The effects of rate regulation are reflected in PGE's financial statements in accordance with SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Paragraph 5 of SFAS No. 71 lists three criteria (summarized below) which must exist in order to recognize certain assets and liabilities (termed "regulatory assets" and "regulatory liabilities"). We evaluate at least annually, and more frequently if facts or circumstances change, whether PGE should continue to apply the provisions of SFAS No. 71. As PGE continues to meet each of these criteria, such assets and liabilities are recognized in the Company's financial statements.

1. Rates for regulated services provided to customers are established by or subject to approval by an independent, third-party regulator.

PGE is subject to the jurisdiction of the Public Utility Commission of Oregon (OPUC), comprised of three members appointed by Oregon's governor. The OPUC approves PGE's retail prices and establishes conditions of utility service, ensuring that they are fair, non-discriminatory, and provide the Company an opportunity to earn a fair return on its investment, as required by Oregon law.

2. The regulated rates are designed to recover the specific Company's cost of providing the regulated services.

PGE's retail rates, as authorized by the OPUC, are designed to recover capitalized and ongoing costs associated with generation, transmission and distribution assets used to provide regulated service to customers. Oregon law (ORS 756.040) grants the OPUC authority to obtain for customers "adequate service at fair and reasonable rates" that provide adequate revenue both for operating expenses and capital costs of the utility, with an investment return that is commensurate with the corresponding risk and sufficient to ensure confidence in the financial integrity of the utility that allows it to maintain its credit and attract capital.

The OPUC approves tariffs and retail revenue requirements for Oregon utilities based upon the cost to serve retail customers, using a forecasted test year and the original cost of its accumulated investment in utility assets less accumulated depreciation ("rate base"). Although changes in such rates are subject to a formal ratemaking process, it is expected that the OPUC will continue to recognize all prudently-incurred costs and authorize rates that allow for the recovery of such costs, including an allowed rate of return on rate base. PGE's last general rate case decision in 2001, for the 2002 test period, was based upon this cost-of-service model.

In PGE's last general rate case, the OPUC approved a new Resource Valuation Mechanism (RVM) process by which base rates are adjusted annually for changes in projected power costs, including company generation and power purchase contracts, used to meet retail load requirements. The RVM utilizes a combination of market prices and the cost of the Company's resources to establish power costs and set prices for energy services, with approved price adjustments effective at the beginning of each succeeding calendar year. The initial RVM price adjustment became effective on January 1, 2003, with further adjustments effective on January 1st of 2004 and 2005; adjustments for the year 2006 are currently being finalized.

The RVM has enabled the Company to adjust customer prices on a more timely basis to reflect the forecasted variable cost of power for the following year. However, since retail prices are set on an annual basis, intra year fluctuations in energy sales, hydro output, plant availability, and power and fuel prices can impact the Company's earnings. In this regard, the Company has been working extensively with the OPUC Staff and other parties to develop a mechanism that would allow rate adjustments reflecting changes in intra year power costs caused by variations in hydro conditions, natural gas prices, and other factors during calendar years 2005 and 2006. Although a stipulation has been reached with the OPUC Staff, two major customer interest groups oppose the stipulation. An OPUC decision is expected by year-end 2005.

PGE continues to evaluate the need to align its general rate structure to sufficiently cover its operating costs. If there are significant variations between costs and retail rates, the Company will file (or the OPUC will request that the Company file) a general rate case to change its retail rates to more closely align with its operating costs. PGE is in the process of preparing a general rate case for consideration by the OPUC, which it currently plans to file in the first quarter of 2006.

3. In view of the demand for the regulated service and level of competition, it is reasonable to assume that rates can be charged to and collected from customers at levels that will recover the Company's costs.

PGE conducts retail electric operations exclusively in Oregon as a single integrated electric utility within a state-approved service area of approximately 4,000 square miles that includes 52 incorporated cities and a population of approximately 1.5 million (43% of the state's population). Growth in the number of retail customers has averaged about 10,000 over each of the last five years, and at December 31, 2004, PGE served approximately 767,000 retail customers. Although there is competition from alternative fuel suppliers of oil and natural gas in the residential and commercial space and water heating market, there is no retail competition from other electricity providers, other than that related to the state's customer choice program, as described below.

In 2002, Oregon implemented a partial electric customer choice program that provides commercial and industrial customers direct access to energy service suppliers as well as market price options. Stranded costs are not an issue here since the program further provides for a transition adjustment for non-residential customers that choose to purchase energy at market prices from investor-owned utilities or from energy service suppliers. Such charges and credits reflect the above-market or below-market costs, respectively, of energy resources owned or purchased by the utility and are designed to ensure that such costs or benefits do not unfairly shift to the utility's remaining energy customers. Under this program, PGE remains obligated to provide full ("bundled") service to all of its customers.

Since the program's implementation, participation has been limited. In 2004, seven customers were served by alternative energy suppliers, comprising approximately 4% of PGE's total retail load. PGE continues to deliver energy to these customers in return for unbundled transmission and distribution service charges that are set by the Federal Energy Regulatory Commission and the OPUC. A total of 46 commercial and industrial customers received service under PGE-supplied market price options in 2004, comprising less than 3% of total retail load. In 2005, participation in market price options comprises less than 1% of retail load. At this time, the large majority of PGE's customers continue to take service under rate tariffs determined by the cost of service. As a result, Oregon's customer choice program has not had a material impact on the Company's regulated operations and would, therefore, not be considered a separable portion of PGE's regulated retail business subject to the guidance of EIT F Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statement No. 71 and No. 101. Changes in demand and level of competition for PGE's regulated services have not materially impacted the Company's ability to recover its costs through regulation.

Following is a history of annualized rate changes by class of customer since PGE's last general rate case that authorized retail price changes effective on October 1, 2001. Changes made on January 1 were related primarily to the Company's RVM, as described above. The July 1, 2003 change related to the recovery of amounts deferred under a Power Cost Adjustment mechanism covering the period October 2001 through December 2002, which were fully collected by the end of 2004.