PORTLAND GENERAL ELECTRIC CO /OR/ - Quarter Report: 2007 June (Form 10-Q)

The interim financial statements have been prepared by Portland General Electric Company (PGE or the Company) and, in the opinion of management, reflect all adjustments which are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Such statements, which are unaudited, are presented in accordance with the interim reporting requirements of the Securities and Exchange Commission (SEC), which do not include all the disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. Certain information and footnote disclosures made in the last annual report on Form 10-K have been condensed or omitted for the interim statements. Certain costs are estimated for the full year and allocated to interim periods based on estimates of operating time expired, benefit received, or activity associated with the interim period; accordingly, such costs may not be reflective of amounts to be recognized for a full year. Due to seasonal fluctuations in electricity sales, as well as the price of wholesale energy and natural gas costs, interim financial results do not necessarily represent those to be expected for the year. It is management's opinion that, when the interim statements are read in conjunction with the Company's 2006 Annual Report on Form 10-K filed with the SEC, the disclosures are adequate to make the information presented not misleading.

Reclassifications - Certain amounts in prior year financial statements have been reclassified for comparative purposes. Specifically, amounts representing "Allowance for equity funds used during construction", previously classified within "Other Income (Deductions) - Miscellaneous" on the Condensed Consolidated Statements of Income, are now reported separately. These reclassifications had no effect on PGE's previously reported consolidated financial position, results of operations, or cash flows.

Defined Benefit Pension Plan - PGE sponsors a non-contributory defined benefit pension plan, of which substantially all members are current or former PGE employees. The assets of the pension plan are held in a trust. Pension plan calculations include several assumptions which are reviewed annually with PGE's consulting actuaries and trust investment consultants and are updated as appropriate.

Non-Qualified Benefit Plans - The amounts included under Non-Qualified Benefit Plans in the accompanying table primarily represent obligations for a Supplemental Executive Retirement Plan (SERP). The SERP was closed to new participants in 1997. Investments in a non-qualified benefit plan trust, consisting of trust owned life insurance policies and marketable securities, are intended to be the primary source for financing these plans.

Other Benefits - PGE also participates in non-contributory post-retirement health and life insurance plans ("Other Benefits" in the table below). Employees are covered under a Defined Dollar Medical Benefit Plan which limits PGE's obligation by establishing a maximum benefit per employee. Contributions made to a voluntary employees' beneficiary association trust are used to fund these plans. Costs of these plans, based upon an actuarial study, are included in rates charged to customers. Post-retirement benefit plan calculations include several assumptions which are reviewed annually with PGE's consulting actuaries and trust investment consultants and updated as appropriate. In addition, PGE has established Health Retirement Accounts (HRAs) for its employees under which the Company makes contributions to trust accounts to provide for claims by retirees for qualified medical costs.

The measurement date for these plans is December 31. PGE does not expect to make contributions to the pension plan, SERP, or post-retirement health and life insurance plans during 2007; contributions to the HRAs are not expected to be material.

The following table reflects the components of net periodic benefit cost for the periods indicated (in millions):

PGE utilizes derivative instruments, including electricity forward, swap, and option contracts and natural gas forward, swap, option, and futures contracts in its retail (non-trading) electric utility activities to manage its exposure to commodity price risk and to minimize net power costs for service to its retail customers. Under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended), derivative instruments are recorded on the Balance Sheet as an asset or liability measured at estimated fair value, with changes in fair value recognized currently in earnings, unless specific hedge accounting criteria are met.

Changes in the fair value of retail (non-trading) derivative instruments prior to settlement that do not qualify for either the normal purchase and normal sale exception or for hedge accounting are recorded on a net basis in Purchased Power and Fuel expense. For derivative instruments that are physically settled, sales are recorded in Operating Revenues, with purchases, natural gas swaps and futures recorded in Purchased Power and Fuel expense. PGE records the non-physical settlement of non-trading electricity derivative activities on a net basis in Purchased Power and Fuel expense, in accordance with Emerging Issues Task Force Issue (EITF) No. 03-11, Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and "Not Held for Trading Purposes."

Special accounting for qualifying hedges allows gains and losses on a derivative instrument to be recorded in Other Comprehensive Income (OCI) until they can offset the related results on the hedged item in the Income Statement. The derivative instruments entered into to manage the Company's future non-trading retail resource requirements are subject to regulation; accordingly, the unrealized gains and losses are deferred pursuant to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.

PGE participates in the wholesale marketplace in order to balance its supply of power to meet the needs of its retail customers, manage risk, and administer its current long-term wholesale contracts. Such activities include power purchases and sales resulting from economic dispatch decisions for its own generation, which allows PGE to secure reasonably priced power for its customers. Most of PGE's non-trading wholesale sales have been to utilities and power marketers and have been predominantly short-term. In this process, PGE may net purchases and sales with the same counterparty rather than simultaneously receiving and delivering physical power. These net transactions are also referred to as "book outs." Only the net amount of those purchases or sales required to fulfill retail and wholesale obligations are physically settled.

Prior to December 2006, PGE recorded a regulatory asset or regulatory liability under SFAS No. 71 to offset unrealized gains and losses on certain non-trading contracts recorded prior to settlement to the extent that such contracts are included in the Company's Resource Valuation Mechanism (RVM). Upon settlement, the regulatory asset or regulatory liability was reversed. In its January 2007 general rate order, the Public Utility Commission of Oregon (OPUC) approved a new Power Cost Adjustment Mechanism (PCAM) by which PGE can adjust future rates to reflect the difference between each year's forecasted and actual net variable power costs (NVPC) on a settlement basis. As a result, a regulatory asset or regulatory liability is recorded to offset changes in fair value of derivative instruments not included in the RVM. Effective January 17, 2007, a new Annual Power Cost Update Tariff replaced the RVM.

