonably possible that it may incur as much as an additional $145 million for third-party claims, for a total possible loss of $600 million. PG&E Corporation and the Utility are unable to estimate the amount (or range of amounts) of reasonably possible losses associated with punitive damages, if any, related to these matters. The Utility has publicly stated that it is liable for the San Bruno accident and will take financial responsibility to compensate all of the victims for the injuries they suffered as a result of the accident.

Additionally, the Utility has liability insurance from various insurers who provide coverage at different policy limits that are triggered in sequential order or “layers.” Generally, as the policy limit for a layer is exhausted, the next layer of insurance becomes available. The aggregate amount of this insurance coverage is approximately $992 million in excess of a $10 million deductible. At September 30, 2012, the Utility has recognized cumulative insurance recoveries of $234 million, including $99 million and $135 million during the three and nine months ended September 30, 2012. Although the Utility believes that a significant portion of costs incurred for third-party claims relating to the San Bruno accident will ultimately be recovered through its insurance, it is unable to predict the amount and timing of future insurance recoveries.

On August 23, 2012, a complaint was filed in the San Francisco Superior Court against PG&E Corporation and the Utility (and other unnamed defendants) by individuals who seek certification of a class consisting of all California residents who were customers of the Utility between 1997 and 2010, with certain exceptions. The plaintiffs allege that the Utility collected more than $100 million in customer rates from 1997 through 2010 for the purpose of various safety measures and operations projects but instead used the funds for general corporate purposes such as executive compensation and bonuses. To state their claims, the plaintiffs cited the CPSD's January 2012 investigative report that alleged, from 1996 to 2010, the Utility spent less on capital expenditures and operations and maintenance expense for its natural gas transmission operations than it recovered in rates, by $95 million and $39 million, respectively. The CPSD recommended that the Utility should use such amounts to fund future gas transmission expenditures and operations. (See the 2011 Annual Report.) Plaintiffs allege that PG&E Corporation and the Utility engaged in unfair business practices in violation of Section 17200 of the California Business and Professions Code (“Section 17200”) and claim that this violation also constitutes a violation of California Public Utilities Code Section 2106 (“Section 2106”), which provides a private right of action for violations of the California constitution or state laws by public utilities. Plaintiffs seek restitution and disgorgement under Section 17200 and compensatory and punitive damages under Section 2106.

PG&E Corporation and the Utility contest the plaintiffs' allegations. On October 9, 2012, PG&E Corporation and the Utility requested the court to dismiss the complaint on the grounds that the CPUC has exclusive jurisdiction to adjudicate the issues raised by the plaintiffs' allegations. In the alternative, PG&E Corporation and the Utility have requested that the court order the plaintiffs to delay proceeding on the complaint until the CPUC investigations described above are concluded. The court has set a hearing for December 17, 2012. Due to the early stage of this proceeding, PG&E Corporation and the Utility are unable to estimate the amount (or range of amounts) of reasonably possible losses that may be incurred in connection with this matter.

Under the Nuclear Waste Policy Act of 1982, the DOE and electric utilities with commercial nuclear power plants were authorized to enter into contracts under which the DOE would be required to dispose of the utilities' spent nuclear fuel and high-level radioactive waste by January 1998, in exchange for fees paid by the utilities. The DOE has been unable to meet its contractual obligation with the Utility to dispose of nuclear waste from the Utility's two nuclear generating units at Diablo Canyon and its retired nuclear facility at Humboldt Bay (“Humboldt Bay Unit 3”). As a result, the Utility constructed an interim dry cask storage facility to store spent fuel at Diablo Canyon through at least 2024, and a separate facility at Humboldt Bay. The Utility and other nuclear power plant owners sued the DOE to recover the costs that they incurred to construct interim storage facilities for spent nuclear fuel.

On September 5, 2012, the U.S. Department of Justice (“DOJ”) and the Utility executed a settlement agreement that awarded the Utility $266 million for spent fuel storage costs incurred through December 31, 2010. At September 30, 2012, this amount was recorded as a receivable in PG&E Corporation's and the Utility's Condensed Consolidated Financial Statements. The agreement also allows the Utility to submit annual claims to recover costs incurred in 2011, 2012 and 2013, which the Utility estimates to be $25 million per year. Amounts recovered from the DOE will be refunded to customers through rates in future periods. The agreement does not address costs incurred for spent fuel storage after 2013 and such costs could be the subject of future litigation. Considerable uncertainty continues to exist regarding when and whether the DOE will meet its contractual obligation to the Utility and other nuclear power plant owners to dispose of spent fuel.

