3. Discussion

The principal amount, form and terms and conditions of each series of Debt Securities will be determined by PG&E's board of directors or management according to market conditions at the time of sale or issuance. The Debt Securities may bear a fixed, floating or variable rate of interest and may be issued at par or with an original issue discount or premium. Preferred securities may have either mandatory or optional redemption features. PG&E may issue Debt Securities directly or may issue them through an affiliate that will in turn lend or otherwise transfer the proceeds to or for the benefit of PG&E.

The types of Debt Securities that PG&E proposes to issue are similar to those authorized in Decision (D.) 06-06-019, dated June 16, 2006. Those Debt Securities detailed in PG&E's application consist of:

1. Secured Debt Securities in the form of First Mortgage Bonds.

2. Unsecured Debt Securities such as debentures and notes.

3. Overseas Indebtedness sold to foreign investors that would be denominated in U.S. dollars or foreign currencies.

4. Preferred Securities issued by a subsidiary.

5. Foreign Currency Denominated Securities.

6. Medium-term Notes.

7. Direct Loans obtained from financial institutions such as banks and insurance companies.

8. Accounts Receivable Financing.

9. Variable-Rate Debt based on short-term interest rate indices, bankers' acceptances, PG&E's credit ratings, or other factors.

10. Preferred Stock.

PG&E also seeks authority to issue hybrid securities. Hybrid securities are securities that have characteristics of both debt and equity securities. The advantage of these securities over a traditional mix of debt and equity financing is that based on recent guidance by the Internal revenue Service and rating agencies, most new issuances are structured such that the dividends are tax-deductible to the issuer and the securities are treated, in part, like equity by the rating agencies.

Hybrid securities may be issued as subordinated debt directly to the public or structured as a trust preferred security, with PG&E issuing subordinated debt to a subsidiary, generally in the form of a trust, and the trust issuing preferred securities to the public. The terms of hybrid securities may include, but will not be limited to: (i) restrictive redemption provisions, including, but not limited to, capital replacement provisions, (ii) interest rates which may be fixed, floating, adjustable, deferred or which may be set by a market auction procedure, (iii) mandatory sinking funds, and (iv) such other provisions as PG&E may deem appropriate in connection with its issuance and sale of hybrid securities. Hybrid securities may be registered with the Securities and Exchange Commission and may be listed on a stock exchange. Hybrid securities were previously approved for use by Southern California Edison Company pursuant to D.07-05-018.

PG&E has estimated its requirements for issuance of long-term debt securities and preferred stock based largely on financing needs driven by capital expenditure forecast from 2008 through 2011. The estimated requirements included uses of funds such as capital expenditures and maturing debt obligations, as well as sources of funds such as cash flow from operations. The current forecast of annual capital expenditures averages approximately $3.6 billion through 2011. These expenditures include infrastructure replacements and upgrades to gas and electric transmission and distribution facilities, as well as to PG&E's retained generation assets. Not included in the forecast are additional generation facilities that PG&E may build rather than acquiring through power purchase contracts, new generation or transmission projects that may be required to meet renewable portfolio or greenhouse gas standards, and expansion of its gas pipeline infrastructure to connect to new gas supplies such as liquefied natural gas.

PG&E estimated that it will need approximately $5.7 billion in long-term debt between 2008 and 2011, of which $600 million has been issued to date. This need is driven by planned funding for capital expenditures as well as by the potential need to reissue $454 million in tax-exempt bonds that PG&E recently repurchased due to increased interest rates caused by the turmoil in the auction-rate securities market. PG&E's $1.7 billion long-term debt currently authorized but unissued is insufficient to meet its ongoing capital spending requirements, replace maturing debt, and redeem debt and preferred stock. Hence, PG&E seeks authorization to issue $4.0 billion of Debt Securities to provide sufficient flexibility to enable it to meet its financial and service obligations through 2011.

PG&E expects that it will not use more than $3,046,450,000 of the proposed $4 billion financing proceeds for construction expenditures and acquisition of property or to reimburse PG&E for money it has expended for those purposes. The remaining $953,550,000 of proposed financing proceeds is expected to be used for the retirement, refunding or reissuance of securities previously issued.