The following table reflects unrealized gains and losses recorded in earnings for the periods indicated (in millions):

The following table reflects derivative activities from cash flow hedges recorded in OCI (before taxes) for the periods indicated (in millions):

Hedge ineffectiveness from cash flow hedges was not material in the first six months of 2007 and 2006. As of June 30, 2007, the maximum length of time over which PGE is hedging its exposure to such transactions is approximately 51 months. The Company estimates that of the $2 million of net unrealized losses in OCI at June 30, 2007, $6 million in net unrealized losses will be reclassified into earnings within the next twelve months (fully offset by SFAS No. 71 regulatory assets) and $4 million in net unrealized gains will be reclassified over the remaining 39 months (fully offset by SFAS No. 71 regulatory liabilities).

Trojan Investment Recovery - In 1993, following the closure of the Trojan Nuclear Plant as part of its least cost planning process, PGE sought full recovery of, and a rate of return on, its Trojan plant costs, including decommissioning, in a general rate case filing with the OPUC. In 1995, the OPUC issued a general rate order which granted the Company recovery of, and a rate of return on, 87% of its remaining investment in Trojan plant costs, and full recovery of its estimated decommissioning costs through 2011.

Numerous challenges, appeals and reviews were subsequently filed in the Marion County Circuit Court, the Oregon Court of Appeals, and the Oregon Supreme Court on the issue of the OPUC's authority under Oregon law to grant recovery of, and a return on, the Trojan investment. The primary plaintiffs in the litigation were the Citizens' Utility Board (CUB) and the Utility Reform Project (URP). The Oregon Court of Appeals issued an opinion in 1998, stating that the OPUC does not have the authority to allow PGE to recover a return on the Trojan investment, but upholding the OPUC's authorization of PGE's recovery of the Trojan investment and ordering remand of the case to the OPUC. PGE, the OPUC, and URP each requested the Oregon Supreme Court to conduct a review of the Court of Appeals decision. On November 19, 2002, the Oregon Supreme Court dismissed the petitions for review. As a result, the 1998 Oregon Court of Appeals opinion stands and the case has been remanded to the OPUC (1998 Remand).

In 2000, while the petitions for review of the 1998 Oregon Court of Appeals decision were pending at the Oregon Supreme Court, PGE, CUB, and the staff of the OPUC entered into agreements to settle the litigation related to PGE's recovery of, and return on, its investment in the Trojan plant. The URP did not participate in the settlement. The settlement, which was approved by the OPUC in September 2000, allowed PGE to remove from its balance sheet the remaining before-tax investment in Trojan of approximately $180 million at September 30, 2000, along with several largely offsetting regulatory liabilities. The largest of such amounts consisted of before-tax credits of approximately $79 million in customer benefits related to the previous settlement of power contracts with two other utilities and the approximately $80 million remaining credit due customers under terms of the 1997 merger of the Company's parent corporation at the time (Portland General Corporation) with Enron. The settlement also allowed PGE recovery of approximately $47 million in income tax benefits related to the Trojan investment which had been flowed through to customers in prior years; such amount was substantially recovered from PGE customers by the end of 2006. After offsetting the investment in Trojan with these credits and prior tax benefits, the remaining Trojan regulatory asset balance of approximately $5 million (after tax) was expensed. As a result of the settlement, PGE's investment in Trojan is no longer included in rates charged to customers, either through a return of or a return on that investment. Authorized collection of Trojan decommissioning costs is unaffected by the settlement agreements or the OPUC orders.

URP filed a complaint with the OPUC challenging the settlement agreements and the OPUC's September 2000 order. In March 2002, the OPUC issued an order (2002 Order) denying all of URP's challenges, and approving the accounting and ratemaking elements of the 2000 settlement. URP appealed the 2002 Order to the Marion County Circuit Court. On November 7, 2003, the Marion County Circuit Court issued an opinion remanding the case to the OPUC for action to reduce rates or order refunds (2003 Remand). The opinion does not specify the amount or timeframe of any reductions or refunds. PGE and the OPUC have appealed the 2003 Remand to the Oregon Court of Appeals. On February 16, 2007, the Oregon Court of Appeals declined to reverse or abate the 2003 Remand and ordered the parties to file revised briefs with the Court.

The OPUC combined the 1998 Remand and the 2003 Remand into one proceeding and is considering the matter in phases. The first phase addresses what rates would have been if the OPUC had interpreted the law to prohibit a return on the Trojan investment.

In Order No. 07-157 (the Order) entered on April 19, 2007, the OPUC denied the motion PGE filed in November 2006 to consolidate phases and re-open the record. In addition, the Order abated the Phase I proceeding pending a decision by the Oregon Court of Appeals of the 2003 Remand, and ordered that a second phase of the joint remand proceedings be immediately commenced to investigate the OPUC's delegated authority to engage in retroactive ratemaking. The Order further stated that parties not now participating in the joint remand proceedings will be allowed to intervene and participate in the second phase. The parties have submitted final briefs and oral argument is scheduled for August 9, 2007.

