Working Collaboratively and Creatively to Address Climate Change

PG&E is committed to leading by example when it comes to climate change. That means more than just minimizing the greenhouse gas emissions from our operations. It also means maximizing the opportunity we have to establish responsible policies and programs that address global climate change.

We recognize that climate change threatens to significantly alter the physical environment for this and future generations. We also recognize that the electric and natural gas industry is a significant contributor to greenhouse gas emissions and has a responsibility to find solutions and take action. This approach to climate change was a driver in 2006, when we took the following actions:

We believe that investors, policymakers, stakeholders and customers need to understand how we view the issue of climate change and the steps we are taking to mitigate our emissions and identify emerging business trends; this will allow them to make informed decisions about PG&E. Toward that end, we continued our participation in the California Climate Action Registry (Registry) and, in 2006, became the state's first investor-owned utility to certify our entity-wide greenhouse gas emissions for all six greenhouse gases (CO₂, methane, SF₆, N₂O, HFCs, and PFCs). (Please see the chart below for greenhouse gas emissions by source category.) Also, in 2006, we certified the CO₂ emissions rate associated with our 2005 electric delivery mix—489 lbs CO₂/MWh.

PG&E also worked cooperatively with the Registry to develop a protocol for measuring and reporting emission reductions associated with various types of forestry projects. These protocols will be used to support PG&E's ClimateSmart program, which provides our customers with the opportunity to make their energy use climate neutral. PG&E also began work with the Registry to develop a protocol for measuring and reporting on emission reductions associated with the capture and use of methane from dairy cattle manure. Methane from dairy cattle manure provides significant promise as a form of bio-gas for use in our pipeline system.

In addition to understanding and reporting our emissions sources to the Registry, we also took steps to more broadly articulate our approach to climate change. For example, PG&E received an invitation from the Carbon Disclosure Project (CDP) in 2006 and was pleased to provide a submission. The CDP serves as an information clearinghouse on what companies are doing to mitigate the risk associated with climate change as well as to identify emerging business opportunities. PG&E plans to participate again in 2007.

Finally, PG&E developed and released a document discussing our views on climate change, the process we undertook in developing these views, and our proposals for moving the U.S. forward and into a leadership role on this issue. The document, Global Climate Change: Risks, Challenges, Opportunities and a Call to Action, was made available on our Web site (www.pgecorp.com), mailed to all our employees and distributed broadly to our stakeholders—including elected officials, regulators, customers, investors, community leaders and other interested parties.

PG&E has one of the cleanest electric-generation operations in the industry. By making cost-effective energy efficiency a priority, we first look to meet our customers' energy needs by utilizing the ultimate emissions-free resource. Also, with significant hydroelectric and nuclear resources, the CO₂ emissions rate for our generating operations is now among the lowest of any utility in the country. When factoring in the power we purchase from other sources—a growing portion of which comes from California-eligible renewable resources—the emissions rate associated with the electricity we deliver to our customers is more than 60 percent less than the average among utilities nationwide.

In addition to the steps we are taking to ensure some of the lowest greenhouse gas emitting power in the country, we are also working to reduce our overall emissions footprint.

Here are some of the actions that PG&E is now taking; we believe these actions will continue to yield benefits in combating climate change and reducing energy consumption.

Continuing our participation in EPA's SF₆ Emission Reduction Partnership; this program has helped us reduce our SF₆ absolute emissions by more than 76 percent since 1998.

Continuing our active participation in EPA's Natural Gas STAR Partnership; this program has helped us reduce the methane leak rate associated with our natural gas pipeline operations and enabled us to avoid the release of more than 14,000 tons of CO₂-equivalent in 2006. As part of this program, we are sharing best practices associated with cross compression, a process by which natural gas is transferred from one pipeline to another during large pipeline construction and repair projects.