The Utility has several types of nuclear insurance for the two nuclear generating units at Diablo Canyon and Humboldt Bay Unit 3. The Utility has insurance coverage for property damages and business interruption losses as a member of Nuclear Electric Insurance Limited (“NEIL”). NEIL is a mutual insurer owned by utilities with nuclear facilities. NEIL provides property damage and business interruption coverage of up to $3.2 billion per incident ($2.7 billion for property damage and $490 million for business interruption) for Diablo Canyon. In addition, NEIL provides $131 million of property damage insurance for Humboldt Bay Unit 3. Under this insurance, if any nuclear generating facility insured by NEIL suffers a catastrophic loss, the Utility may be required to pay an additional premium of up to $44 million per one-year policy term. NRC regulations require that the Utility's property damage insurance policies provide that all proceeds from such insurance be applied, first, to place the plant in a safe and stable condition after an accident and, second, to decontaminate the plant before any proceeds can be used for decommissioning or plant repair.

NEIL policies also provide coverage for damages caused by acts of terrorism at nuclear power plants. Certain acts of terrorism may be “certified” by the Secretary of the Treasury. If damages are caused by certified acts of terrorism, NEIL can obtain compensation from the federal government and will provide up to its full policy limit of $3.2 billion for each insured loss. In contrast, NEIL would treat all non-certified terrorist acts occurring within a 12-month period against one or more commercial nuclear power plants insured by NEIL as one event and the owners of the affected plants would share the $3.2 billion policy limit amount.

Under the Price-Anderson Act, public liability claims that arise from nuclear incidents that occur at Diablo Canyon, and that occur during the transportation of material to and from Diablo Canyon are limited to $12.6 billion. As required by the Price-Anderson Act, the Utility purchased the maximum available public liability insurance of $375 million for Diablo Canyon. The balance of the $12.6 billion of liability protection is provided under a loss-sharing program among utilities owning nuclear reactors. The Utility may be assessed up to $235 million per nuclear incident under this program, with payments in each year limited to a maximum of $35 million per incident. Both the maximum assessment and the maximum yearly assessment are adjusted for inflation at least every five years. The next scheduled adjustment is due on or before October 29, 2013.

The Price-Anderson Act does not apply to public liability claims that arise from nuclear incidents that occur during shipping of nuclear material from the nuclear fuel enricher to a fuel fabricator or that occur at the fuel fabricator's facility. Such claims are covered by nuclear liability policies purchased by the enricher and the fuel fabricator, as well as by separate supplier's and transporter's (“S&T”) insurance policies. The Utility has a S&T policy that provides coverage for claims arising from some of these incidents up to a maximum of $375 million per incident.

PG&E Corporation retains a guarantee related to certain obligations of its former subsidiary, Replace National Energy & Gas Transmission, Inc. (“NEGT”), that were issued to the purchaser of an NEGT subsidiary company in 2000. PG&E Corporation's primary remaining exposure relates to any potential environmental obligations that were known to NEGT at the time of the sale but not disclosed to the purchaser, and is limited to $150 million. PG&E Corporation has not received any claims nor does it consider it probable that any claims will be made under the guarantee. PG&E Corporation believes that if it were required to satisfy its obligations under this guarantee, any required payments would not have a material impact on its financial condition, results of operations, or cash flows.

The Utility has been, and may be required to pay for environmental remediation at sites where it has been, or may be, a potentially responsible party under federal and state environmental laws. These sites include former manufactured gas plant (“MGP”) sites, power plant sites, gas gathering sites, sites where natural gas compressor stations are located, and sites used by the Utility for the storage, recycling, or disposal of potentially hazardous substances. 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.

Given the complexities of the legal and regulatory environment and the inherent uncertainties involved in the early stages of a remediation project, the process for estimating remediation liabilities is subjective and requires significant judgment. The Utility records an environmental remediation liability when site assessments indicate that remediation is probable and the Utility can reasonably estimate the loss or a range of probable amounts. The Utility records an environmental remediation liability based on the lower end of the range of estimated probable costs, unless an amount within the range is a better estimate than any other amount. Amounts recorded are not discounted to their present value.

The CPUC has authorized the Utility to recover most of its environmental remediation costs through various ratemaking mechanisms, subject to exclusions for certain sites, such as the Hinkley natural gas compressor site, and subject to limitations for certain liabilities such as amounts associated with fossil fuel-fired generation facilities formerly owned by the Utility. At September 30, 2012, the Utility expected to recover $550 million through these ratemaking mechanisms. The Utility also recovers environmental remediation costs from insurance carriers and from other third parties whenever possible. Amounts collected in excess of the Utility's ultimate obligations may be subject to refund to customers through rates.

The Utility's remediation and abatement efforts at the Hinkley site are subject to the regulatory authority of the California Regional Water Quality Control Board, Lahontan Region (“Regional Board”). The Regional Board has issued several orders directing the Utility to implement interim remedial measures to reduce the mass of the underground plume of hexavalent chromium, monitor and control movement of the plume, and provide replacement water to affected residents.