In a separate legal proceeding, two class action suits were filed in Marion County Circuit Court against PGE on January 17, 2003 on behalf of two classes of electric service customers. One case seeks to represent current PGE customers that were customers during the period from April 1, 1995 to October 1, 2000 (Current Class) and the other case seeks to represent PGE customers that were customers during the period from April 1, 1995 to October 1, 2000, but who are no longer customers (Former Class, together with the Current Class, the Class Action Plaintiffs). The suits seek damages of $190 million for the Current Class and $70 million for the Former Class, as a result of the inclusion of a return on investment of Trojan in the rates PGE charges its customers. On December 14, 2004, the Judge granted the Class Action Plaintiffs' motion for Class Certification and Partial Summary Judgment and denied PGE's motion for Summary Judgment. On March 3, 2005 and March 29, 2005, PGE filed two Petitions for an Alternative Writ of Mandamus with the Oregon Supreme Court, asking the Court to take jurisdiction and command the trial Judge to dismiss the complaints or to show cause why they should not be dismissed and seeking to overturn the Class Certification. On August 31, 2006, the Oregon Supreme Court issued a ruling on PGE's Petitions for Alternative Writ of Mandamus, abating the class action proceedings until the OPUC responds to the 2003 Remand (described above). The Oregon Supreme Court concluded that the OPUC has primary jurisdiction to determine what, if any, remedy it can offer to PGE customers, through rate reductions or refunds, for any amount of return on the Trojan investment PGE collected in rates for the period from April 1995 through October 2000. The Supreme Court further stated that if the OPUC determines that it can provide a remedy to PGE's customers, then the class action proceedings may become moot in whole or in part, but if the OPUC determines that it cannot provide a remedy, and that decision becomes final, the court system may have a role to play. The Supreme Court also ruled that the plaintiffs retain the right to return to the Marion County Circuit Court for disposition of whatever issues remain unresolved from the remanded OPUC proceedings. On October 5, 2006, the Marion County Circuit Court issued an Order of Abatement in response to the ruling of the Oregon Supreme Court, abating the class actions for one year.

On February 14, 2005, PGE received a Notice of Potential Class Action Lawsuit for Damages and Demand to Rectify Damages from counsel representing Frank Gearhart, David Kafoury and Kafoury Brothers, LLC (Potential Plaintiffs), stating that Potential Plaintiffs intend to bring a class action lawsuit against the Company. Potential Plaintiffs allege that for the period from October 1, 2000 to the present, PGE's electricity rates have included unlawful charges for a return on investment in Trojan in an amount in excess of $100 million. Under Oregon law, there is no requirement as to the time the lawsuit must be filed following the 30-day notice period. No action has been filed to date.

Management cannot predict the ultimate outcome of the above matters. However, it believes these matters will not have a material adverse impact on the financial condition of the Company, but may have a material impact on the results of operations and cash flows for a future reporting period. No reserves have been established by PGE for any amounts related to this issue.

Colstrip Royalty Claim - Western Energy Company (WECO) supplies coal from the Rosebud Mine in Montana under a Coal Supply Agreement and a Transportation Agreement with owners of Colstrip Units 3 and 4, in which PGE has a 20% ownership interest. In 2002 and 2003, WECO received two orders from the Office of Minerals Revenue Management of the U.S. Department of the Interior which asserted underpayment of royalties and taxes by WECO related to transportation of coal from the mine to Colstrip during the period October 1991 through December 2001. WECO subsequently appealed the two orders to the Minerals Management Service (MMS) of the U.S. Department of the Interior. On March 28, 2005, the appeal by WECO was substantially denied. On April 28, 2005, WECO appealed the decision of the MMS to the Interior Board of Land Appeals of the U.S. Department of the Interior. In late September 2006, WECO received an additional order from the Office of Minerals Revenue Management to report and pay additional royalties for the period January 2002 through December 2004.

In May 2005, WECO received a "Preliminary Assessment Notice" from the Montana Department of Revenue, asserting claims similar to those of the Office of Minerals Revenue Management.

WECO has indicated to the owners of Colstrip Units 3 and 4 that, if WECO is unsuccessful in the above appeal process, it will seek reimbursement of any royalty payments by passing these costs on to the owners. The owners of Colstrip Units 3 and 4 advised WECO that their position would be that these claims are not allowable costs under either the Coal Supply Agreement or the Transportation Agreement.

Management cannot predict the ultimate outcome of the above matters or estimate any potential loss. Based on information currently known to the Company's management, PGE does not expect that this issue will have a material adverse effect on its financial condition, results of operations or cash flows. If WECO is able to pass any of these costs on to the owners, the Company would most likely seek recovery through the ratemaking process.

Harborton - A 1997 investigation by the Environmental Protection Agency (EPA) of a 5.5 mile segment of the Willamette River known as the Portland Harbor revealed significant contamination of sediments within the harbor. The EPA subsequently included the Portland Harbor on the federal National Priority List pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act (Superfund).

In December 2000, PGE received from the EPA a "Notice of Potential Liability" regarding the Harborton Substation facility. The notice listed sixty-eight other companies that the EPA believes may be Potentially Responsible Parties (PRPs) with respect to the Portland Harbor Superfund Site.

In February 2002, PGE provided a report on its remedial investigation of the Harborton site to the Oregon Department of Environmental Quality (DEQ). The report concluded that there is no likely present or past source or pathway for release of hazardous substances to surface water or sediments in the Portland Harbor Superfund Site at or from the site and that the site does not present a high priority threat to present and future public health, safety, welfare, or the environment. The DEQ submitted the report to the EPA and, in a May 18, 2004 letter, the EPA notified the DEQ that, based on the summary information from the DEQ and the stage of the process, the EPA, as of that time, agreed, the Harborton site does not appear to be a current source of contamination to the river.

In a December 6, 2005 letter, the DEQ notified PGE that the site is not likely a current source of contamination to the river and that the site is a low priority for further action. Management believes that the Company's contribution to the sediment contamination, if any, from the Harborton Substation site would qualify it as a de minimis PRP.

Sufficient information is currently not available to determine the total cost of investigation and remediation of the Portland Harbor or the liability of PRPs, including PGE. Management cannot predict the ultimate outcome of this matter or estimate any potential loss. However, it believes this matter will not have a material adverse impact on the Company's financial condition, results of operations or cash flows.