Leveling the playing field for low-emissions sources by analyzing the greenhouse gas emission implications of competitive bids for long-term electric contracts. This approach monetizes the emissions associated with the electricity so we can determine the relative financial risks associated with the greenhouse gas emissions from various generation sources.

Finally, in addition to these activities, PG&E is currently assessing the impacts of California Assembly Bill 32 (AB 32), the Global Warming Solutions Act, on our current and future electric delivery mix, as well as other aspects of our business. AB 32 requires California to reduce statewide greenhouse gas emissions to 1990 levels by 2020. PG&E is actively participating in AB 32's implementation process and will take the necessary steps to meet the reduction targets established by the legislation.

In 2006, PG&E received approval to implement ClimateSmart—a new and innovative voluntary program that will provide customers with the option to neutralize greenhouse gas emissions associated with their energy use, thereby protecting California's environment and contributing to state and local efforts aimed at fighting climate change. ClimateSmart is scheduled to launch in summer 2007. Conceived and developed by a team of PG&E employees to provide additional, environmentally responsible products for our customers, ClimateSmart allows residential and business customers to sign up voluntarily and pay a small amount on their monthly utility bill based on energy usage; the payment will fund environmental projects aimed at removing CO₂ from the air. The amount removed from the air will equal the amount of greenhouse gases associated with the customer's energy use, thus making them "climate neutral".

PG&E anticipates that ClimateSmart will receive approximately $20 million in its first three years, and the goal is to remove two million tons of CO₂ from the atmosphere. This reduction would be the equivalent of taking 350,000 cars off the road for one year. PG&E will invest in a range of emission reduction projects, including conserving and restoring California's forests, and all reductions will be certified using rigorous criteria established by the Registry.

While we have worked cooperatively with local, state and federal partners to achieve significant greenhouse gas reductions and avoid emissions, we recognize that voluntary initiatives alone will not be enough. PG&E believes that effectively combating global climate change will take sustained and coordinated international action, cooperation and investment over the long term. To accomplish this, we believe that it is critical for the United States to take a leadership role and enact mandatory climate change legislation that is both environmentally effective and economically sustainable.

For example, PG&E is an active member of the Clean Energy Group, a coalition of progressive energy companies advocating a national, mandatory and market-based program to reduce greenhouse gas emissions. In the 109th Congress, the Clean Energy Group supported the Clean Air Planning Act, which would have established mandatory limits on CO₂ emissions from the power sector. Also, in 2006 PG&E participated with 10 other leading businesses and four leading environmental nongovernmental organizations as part of the U.S. Climate Action Partnership to develop a set of policy principles and a legislative framework for a federal, market-based, mandatory climate change program.

And, while we prefer a national approach to addressing climate change, we also recognize the important role that states can play—in terms of acting as a catalyst for federal legislation, bringing forth innovative ideas and approaches to tackle the complexities of the issue, and making progress toward combating climate change. That is why we worked constructively with the California legislature and the Administration to enact AB 32, the Global Warming Solutions Act, and were the first major utility to support its passage. We also supported passage of SB 1368, which requires that all power sold to utilities in the state under long-term contracts meet a greenhouse gas emissions performance standard that is equivalent to that of an efficient, combined-cycle natural gas plant. Implementation of these two pieces of legislation will ensure that California continues on a path of reducing its overall carbon footprint and challenging its businesses to do the same.

PG&E is working cooperatively with the CPUC, the California Air Resources Board and the California EPA to implement these groundbreaking pieces of legislation in a way that maximizes environmental effectiveness, minimizes costs, provides for economic opportunities and serves as a model for federal legislation.

As part of PG&E's Enterprise Risk Management strategy, we plan to take an integrated, structured approach to evaluating the projected impacts of climate change on our business and the communities we serve—from the threat of more frequent and intense heat waves to reductions in summer snow pack in the Sierra Nevada mountain range, which supplies the state's hydroelectric system. This analysis will be incorporated into our overall risk management program, which is managed by PG&E Corporation's Chief Risk and Audit Officer.