In June 2012, the Regional Board issued an amended cleanup and abatement order to allow the Utility to implement a voluntary whole house water replacement program for approximately 300 resident households located within or near the chromium plume boundary. Eligible residents were given until October 15, 2012 to decide whether to accept a replacement water supply or have the Utility purchase their properties, or alternatively not participate in the program. The majority of eligible residents opted to accept the Utility's offer to purchase their property. The Utility is required to complete implementation of the whole house water replacement systems by August 31, 2013. The Utility will maintain and operate the whole house replacement systems for five years or until the State of California has adopted a drinking water standard specifically for hexavalent chromium at which time the program will be evaluated.

In August 2012, the Regional Board issued a draft environmental impact report (“EIR”) that evaluated several alternatives for remediating groundwater contamination using a combination of different remedial methods, including using pumped groundwater from extraction wells to irrigate agricultural land and in-situ treatment of the contaminated water. The Utility expects that the Regional Board will consider certification of the final EIR in 2013.

At September 30, 2012, $227 million was accrued in PG&E Corporation's and the Utility's Condensed Consolidated Balance Sheets for estimated undiscounted future remediation costs associated with the Hinkley natural gas compressor site, compared to $149 million accrued at December 31, 2011. The increase primarily reflects the Utility's best estimate of costs associated with providing water replacement systems to eligible residents or purchasing property from eligible residents, as described above. Remediation costs for the Hinkley natural gas compressor site are not recovered from customers.

Future costs will depend on many factors, including the Regional Board's certification of the final EIR, the levels of hexavalent chromium the Utility is required to use as the standard for remediation, the Utility's required time frame for remediation, and adoption of a final drinking water standard currently under development by the State of California, as mentioned above. As more information becomes known regarding these factors, estimates and assumptions regarding the amount of liability incurred may be subject to further changes. Future changes in estimates may have a material impact on PG&E Corporation's and the Utility's financial condition, results of operations, and cash flows.

The Utility's remediation and abatement efforts at the Topock site are subject to the regulatory authority of the California Department of Toxic Substances Control (“DTSC”) and the U.S. Department of the Interior (“DOI”). As directed by the DTSC, the Utility has implemented interim remediation measures, including a system of extraction wells and a treatment plant designed to prevent movement of a hexavalent chromium plume toward the Colorado River. The DTSC has certified the final EIR and approved the Utility's final remediation plan for the groundwater plume, under which the Utility will implement an in-situ groundwater treatment system to convert hexavalent chromium into a non-toxic and non-soluble form of chromium. The Utility has completed the preliminary design stage for implementing the final groundwater remedy and plans to submit its intermediate design plan to the DTSC and DOI in January 2013 and a final plan for approval in late 2013. In developing its intermediate plan, the Utility is currently evaluating input received from regulatory agencies and other stakeholders, exploring potential sources of fresh water to be used as part of the remedy, and performing other engineering activities necessary to complete the remedial design.

At September 30, 2012, $236 million was accrued in PG&E Corporation's and the Utility's Condensed Consolidated Balance Sheets for estimated undiscounted future remediation costs associated with the Topock site, compared to $218 million accrued at December 31, 2011. As the Utility completes its remedial design plan and more information becomes known regarding the extent of work to be performed to implement the final groundwater remedy, estimates and assumptions regarding the amount of liability incurred may be subject to change. The Utility expects to recover 90% of its remediation costs for the Topock site from customers. Future changes in estimates could have a material impact on PG&E Corporation's and the Utility's future financial condition.

Although the Utility has provided for known environmental obligations that are probable and reasonably estimable, the Utility's undiscounted future costs could increase to as much as $1.7 billion (including amounts related to the Hinkley and Topock natural gas compressor sites discussed above) if the extent of contamination or necessary remediation is greater than anticipated or if the other potentially responsible parties are not financially able to contribute to these costs, and could increase further if the Utility chooses to remediate beyond regulatory requirements. The Utility may incur actual costs in the future that are materially different than this estimate and such costs could have a material impact on PG&E Corporation's and the Utility's results of operations during the period in which they are recorded.

In 2008, PG&E Corporation began participating in the Compliance Assurance Process (“CAP”), a real-time Internal Revenue Service (“IRS”) audit intended to expedite resolution of tax matters. The CAP audit culminates with a letter from the IRS indicating its acceptance of the return. The IRS partially accepted the 2008 return, withholding two matters for further review. In December 2010, the IRS accepted the 2009 tax return without change. In September 2011, the IRS partially accepted the 2010 return, withholding two matters for further review. In September 2012, the IRS partially accepted the 2011 return, withholding several matters for future review.

The most significant of the matters withheld for further review relates to a tax accounting method change filed by PG&E Corporation to accelerate the amount of deductible repairs. In the fourth quarter 2011, the IRS agreed to allow PG&E Corporation to file claims for 2008-2010 for the repairs method change. The IRS has not completed its review of these claims.