Harbor Oil - Harbor Oil, Inc. (Harbor Oil), located in north Portland, was utilized by PGE to process used oil from the Company's power plants and electrical distribution system from at least 1990 until 2003. Harbor Oil is also utilized by other entities for the processing of used oil and other lubricants.

In 1974 and 1979, major oil spills occurred at the Harbor Oil site that impacted an approximate two acre area. Elevated levels of contaminants, including metals, pesticides, and polychlorinated biphenyls (PCBs), have been detected at the site. On September 29, 2003, Harbor Oil was included on the federal National Priority List as a federal Superfund site.

PGE received a Special Notice Letter for Remedial Investigation/Feasibility Study (RI/FS) from the EPA, dated June 27, 2005, in which the Company was named as one of fourteen PRPs with respect to the Harbor Oil site. The letter started a period for the PRPs to participate in negotiations with the EPA to reach a settlement to conduct or finance an RI/FS of the Harbor Oil site. On May 31, 2007, an Administrative Order on Compliance was signed by the EPA and six other parties, including PGE, to implement an RI/FS at the Harbor Oil site.

Sufficient information is currently not available to determine the total cost of investigation and remediation of the Harbor Oil Site or the liability of the PRPs, including PGE. Management cannot predict the ultimate outcome of this matter. However, it believes this matter will not have a material adverse impact on the Company's financial condition, results of operations or cash flows.

On May 17, 2007, the Federal Energy Regulatory Commission (FERC) approved a March 12, 2007 settlement (the May 17 Settlement) among PGE, the California Attorney General, the California Department of Water Resources, the California Electricity Oversight Board, the California Public Utilities Commission, Southern California Edison Company, Pacific Gas & Electric Company, and San Diego Gas & Electric Company that resolved all issues between the parties relating to wholesale energy transactions in the western markets during the January 1, 2000 through June 20, 2001 time period. The settlement resolved a number of proceedings and investigations before the FERC and the U.S. Ninth Circuit Court of Appeals relating to various issues and claims in the California refund case (Docket No. EL00-95), the issue of refunds for the summer 2000 period, investigations of anomalous bidding activities and market practices (Docket Nos. IN03-10-000 and EL03-165-000), claims for refunds related to sales in the Pacific Northwest (Docket No. EL01-10), and the complaint by the California Attorney General for refunds from market-based rates retroactively to May 1, 2000.

Certain other market participants have now joined the May 17 Settlement, but releases as to those parties do not cover transactions outside of the California organized markets, including potential claims in the Pacific Northwest. The rights of parties electing not to join the settlement are unaffected and they will neither receive the benefits of the settlement nor be subject to its obligations. PGE believes that any amount that it may owe to non-settling parties related to transactions in the California organized market would not be material to the Company's financial condition, results of operations or cash flows.

Pursuant to the terms of the May 17 Settlement, PGE received a cash payment from the California Power Exchange (PX) of approximately $28 million (including net interest on the Company's past due receivables) in June 2007 and adjusted the reserve related to this matter to zero at June 30, 2007. Based upon previously-recorded reserves and the terms of the May 17 Settlement, PGE recorded a pre-tax increase to income of approximately $6 million in the first quarter of 2007 (reflected as a reduction to Purchased Power and Fuel expense).

Challenge of the California Attorney General to Market-Based Rates - On March 20, 2002, the California Attorney General filed a complaint with the FERC against various sellers in the wholesale power market, alleging that the FERC's authorization of market-based rates violated the Federal Power Act (FPA), and, even if market-based rates were valid under the FPA, that the quarterly transaction reports required to be filed by sellers, including PGE, did not contain the transaction-specific information mandated by the FPA and the FERC. The complaint argued that refunds for amounts charged between market-based rates and cost-based rates should be ordered. The FERC denied the challenge to market-based rates and refused to order refunds, but did require sellers, including PGE, to re-file their quarterly reports to include transaction-specific data. The California Attorney General appealed the FERC's decision to the Ninth Circuit. On September 8, 2004, the Court issued an opinion upholding the FERC's authority to approve market-based tariffs, but also holding that the FERC had the authority to order refunds, if quarterly filing of market-based sales transactions had not been properly made. The Court required the FERC, upon remand, to reconsider whether refunds should be ordered. Petitions for rehearing at the Ninth Circuit and for U.S. Supreme Court review have been denied.

In the refund case and in related dockets, including the above challenge to market-based rates, the California Attorney General and other parties have argued that refunds should be ordered retroactively to at least May 1, 2000. The May 17 Settlement in the California refund case described above resolves all claims as to market-based rates in western energy markets as between PGE and the named California parties and PGE and the opt-in participants during the settlement period, January 1, 2000 through June 21, 2001; however, it does not settle such claims from market participants who do not opt-in to the settlement, nor does it settle such potential claims arising from transactions with other market participants outside of the California Independent System Operator and PX markets. Management cannot predict the outcome of these proceedings or whether the FERC will order refunds retroactively to May 1, 2000, and if so, how such refunds would be calculated. However, management believes that the outcome will not have a material adverse impact on the Company's financial condition, results of operations or cash flows.

Pacific Northwest - In the July 25, 2001 order, the FERC also called for a preliminary evidentiary hearing to explore whether there may have been unjust and unreasonable charges for spot market sales of electricity in the Pacific Northwest from December 25, 2000 through June 20, 2001. During that period, PGE both sold and purchased electricity in the Pacific Northwest. In September 2001, upon completion of hearings, the appointed administrative law judge issued a recommended order that the claims for refunds be dismissed. In December 2002, the FERC re-opened the case to allow parties to conduct further discovery. In June 2003, the FERC issued an order terminating the proceeding and denying the claims for refunds. In July 2003, numerous parties filed requests for rehearing of the June 2003 FERC order. In November 2003 and February 2004, the FERC issued orders that denied all pending requests for rehearing. Parties have appealed various aspects of these FERC orders. Briefing has been completed and oral argument was held on January 8, 2007. A decision in the case is pending.

