OVERVIEW

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 ("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. PG&E Corporation became the holding company of the Utility and its subsidiaries on January 1, 1997. Both PG&E Corporation and the Utility are headquartered in San Francisco, California.

The Utility served approximately 5.1 million electricity distribution customers and approximately 4.3 million natural gas distribution customers at September 30, 2008. The Utility had approximately $39 billion in assets at September 30, 2008 and generated revenues of approximately $11 billion in the nine months ended September 30, 2008.

The Utility is regulated primarily by the California Public Utilities Commission ("CPUC") and the Federal Energy Regulatory Commission ("FERC"). The Utility generates revenues mainly through the sale and delivery of electricity and natural gas at rates set by the CPUC and the FERC. Rates are set to permit the Utility to recover its authorized "revenue requirements" from customers. Revenue requirements are designed to allow the Utility an opportunity to recover its reasonable costs of providing utility services, including a return of, and a fair rate of return on, its investment in utility facilities ("rate base"). Pending regulatory proceedings that could result in rate changes and affect the Utility's revenues are discussed in PG&E Corporation and the Utility's combined Annual Report on Form 10-K for the year ended December 31, 2007, which, together with the information incorporated by reference into such report, is referred to in this quarterly report as the "2007 Annual Report." Significant developments that have occurred since the 2007 Annual Report was filed with the Securities and Exchange Commission ("SEC") are discussed in this Quarterly Report on Form 10-Q.

This is a combined quarterly report of PG&E Corporation and the Utility, and includes separate Condensed Consolidated Financial Statements for each of these two entities. PG&E Corporation's Condensed Consolidated Financial Statements include the accounts of PG&E Corporation, the Utility, and other wholly owned and controlled subsidiaries. The Utility's Condensed Consolidated Financial Statements include the accounts of the Utility and its wholly owned and controlled subsidiaries which the Utility is required to consolidate under applicable accounting standards and variable interest entities for which the Utility absorbs a majority of the risk of loss or gain. This combined Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of PG&E Corporation and the Utility should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes to the Condensed Consolidated Financial Statements included in this quarterly report, as well as the MD&A, the audited Consolidated Financial Statements, and Notes to the Consolidated Financial Statements incorporated by reference in the 2007 Annual Report.

Summary of Changes in Earnings per Common Share and Net Income for the Three and Nine Months Ended September 30, 2008

For the three months ended September 30, 2008, PG&E Corporation's diluted earnings per common share ("EPS") was $0.83 compared to $0.77 for the same period in 2007. For the nine months ended September 30, 2008, PG&E Corporation's diluted EPS was $2.24 compared to $2.22 for the same period in 2007. PG&E Corporation's net income for the three months ended September 30, 2008 increased by approximately $26 million, or 9%, to $304 million, compared to $278 million for the same period in 2007. For the nine months ended September 30, 2008, net income increased by approximately $18 million, or 2%, to $821 million, compared to $803 million for the same period in 2007.

The increase in diluted EPS and net income for the three months ended September 30, 2008 compared to the same period in 2007 is primarily due to the Utility's return on equity ("ROE") on higher authorized capital investments (representing a $22 million increase in net income as compared to the same period in the prior year). The increase in diluted EPS and net income for the nine months ended September 30, 2008 compared to the same period in 2007 is primarily due to the Utility's ROE on higher authorized capital investments (representing a $73 million increase in net income as compared to the same period in the prior year), partially offset by (1) higher storm and outage-related costs, largely due to severe winter weather that occurred in January 2008 (resulting in a $27 million decrease in net income as compared to the same period in the prior year), (2) increased operating and maintenance expenses associated with the natural gas system (resulting in a $17 million decrease in net income as compared to the same period in the prior year), and (3) increased refueling expenses at the Utility's Diablo Canyon nuclear generating facilities ("Diablo Canyon") resulting from an extended outage to replace the steam generators in one of the nuclear generating units (resulting in a $6 million decrease in net income as compared to the same period in the prior year).

