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Mindy Lubber
Peter A. Darbee

To Our Stakeholders:

Our business today operates in a world of relentless and real-time change as we approach the second decade of the 21st century. From shifts in the global climate to evolving economic and demographic trends in our local communities, we live and work in an environment that constantly challenges us to think anew about our customers, communities and responsibilities as a company.

We embrace these changes. As a company that aspires to be the leading utility in the United States, our long-term success depends on us staying on top of—or ahead of—these transformative waves, which roll in each and every day. We do this, in part, by always reminding ourselves that true leadership has to be sustainable leadership.

To us, sustainable leadership means doing the big things, small things—and the right things—that will help ensure that PG&E remains relevant, vibrant and connected to all of our stakeholders for the next quarter of a century, not just the next quarter.

Our report this year illustrates some of the many ways we are thinking and working outside of the box, and outside of our northern and central California service area, as we strive to fulfill global responsibilities and meet our ethical obligations to take care of the world around us.

This accountability starts with our 15 million customers, nearly 20,000 employees, investors, regulators, partners and communities within California, which is now the sixth-largest economy on the planet. It ultimately extends to everyone who shares PG&E's interest in ensuring a clean, secure energy future—from national policymakers to industry peers at home and even overseas.

As a utility, we also believe strongly that our stakeholders are entitled to high expectations of us. We enjoy a unique relationship with customers and communities by virtue of our franchise to serve a given area and the promise of an opportunity to earn a fair return for our investors. This is a privilege, and we accept that it requires a readiness to be held to a higher standard than other companies who operate in a different environment.

Even as we accept this responsibility and willingly confront the issues that are most critical to us and our stakeholders, it is clear we can't resolve every challenge on our own. That's why, wherever possible, we seek solutions together with partners who are as passionate and committed as we are.

Last year, for example, PG&E accepted an invitation to be a member of Ceres, a leading national network of investors, environmental organizations and other public interest groups working to address sustainability challenges such as global climate change. More recently, we joined a handful of the nation's leading companies and environmental organizations to form the U.S. Climate Action Partnership and call for federal action to reduce greenhouse gas emissions.

Other examples of partners include Habitat for Humanity, with whom we work to install solar energy systems in affordable housing, or the Red Cross, which is working with PG&E to prepare communities in the Bay Area to weather a natural disaster. Without partners like these, we'd be far less effective in achieving our long-term goals as a company.

The basis for all of our partnerships is shared values. We may operate in a complex world today, but at PG&E we believe the bottom line isn't that complicated; if we live by our values, we'll create real value for employees, customers, communities, partners and investors.

Examples of this are abundant across our business. Our values are driving new investments in our communities, through increased charitable support, which reached its highest level ever last year. They are driving us to significantly improve our performance in areas like supplier diversity, where in 2006 we exceeded our target for the first time since 2002. They are driving increased transparency around corporate governance, where third-parties consistently rank us among the best in the industry.

They are also driving us to be more aggressive than ever in our efforts on behalf of the environment.

Over 50 percent of the electricity we deliver to customers today comes from sources that emit no greenhouse gases. We have also helped Californians become the most energy efficient consumers in the nation. A leader in energy efficiency since the 1970’s, we’ve worked with our customers to achieve significant cumulative lifecycle energy and cost savings, on the order of $9 billion, and prevent approximately 125 million tons of carbon dioxide from entering the atmosphere. In 2006, PG&E began a new chapter by launching a three-year, $1 billion customer energy efficiency commitment—the largest such program of its kind by a U.S. utility.

By continuing to succeed in these efforts, we'll be able to generate greater environmental and economic security for our customers and communities—another way we define corporate responsibility.

With that in mind, we are investing prudently and significantly in this new energy economy. Among other efforts, we're working with technology companies and entrepreneurs on innovative strategies to advance and commercialize energy efficiency, renewable energy technologies; we're actively hiring a diverse group of the best and brightest to work on these challenges; we're engaging with the transportation sector through our support of plug-in hybrid electric vehicles and other clean air vehicle strategies; and we're partnering with companies in the manufacturing and retailing sectors to establish and promote energy-efficiency standards.

These efforts are not only the right thing for customers, they are keys to achieving our vision of sustained and sustainable leadership in the industry.

As we have acknowledged, as proud as we are of the progress we are making, we are not there yet. This report is as much an opportunity for us to openly and honestly assess the areas on which we need to continue working as it is to highlight accomplishments. In that spirit, we are redoubling efforts in areas like employee safety, where our performance falls short of where we aim to be. We're also continuing to focus on fostering diversity within our leadership.

Lastly, we need your engagement and feedback in order to have an open and two-way dialogue. Please let us know what you think of this report and our overall performance. Speaking up in the name of continuous improvement is your responsibility; delivering on the promises we've made is PG&E's responsibility. Together, I am confident we can make the world better for all of our stakeholders.


Sincerely,

Peter A. Darbee
Chairman of the Board, CEO and President, PG&E Corporation