The May 17 Settlement in the California refund case described above resolves all claims as between PGE and the named California parties as to transactions in the Pacific Northwest during the settlement period, January 1, 2000 through June 21, 2001; however, it does not settle such potential claims from other market participants.

Management cannot predict the ultimate outcome of the above matter related to wholesale transactions in the Pacific Northwest. However, it believes that the outcome will not have a material adverse impact on the financial condition of the Company, but may have a material impact on the results of operations and cash flows for future reporting periods.

An Oregon law, commonly referred to as SB 408, attempts to more closely match income tax amounts forecasted to be collected in revenues with the amount of income taxes paid to governmental entities by investor-owned utilities or their consolidated group. The law requires that utilities file a report with the OPUC each year regarding the amount of taxes paid by the utility or its consolidated group (with certain adjustments), as well as the amount of taxes authorized to be collected in rates, as defined by the statute. This report is to be filed by October 15th of the year following the reporting year.

If the OPUC determines that the difference between the two amounts is greater than $100,000, the utility is required to establish an "automatic adjustment clause" to adjust rates. The first adjustment under the automatic adjustment clause applies only to taxes paid to units of government and collected from customers on or after January 1, 2006.

The OPUC has adopted rules to implement SB 408. The rules include the use of fixed reference points for margins and effective tax rates from a ratemaking proceeding. The rules also include a methodology to determine the amounts properly attributed to the utility from a consolidated tax payment using a formula to determine the ratio of the utility's payroll, property and sales to the consolidated group's amounts for the same items. This ratio is then multiplied by the amount of total taxes paid by the consolidated group to determine the utility's attributed portion. The OPUC also determined that interest should begin to accrue beginning January 1, 2006 using a mid-year convention for differences between income taxes collected and income taxes paid to governmental entities for tax year 2006.

In its order, the OPUC addressed the so-called "double whammy" effect wherein the application of the rules can result in unusual outcomes in certain situations. If a utility incurs higher expenses or receives lower revenues, resulting in lower taxes paid than the OPUC assumed it would incur in its last rate case, the automatic adjustment clause under SB 408 will require the utility to make a refund to customers and decrease the utility's earnings. Conversely, if a utility incurs lower expenses or receives higher revenues, resulting in higher taxes paid than the OPUC assumed it would incur in its last rate case, the automatic adjustment clause under SB 408 will surcharge customers and increase the utility's earnings. The OPUC stated in its order that it will be responsive to concerns related to the consequences of the "double whammy" problem, and may address those concerns in other regulatory proceedings; however, it did not provide clear guidance on avenues of relief. The Oregon legislature did not address this issue in the 2007 legislative session and it is uncertain whether it will be considered in the future. Accordingly, the ultimate outcome of this matter is not certain.

On December 30, 2005, PGE filed with the OPUC an application for deferred accounting to prevent either the financial enrichment or financial harm to the Company should the rules implementing SB 408 include the use of fixed reference points for margins and effective tax rates from a ratemaking proceeding. The OPUC rules do use fixed reference points for margins and effective tax rates from a ratemaking proceeding. The deferred amount would reflect the tax effect of the difference between PGE's implied operating costs under a fixed margin assumption and the Company's actual operating costs. In an interim order in the rulemaking process, the OPUC indicated that it would review deferral applications related to SB 408 on a case by case basis, but would view such applications with skepticism.

PGE has estimated its potential refunds to customers to be approximately $42 million (including $2 million of accrued interest) for 2006 and recorded a (pre-tax) reserve of such amount for the year. (The reserve includes $17 million paid to Enron for net current taxes payable for the first quarter of 2006 when PGE was included in its former parent's consolidated group for filing consolidated federal and state income tax returns). Interest will continue to accrue on the reserve, with an additional $2 million recorded in the first half of 2007. In accordance with the statute, PGE will file a report with the OPUC by October 15, 2007 for the 2006 tax year regarding the amount of taxes paid by the Company as well as the amount of taxes authorized to be collected in rates, as defined by the statute. Under the OPUC rules, any refunds to customers for the 2006 tax year would begin after June 1, 2008.

For the year 2007, PGE estimates a potential collection from customers of approximately $10 million. Based on a percentage of estimated annual revenues collected in the first half of the year, PGE deferred, as a regulatory asset, approximately $5 million (including accrued interest) at June 30, 2007. Any collections from, or refunds to, customers for the 2007 tax year will be reported in the Company's October 15, 2008 filing with the OPUC.

PGE is participating in an OPUC rulemaking process to resolve certain issues related to the application of SB 408 rules. A procedural schedule has been established, with completion of the process expected by September 2007.

Complaint and Application for Deferral - Income Taxes - On October 5, 2005, the URP and Ken Lewis (together, the Complainants) filed a Complaint with the OPUC alleging that, since September 2, 2005 (the effective date of SB 408), PGE's rates are not just and reasonable and are in violation of SB 408 because they contain approximately $92.6 million in annual charges for state and federal income taxes that are not being paid to any government. The Complaint requests that the OPUC order the creation of a deferred account for all amounts charged to ratepayers since September 2, 2005 for state and federal income taxes, less amounts actually paid by or on behalf of PGE to the federal and state governments for income taxes.