PG&E Corporation and the Utility's results of operations and financial condition depend primarily on whether the Utility is able to operate its business within authorized revenue requirements, timely recover its authorized costs, and earn its authorized rate of return. A number of factors have had, or are expected to have, a significant impact on PG&E Corporation and the Utility's results of operations and financial condition, including:

· The Outcome of Regulatory Proceedings and the Impact of Ratemaking Mechanisms. The amount of the Utility's revenues and the amount of costs that the Utility is authorized to recover from customers are primarily determined through regulatory proceedings. Most of the Utility's revenue requirements are set based on its costs of service in proceedings such as the General Rate Case ("GRC") filed with the CPUC and transmission owner ("TO") rate cases filed with the FERC. Unlike the current GRC, which set revenue requirements for a four-year period (2007 through 2010), it is expected that the next GRC will set revenue requirements for the Utility's electric and natural gas distribution operations and electric generation operations for a three-year period (2011 through 2013). From time to time, the Utility also files separate applications requesting the CPUC or the FERC to authorize additional revenue requirements for specific projects, such as new power plants, gas or electric transmission facilities, installation of an advanced metering infrastructure, and reliability improvements. The Utility's revenues can also be affected by incentive ratemaking, such as the CPUC's customer energy efficiency shareholder incentive mechanism. The amount of incentives the Utility may receive and the amount of any reimbursement obligations the Utility may incur will depend on the level of energy efficiency savings actually achieved over the three-year program cycles (2006-2008 and 2009-2011). (See "Regulatory Matters" below.) Finally, the outcome of regulatory proceedings may also be affected by volatility in the prices of natural gas and electricity as these costs are passed through to customers in the form of higher rates.

· Capital Structure and Return on Common Equity. On May 29, 2008, the CPUC adopted a new three-year cost of capital mechanism to replace the CPUC's annual cost of capital proceeding. The Utility's current authorized capital structure, including a 52% common equity component, will be maintained through 2010. The Utility's current authorized cost of capital, including a ROE of 11.35% on its electric and natural gas distribution and electric generation rate base, will be maintained through 2010, unless the annual automatic adjustment mechanism established by the CPUC is triggered. The Utility can apply for an adjustment to either the capital structure or cost of capital sooner based on extraordinary circumstances. (See "Regulatory Matters" below.)

· The Ability of the Utility to Control Costs While Improving Reliability. The Utility's revenue requirements are primarily set based on forecasted operating expenses and capital expenditures. The Utility's revenue requirements are designed to allow the Utility to earn an ROE, as well as to recover depreciation, tax, and interest expense associated with authorized capital expenditures. Differences in the amount or timing of forecasted and actual operating expenses and capital expenditures can affect the Utility's ability to earn its authorized rate of return and the amount of PG&E Corporation's net income available for shareholders. The Utility anticipates that it will incur higher expenses than originally forecasted in the GRC to maintain the aging infrastructure of its electric and natural gas systems and to improve operating and maintenance processes. The Utility intends to continue its efforts to identify and implement initiatives to achieve operational efficiencies to create future sustainable cost-savings and to offset increased spending related to the natural gas system and the increasing cost of materials. (See "Results of Operations - Operating and Maintenance" below.) When capital is placed in service at a higher rate than forecasted, the Utility incurs associated depreciation, property tax, and interest expense. The Utility does not recover an ROE on the higher level of capital expenditures until added to rate base in future rate cases. The Utility's financial condition and results of operations will be impacted by the amount of revenue requirements it is authorized to recover, the amount and timing of its capital expenditures, and whether the Utility is able to manage its operating costs and capital expenditures within authorized levels.

· The Availability of Debt and Equity Financing. The Utility's needs for additional financing during 2008 and future years will be affected by the amount and timing of capital expenditures, as well as by the amount and timing of interest payments related to the remaining disputed claims that were made by electricity suppliers in the Utility's proceeding under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11"). (See Note 10 of the Notes to the Condensed Consolidated Financial Statements.) The Utility's ability to make scheduled principal and interest payments, refinance debt, fund operations, deposit collateral in connection with its natural gas and electricity procurement hedging contracts, and make planned capital expenditures, depends on the levels of its operating cash flow and access to the capital markets. The recent financial distress experienced at major financial institutions has caused significant disruption in the capital markets. Although the Utility continues to have access to the commercial paper markets, short-term interest rates have increased significantly. Interest rates on long-term debt also have increased. For example, the Utility's $600 million principal amount of 10-year senior notes issued on October 21, 2008 bear interest at 8.25% compared to the Utility's $700 million principal amount of 10-year senior notes issued in December 2007 and March 3, 2008 that bears interest at 5.625%. The timing and amount of PG&E Corporation's future equity contributions to the Utility will affect the timing and amount of any PG&E Corporation equity issuances and/or debt issuances which, in turn, will affect PG&E Corporation's results of operations and financial condition. (See "Liquidity and Financial Resources" below.)

