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High Standards and Clear Values Form the Foundation of Leadership

Integrity is the foundation of a responsible company, and a clear commitment to compliance and ethics is an essential element of corporate integrity. PG&E is committed to acting with integrity and aims to set the industry standard for complying with the laws and regulations that govern our business. To achieve this, PG&E has an integrated compliance program that works with all of our operating groups. This is facilitated by the Compliance and Ethics department, which reports to PG&E Corporation's Chief Risk and Audit Officer.

The Compliance and Ethics department provides an infrastructure that enables PG&E's employees to fully comply with all applicable laws, regulations and PG&E policies and standards, and to adhere to high ethical standards in every business decision. In concert with other departments and leadership throughout the company, Compliance and Ethics is providing employees with a clear sense of the values and behaviors critical to achieving PG&E's vision of being the leading utility in the United States. PG&E's values are presented above and featured throughout this report.

Senior leaders at PG&E introduced the values in 2005 through an extensive outreach program with employees. Personal conduct expectations are communicated through our values and annual compliance and ethics training. Our Compliance and Ethics department develops new training each year to address our employees' needs and to respond to their suggestions. In 2006, almost 100 percent of employees completed the annual compliance and ethics training, and nearly 95 percent of those targeted to complete our Business Conduct Questionnaire (BCQ) did so.

PG&E's annual compliance and ethics training is typically conducted in small groups so as to stimulate discussion and share experiences. The trainings are facilitated and are supported by a video created by the Compliance and Ethics department that portrays various compliance or ethical dilemmas that employees may face.

The annual completion of the BCQ is one way in which employees support the company's commitment to ensure that our business decisions and practices reflect high ethical and safety standards, follow our policies and comply fully with all applicable laws and regulations. The BCQ has questions that relate to employee conduct standards in the Code of Conduct Handbook. Completing the BCQ is mandatory for all management employees.

In addition, PG&E's Compliance and Ethics department has produced handbooks on major topics that require detailed knowledge with regard to how to act and work responsibly. Examples include:

Code of Conduct: Standards for Personal Conduct and Business Decisions
Protecting the Environment: An Overview of Environmental Laws
Insider Trading: An Overview of Laws and Corporate Policies
Working With Government Officials: Compliance with Political Laws

In 2006, we revised our Code of Conduct Handbook, which was provided to employees in 2007 and is available at our web site. The handbook outlines our core values, describes our standards of conduct and addresses key regulatory and compliance requirements.

Just as we are committed to ethical business conduct and compliance with applicable laws, regulations and policies, we appreciate and expect equal commitment from our vendors and contractors. For additional information, please visit our web site to view PG&E's Contractor, Consultant and Supplier Code of Conduct.

In addition to the publications, PG&E has identified a person or persons with expertise in each area who is responsible for ensuring compliance with all applicable laws and regulations as they pertain to each issue. For example, PG&E has a manager for political resources, who has the expertise to answer questions and provide guidance to other employees and who is responsible for ensuring that PG&E is in compliance with all state and federal laws surrounding political contributions and management of the company's EnergyPAC.

Finally, we provide opportunities for employees to ask questions and report questionable activities. PG&E's Compliance and Ethics Helpline is available to employees, contractors and customers 24 hours a day. It handled 461 calls in 2006, which is up slightly from approximately 450 in 2005. Calls are handled confidentially, and callers can remain anonymous.