Also on October 5, 2005, the Complainants filed an Application for Deferred Accounting with the OPUC, claiming that PGE is charging ratepayers $92.6 million annually for federal and state income taxes that are not being paid, and that such charges are not fair, just and reasonable. The Application for Deferred Accounting requests that the portion of PGE's revenue representing estimated PGE liabilities for federal and state income taxes, less any amounts of federal and state income taxes paid by PGE or on behalf of PGE, be deferred for later incorporation in rates. PGE opposes the deferral and has moved to dismiss the Complaint.

On July 10, 2006, the OPUC commenced proceedings on the Complaint and deferral. Management cannot predict the ultimate outcome of this matter or estimate any potential loss.

In accordance with Enron's Chapter 11 Plan, on April 3, 2006 PGE issued 62.5 million shares (of 80 million, no par value, shares authorized) of new PGE common stock. The 42.8 million shares of PGE common stock previously held by Enron were cancelled. Approximately 27 million shares of the new PGE common stock were initially issued to the Debtors' creditors holding allowed claims, and approximately 35.5 million shares were issued to a Disputed Claims Reserve (DCR) where the shares were held and were being released over time to the Debtors' creditors holding allowed claims, in accordance with the Chapter 11 Plan. In June 2007, substantially all of the remaining shares of PGE's common stock held by the DCR were sold in a public offering.

In addition to the issuance of the 62.5 million shares of new PGE common stock described above, 4.7 million and 625,000 shares, respectively, have been registered for future issuance pursuant to the Portland General Electric Company 2006 Stock Incentive Plan and 2007 Employee Stock Purchase Plan.

In May 2007, PGE shareholders approved the Portland General Electric Company 2007 Employee Stock Purchase Plan (ESPP). The ESPP permits all eligible Company employees to purchase shares of PGE common stock through regular payroll deductions, which are limited to 10% of base pay. Each year, employees may purchase up to a maximum of $25,000 worth of stock (based on fair market value on the purchase date) or 1,500 shares, whichever is less. Each year during the term of the ESPP there will be two six-month offering periods, during which eligible employees will have the right to purchase shares of PGE common stock at a price per share equal to 95% of the fair market value of the stock on the purchase date. The offering periods will run from January 1 through June 30 and from July 1 through December 31, with shares purchased at the end of each offering period. The first offering period began on July 1, 2007.

The OPUC order that approved the issuance of new PGE common stock includes a stipulation containing several conditions, including a requirement that the OPUC approve the payment of dividends that reduce the Company's common equity capital percentage below certain levels, depending upon the percentage of issued and outstanding common stock held by the DCR. With the DCR's sale of substantially all of its PGE common stock in June 2007, this requirement is no longer applicable.

The following table indicates common stock dividends declared in 2007:

In 2006, PGE adopted the Portland General Electric Company 2006 Stock Incentive Plan (the Plan). Under the Plan, PGE may grant a variety of equity based awards, including restricted stock units with time-based vesting conditions (Restricted Stock Units) and performance-based vesting conditions (Performance Stock Units) to non-employee directors, officers and certain key employees. A total of 4,687,500 shares of common stock were registered for future issuance under the Plan.

On March 15, 2007, PGE granted 83,410 Performance Stock Units to officers and certain key employees and 5,600 Restricted Stock Units to certain key employees of the Company. PGE also granted 1,089 Restricted Stock Units to a key employee on June 13, 2007. The number of Stock Units was determined by dividing a specified award amount for each grantee by the closing stock price on the grant date. The grants provide for the payment of one Dividend Equivalent Right (DER) for each stock unit. A DER entitles the grantee to receive an amount equal to dividends paid on a share of PGE's common stock, which dividends have a record date between the grant date and the vesting date of the DERs. The Performance Stock Unit DERs vest on the same schedule as the Performance Stock Units and are settled in shares of PGE common stock valued at the closing stock price on the vesting date. The Restricted Stock Unit DERs are settled in shares of PGE common stock valued at each dividend payment date and vest on the same schedule as the Restricted Stock Units.

Performance Stock Units for both officers and key employees vest if performance goals related to overall customer satisfaction, electric service power quality and reliability, generating plant availability, and net income (compared to budget) are met at the end of a three-year performance period. Vesting of Performance Stock Units will be calculated by multiplying the number of units granted by a performance percentage determined by the Compensation and Human Resources Committee of PGE's Board of Directors. The performance percentage will be calculated based on whether and to what extent the performance goals have been met. In accordance with the Plan, however, in determining results relative to these goals, the committee may disregard or offset the effect of extraordinary, unusual or non-recurring items. Based on the attainment of the performance goals, the awards can range from zero to 150% of the grant.

Also on March 15, 2007, a grant of 525 Restricted Stock Units, valued at $15,000, was made to a newly elected director. The grant vested in equal installments on March 31, 2007 and June 30, 2007 and was settled exclusively in shares of the Company's common stock.

On June 13, 2007, PGE's nine non-employee directors were granted a total of 9,801 Restricted Stock Units as part of their annual compensation arrangement. Each director was granted 1,089 units, valued at $30,000, based upon the closing stock price on the grant date. The grants vest over a one-year period in equal installments on the last day of each calendar quarter beginning September 30, 2007 and will be settled exclusively in shares of the Company's common stock, provided that the director remains a member of the Board of Directors. The non-employee director grants also provide for the quarterly payment of DERs on the non-vested Restricted Stock Units. The DERs are settled in cash on the date that the related dividends are paid to holders of PGE's common stock. The cash from the settlement of the DERs may also be deferred under the terms of the Portland General Electric Company 2006 Outside Directors' Deferred Compensation Plan.

Restricted Stock Unit activity for the first half of 2007 is summarized in the following table:

Performance Stock Unit activity for the first half of 2007 is summarized in the following table:

The weighted average fair value is measured based on the closing price of PGE common stock on the date of grant. A total of 4,406,129 shares remain available for future grants. The Plan had no material impact on cash flow for the six months ended June 30, 2007.