In addition to the key factors discussed above, PG&E Corporation and the Utility's future results of operations and financial condition are subject to the risk factors discussed in the section entitled "Risk Factors" in the 2007 Annual Report and the section entitled "PART II Item 1A. Risk Factors" below.

This combined quarterly report on Form 10-Q, including the MD&A, 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, anticipated costs and savings associated with the Utility's efforts to identify and implement initiatives to achieve operational efficiencies and to create future sustainable cost-savings, estimated capital expenditures, estimated environmental remediation liabilities, estimated tax 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:

· the Utility's ability to manage capital expenditures and operating expenses within authorized levels and recover such costs through rates in a timely manner;

· the outcome of regulatory proceedings, including pending and future ratemaking proceedings 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 on 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 businesses;

· 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 Diablo Canyon, the occurrence of unplanned outages at Diablo Canyon, or the temporary or permanent cessation of operations at Diablo Canyon;

· whether the Utility can maintain the cost savings it has recognized from operating efficiencies it has achieved and identify and successfully implement additional sustainable cost-saving measures;

· whether the Utility incurs substantial unanticipated expense to improve the safety and reliability of its electric and natural gas systems;

· whether the Utility achieves the CPUC's energy efficiency targets and recognizes any incentives the Utility may earn in a timely manner;

· 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 new rules of the California Independent System Operator ("CAISO") 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 and liabilities in connection with litigation that are not recoverable through rates, from insurance, or from other third parties;

· the ability of PG&E Corporation, the Utility, and counterparties, to access capital markets and other sources of credit in a timely manner on acceptable terms, especially given the recent deteriorating conditions in the economy and financial markets;

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

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

· the impact of changes in federal or state tax laws, policies, or regulations.

For more information about the significant risks that could affect the outcome of these forward-looking statements and PG&E Corporation and the Utility's future financial condition and results of operations, see the discussion in the section entitled "Risk Factors" in the 2007 Annual Report and the section entitled "PART II Item 1A. Risk Factors" below. 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.

RESULTS OF OPERATIONS

        The table below details certain items from the accompanying Condensed
Consolidated Statements of Income for the three and nine months ended September
30, 2008 and 2007:

                                              Three Months Ended            Nine Months Ended
                                                 September 30,                September 30,
(in millions)                                 2008           2007          2008          2007
Utility
Electric operating revenues                $    2,880      $   2,574     $   8,039     $   7,107
Natural gas operating revenues                   794            705         2,946         2,714
  Total operating revenues                     3,674          3,279        10,985         9,821
Cost of electricity                             1,282            998         3,406         2,606
Cost of natural gas                               351            281         1,613         1,431
Operating and maintenance                         982            950         3,009         2,788
Depreciation, amortization, and
decommissioning                                  419            465         1,239         1,325
  Total operating expenses                     3,034          2,694         9,267         8,150
Operating income                                  640            585         1,718         1,671
Interest income                                    20             33            77           116
Interest expense                                 (170 )         (189 )        (528 )        (549 )
Other income (expense), net(1)                     (5 )           9            14            28
Income before income taxes                        485            438         1,281         1,266
Income tax provision                             167            159           421           458
Income available for common stock          $      318      $     279     $     860     $     808
PG&E Corporation, Eliminations and
Other(2)
Operating revenues                         $        -      $       -     $       -     $       -
Operating expenses                                 1              3             2             6
Operating loss                                     (1 )           (3 )          (2 )          (6 )
Interest income                                     3              3             5             9
Interest expense                                   (8 )           (7 )         (22 )         (22 )
Other expense, net                                (12 )           (2 )         (28 )          (6 )
Loss before income taxes                          (18 )           (9 )         (47 )         (25 )
Income tax benefit                                 (4 )           (8 )          (8 )         (20 )
Net loss                                   $      (14 )    $      (1 )   $     (39 )   $      (5 )
Consolidated Total
Operating revenues                         $    3,674      $   3,279     $  10,985     $   9,821
Operating expenses                             3,035          2,697         9,269         8,156
Operating income                                  639            582         1,716         1,665
Interest income                                    23             36            82           125
Interest expense                                 (178 )         (196 )        (550 )        (571 )
Other income (expense), net(1)                    (17 )           7            (14 )         22
Income before income taxes                        467            429         1,234         1,241
Income tax provision                             163            151           413           438
Net income                                 $      304      $     278     $     821     $     803

(1) Includes preferred stock dividend requirement as other expense.
(2) PG&E Corporation eliminates all intercompany transactions in consolidation.

