Fitch Places PG&E on Rating Watch Positive.

NEW YORK -- Fitch Ratings has placed the Issuer Default, senior unsecured and preferred ratings of Pacific Gas and Electric Company (PG&E) on Rating Watch Positive (RWP). PG&E's credit ratings are delineated below:

--Issuer Default Rating (IDR) 'BBB';

--Senior unsecured 'BBB+';

--Preferred 'BBB'.

Approximately $5.4 billion of debt and preferred securities are affected by the rating action. PG&E is a subsidiary of PG&E Corporation (PCG).

The rating action recognizes the constructive nature of the recently announced, non-unanimous settlement agreement in the company's pending general rate case (GRC). The settlement, which was filed with the California Public Utilities Commission (CPUC) yesterday, Aug. 21, 2006, is not binding on the commission. However, a final order consistent with the proposed settlement would likely result in favorable resolution of the RWP.

Opening briefs are expected in September 2006, an administrative law judge proposed decision in January 2007 and a final CPUC order in February 2007, retroactive to Jan. 1, 2007. The proposed settlement provides rate certainty through 2010, increasing rates $213 million in 2007, and includes attrition rate increases of $125 million in 2008, $160 in 2009 and $90 million in 2010.

The ratings and RWP reflect legislative and regulatory efforts to ensure the timely recovery of procurement and other costs incurred by PG&E following the energy crisis of 2000-2001. The improved regulatory/legislative environment in California is particularly important for PG&E given its dependence on wholesale power markets to meet its growing load requirements. The recent settlement and final CPUC approval of pension issues in PG&E's pending GRC is a constructive event, in Fitch's opinion.

The rating action also considers the strengthening trend in PG&E's credit metrics since emerging from bankruptcy protection in April 2004, manageable debt burden and strong operating cash flows. PG&E's funds from operations (FFO)-to-interest expense and debt-to-FFO was 5.0 times (x) and 3.2x, respectively, as of June 30, 2006. For the full year 2006, Fitch estimates FFO-to-interest and debt-to-FFO will approximate 5.5x and 4.2x. These ratios are above the target guideline levels for 'BBB' rated companies with similar business risk.

The primary concern for PG&E fixed-income investors is that a prolonged period of high and rising commodity prices will spur political resistance to full and timely recovery of rising procurement costs leading, in a worst case scenario, to a significant deterioration in creditworthiness. However, this fear is mitigated, in Fitch's opinion, by Assembly Bill (AB) 57, which requires upfront approval and timely recovery of investor-owned utility procurement costs and supportive regulatory actions implementing its provisions. Fitch notes that the CPUC administratively continued an AB57 requirement that adjusted rates if projected power procurement costs above or below amounts reflected in rates exceed 5% of trailing annual revenues, excluding amounts collected for California Department of Water Resources (DWR) purchased power. The AB57 mechanism lapsed Jan. 1, 2006. The commission action to extend the mechanism underscores, in Fitch's view, the more balanced regulatory environment currently in place in California.

The ratings and RWP also consider PG&E's status as a subsidiary of PCG. On the effective date of National Energy and Gas Transmission's (NEGT) plan of reorganization, PCG's ownership interest in NEGT was cancelled. As a result, utility operations now account for virtually all of the parent company's consolidated revenues, earnings and cash flows. PCG relies primarily on utility distributions to meet its obligations.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.