For the six months ended June 30, 2007, PGE recorded $1.3 million of stock-based compensation expense (included in Administrative and other expense in the Condensed Consolidated Statements of Income), with a corresponding credit to common stock equity. No equity compensation costs were capitalized. Based upon the attainment of performance goals that would allow the vesting of 100% of awarded Performance Stock Units, and utilizing an estimated forfeiture rate of 3%, unrecognized compensation expense related to unvested Stock Units was $5.2 million at June 30, 2007, of which $1.4 million, $2.6 million, and $1.2 million is expected to be expensed in 2007, 2008, and 2009, respectively.

The following table presents the computation of basic and diluted earnings per common share for the periods indicated:

To meet short-term cash requirements, PGE has established a program under which it may from time to time issue commercial paper for terms of up to 270 days. The commercial paper program is supported by the Company's $400 million five-year unsecured revolving credit facility, which has been extended for one additional year, to July 13, 2012. The amount available under the commercial paper program is limited to the unused line of credit under the revolving credit facility. The facility contains customary covenants and default provisions, including a requirement that limits consolidated indebtedness, as defined in the facility, to 65% of total capitalization. At June 30, 2007, PGE was in compliance with these covenants.

Although the commercial paper program subjects the Company to fluctuations in interest rates, reflecting current market conditions, individual instruments carried a fixed rate during their respective terms.

Short-term borrowings and related interest rates were as follows (dollars in millions):

On March 8, 2007, PGE remarketed $5.8 million of variable interest rate Port of Morrow Pollution Control Bonds due in 2031 under a new remarketing agreement.

On April 12, 2007, PGE and certain institutional buyers in the private placement market entered into a bond purchase agreement under which PGE agreed to sell $130 million of PGE's First Mortgage Bonds to the buyers. Funding will take place, and the bonds will transfer to the buyers, at the direction of PGE at any time up to, but not later than, October 1, 2007 (subject to five business days notification). The bonds will bear interest at an annual rate of 5.81%, and will mature on October 1, 2037. The bonds will be issued under PGE's Indenture of Mortgage and Deed of Trust, dated July 1, 1945, as supplemented, including the Fifty-eighth Supplemental Indenture dated April 1, 2007, between PGE and HSBC Bank USA, National Association in its capacity as trustee. PGE intends to use the proceeds from the sale of the bonds for general corporate purposes, which may include capital expenditures and/or the repayment of existing debt.

On May 16, 2007, PGE received $170 million from the sale of First Mortgage Bonds to certain institutional buyers in the private placement market, pursuant to an agreement entered into in December 2006. The bonds were issued under PGE's Indenture of Mortgage and Deed of Trust, dated July 1, 1945, as amended and supplemented to date and from time to time (including the Fifty-seventh Supplemental Indenture dated December 1, 2006). The bonds bear interest at an annual rate of 5.80% and will mature on June 1, 2039. The proceeds from the sale of the bonds will be used for general corporate purposes, which may include capital expenditures and/or the repayment of existing debt.

On June 15, 2007, PGE redeemed $50 million of 7.15% First Mortgage Bonds at maturity and the remaining $16 million of 7.75% Series Cumulative Preferred Stock, which was mandatory. On June 27, 2007, the Company elected to redeem, at par value, $5.1 million of 7 1/8% Port of St. Helens Pollution Control Bonds due in 2014.

PGE enters into finance and power purchase and sale agreements that include indemnification provisions relating to certain claims or liabilities that may arise relating to the transactions contemplated by these agreements. Generally, a maximum obligation is not explicitly stated in the indemnification provisions and therefore, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. PGE periodically evaluates the likelihood of incurring costs under such indemnities. The Company has not recorded any liability on the Condensed Consolidated Balance Sheets with respect to these indemnifications. Based on PGE's historical experience and the evaluation of the specific indemnities, management believes the likelihood that PGE would be required to perform or otherwise incur any significant losses is remote.

PGE adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement requirements related to accounting for income taxes. It requires that a tax position meet a "more-likely-than-not" threshold before the benefit of an uncertain tax position can be recognized in the financial statements. FIN 48 requires recognition in the financial statements of the best estimate of the effects of a tax position only if that position is more likely than not of being sustained on audit by the appropriate taxing authorities, based solely on its technical merits.

PGE has completed an assessment of FIN 48 with respect to the Company's income tax positions. Based on such assessment, PGE has not recorded any liability for uncertain tax positions. Any interest or penalties on any future income tax deficiencies would be recorded within Interest Charges or Other Deductions, respectively, in the Company's Condensed Consolidated Statements of Income.

PGE files income tax returns in the U.S federal jurisdiction, in the states of Oregon and Montana, and in Multnomah County, Oregon. The Company is not currently under examination by federal, state or local tax authorities. Open tax years include 2004 and subsequent years for federal tax purposes and 2003 and subsequent years for state and local tax purposes.

Effective January 17, 2007, the OPUC approved a new PCAM by which PGE can adjust future rates to reflect the difference between each year's forecasted NVPC included in rates (the baseline), and actual NVPC on a settlement basis. Under the PCAM, PGE will be subject to a portion of the business risk or benefit associated with actual NVPC varying from costs included in base rates by: (1) applying an asymmetrical deadband for PGE to absorb cost increases or decreases, with a 90/10 sharing of costs and benefits between customers and the Company, respectively, beyond the deadband, and (2) employing a regulated earnings test.