Utility

The following presents the Utility's operating results for the three and nine months ended September 30, 2008 and 2007.

Electric Operating Revenues

The Utility provides electricity to residential, industrial, and small and large commercial customers through its own generation facilities and through power purchase agreements with third parties. In addition, the Utility relies on electricity provided under long-term contracts entered into by the California Department of Water Resources ("DWR") to meet a material portion of the Utility's customers' demand ("load"). The Utility's electric operating revenues consist of amounts charged to customers for electricity generation and procurement and for electric transmission and distribution services, as well as amounts charged to customers to recover the cost of public purpose programs, energy efficiency programs, and demand side management.

The following table provides a summary of the Utility's electric operating revenues:

                                                   Three Months Ended                       Nine Months Ended
                                                      September 30,                           September 30,
(in millions)                                   2008                2007                2008                2007
Electric revenues                            $     3,255         $     3,172         $     9,044         $     8,765
DWR pass-through revenues(1)                        (375 )              (598 )            (1,005 )            (1,658 )
Total electric operating revenues            $     2,880         $     2,574         $     8,039         $     7,107
Total electricity sales (in millions of
kWh)(2)                                          21,183              18,688               56,660             49,643

(1)These are revenues collected on behalf of the DWR for electricity allocated to the Utility's customers under contracts between the DWR and power suppliers, and are not included in the Utility's Condensed Consolidated Statements of Income.
(2)These volumes exclude electricity provided by DWR.

The Utility's electric operating revenues increased by approximately $306 million, or 12%, in the three months ended September 30, 2008 and approximately $932 million, or 13%, in the nine months ended September 30, 2008, compared to the same periods in 2007 mainly due to the following factors:

· Electricity procurement costs passed through to customers increased by approximately $291 million in the three months ended September 30, 2008 and approximately $798 million in the nine months ended September 30, 2008, primarily due to an increase in the volume of power purchased by the Utility following the DWR's termination of a power purchase contract in December 2007 and during the extended scheduled outage at Diablo Canyon earlier this year, and increases in purchased power prices. (See "Cost of Electricity" below.)

· Electric operating revenues to fund public purpose and energy efficiency programs increased by approximately $36 million in the three months ended September 30, 2008 and approximately $175 million in the nine months ended September 30, 2008 primarily due to an increase in expenses for these programs. (See "Operating and Maintenance" below.)

· Base revenue requirements increased by approximately $26 million in the three months ended September 30, 2008 and approximately $77 million in the nine months ended September 30, 2008, as a result of attrition adjustments as authorized in the 2007 GRC.

· Electric transmission revenues increased by approximately $13 million in the three months ended September 30, 2008 and approximately $40 million in the nine months ended September 30, 2008, primarily due to an increase in rates as authorized in the current TO rate case.

· Other electric operating revenues increased by approximately $22 million in the three months ended September 30, 2008 and approximately $70 million in the nine months ended September 30, 2008 primarily due to increases in revenues to recover costs related to the Diablo Canyon steam generator replacement project and revenues to fund the SmartMeterTM advanced metering project (see "Capital Expenditures" below for further discussion of SmartMeterTM).

The Utility's electric operating revenues for 2009 and 2010 are expected to increase as authorized by the CPUC in the 2007 GRC. The Utility's electric operating revenues for future years are also expected to increase as authorized by the FERC in the TO rate cases. In addition, the Utility expects to continue to collect revenue requirements related to CPUC-approved capital expenditures outside the GRC, including capital expenditures for the new Utility-owned generation projects and the SmartMeterTM advanced metering project. Revenues would also increase to the extent the CPUC approves the Utility's proposal for other capital projects. (See "Capital Expenditures" below.) Revenue requirements associated with new or expanded public purpose, energy efficiency, and demand response programs will also result in increased electric operating revenues. Finally, future electric operating revenues are impacted by changes in the Utility's electricity procurement costs as discussed under "Cost of Electricity" below.

Cost of Electricity

The Utility's cost of electricity includes electricity purchase costs, the cost of fuel used by its generation facilities, the cost of fuel supplied to other . . .