The asymmetrical deadband is based on 75 basis points below and 150 basis points above PGE's authorized return on equity (ROE), or approximately $(11.7) million and $23.4 million, respectively, for 2007. The Annual Variance is defined as the difference between actual NVPC and baseline NVPC. An Annual Power Cost Variance (PCV), defined as 90% of the Annual Variance outside the deadband, is recorded as a customer refund or collection (subject to a regulated earnings test). The following table summarizes the approximate PCAM deadband for 2007 (in millions):

The refund or collection amount will be subject to a regulated earnings test for the year that the NVPC were incurred. The customer refund amount will be limited to the extent that such refund will not cause PGE's actual regulated ROE for the year to fall below its authorized ROE plus 100 basis points, or 11.1%. Conversely, the customer collection amount will be limited to the extent that such collection will not cause PGE's actual regulated ROE for the year to exceed its authorized ROE minus 100 basis points, or 9.1%. A regulatory asset or liability will be recorded, with the offset to Purchased Power and Fuel expense, for any PCV deferral that arises. Interest will accrue on any deferral at the Company's authorized rate of return.

As of June 30, 2007, the year-to-date Annual Variance is $14.8 million below the baseline. Since this variance amount exceeded the $(11.7) million deadband, a $2.8 million regulatory liability was recorded for the second quarter of 2007. Any regulatory asset or liability arising from the deadband calculation would be adjusted by a regulated earnings test calculation at year end. Final determination of any refund or collection amount would be determined by the OPUC through a public filing and review.

Annually, the Company will propose PCV adjustment rates that will amortize the PCV to customer rates. The OPUC will make the final determination regarding such rates and the period over which they would apply.

In addition, as part of its Order No. 07-015, issued on January 12, 2007, the OPUC adopted an Annual Power Cost Update Tariff, which replaces the Resource Valuation Mechanism. The Annual Power Cost Update Tariff provides for rate adjustments to reflect updated forecasts of NVPC for future calendar years. The approved Annual Power Cost Update Tariff establishes the new baseline NVPC for purposes of the PCAM calculation each year. On July 11, 2007, PGE submitted to the OPUC an update of its 2008 NVPC forecast. The Company projects an approximate 2% average increase in customer rates, effective January 1, 2008. A final 2008 NVPC forecast will be submitted to the OPUC in the fourth quarter of 2007.

On June 11, 2007, the Port Westward Generating Plant (Port Westward), a 400 MW natural gas-fired facility located in Clatskanie, Oregon, was placed into service. Total cost of the new plant through June 30, 2007 was approximately $280 million (including allowance for funds used during construction).

In January 2007, the OPUC issued a rate order approving a 2.8% increase related to the cost recovery of Port Westward, which became effective on June 15, 2007. In the rate order, the OPUC also established a process for re-examining the rate increase if the plant's in service date was on or after May 2, 2007. The OPUC staff and intervenors were permitted, within 15 days of the in service date of the plant, to request a re-examination of the costs of Port Westward reflected in PGE's rates. The Citizens' Utility Board has requested a re-examination, while the OPUC staff has indicated its support of the new rates. If the OPUC determines that further proceedings are necessary, the additional revenues collected as a result of the rate increase would be subject to refund, pending the outcome of the proceedings and any required rate adjustment. If there is no determination that further proceedings are necessary, the new rates are expected to remain in effect.

SFAS No. 157, Fair Value Measurements, was issued in September 2006 and is effective for fiscal years beginning after November 15, 2007. SFAS No. 157 provides enhanced guidance for the use of fair value to measure assets and liabilities. It also requires expanded disclosure regarding the extent to which fair value is used for such measurements, information used to measure fair value, and the effect of fair value measurements on earnings. Provisions of SFAS No. 157 apply whenever other accounting standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. PGE is evaluating the application of SFAS No. 157 with respect to its assets and liabilities.

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, was issued in February 2007 and is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 provides entities the option to report most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. PGE is evaluating the application of SFAS No. 159 with respect to its financial assets and liabilities.

FASB Staff Position No. 39-1 (FSP FIN 39-1), Amendment of FASB Interpretation No. 39 (FIN 39), was issued in April 2007 and is effective for fiscal years beginning after November 15, 2007. FSP FIN 39-1 modifies FIN 39, Offsetting of Amounts Related to Certain Contracts, and permits reporting entities to offset the receivable or payable recognized upon payment or receipt of cash collateral against fair value amounts recognized for derivative instruments that have been offset under a master netting arrangement. FSP FIN 39-1 requires financial statement disclosure of a reporting entity's accounting policy (to offset or not offset) as well as amounts recognized for the right to reclaim cash collateral, or the obligation to return cash collateral, that have been offset against net derivative positions. PGE is evaluating the application of FSP FIN 39-1 with respect to its assets and liabilities.

Information Regarding Forward-Looking Statements

This report contains statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements of expectations, beliefs, plans, objectives, assumptions or future events or performance. Words or phrases such as "anticipates," "believes," "should," "estimates," "expects," "intends," "plans," "predicts," "projects," "will likely result," "will continue," or similar expressions identify forward-looking statements.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed. Portland General Electric's (PGE or the Company) expectations, beliefs and projections are expressed in good faith and are believed by PGE to have a reasonable basis including, without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, but there can be no assurance that PGE's expectations, beliefs or projections will be achieved or accomplished.

In addition to other factors and matters discussed elsewhere in this report, some important factors that could cause actual results or outcomes for PGE to differ materially from those discussed in forward-looking statements include:

• governmental policies and regulatory investigations and actions, including those of the FERC and OPUC with respect to allowed rates of return, financings, electricity pricing and rate structures, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of net variable power costs (NVPC) and other capital investments, and present or prospective wholesale and retail competition;
• the effects of Oregon law related to utility rate treatment of income taxes (SB 408), which may result in potential earnings volatility and adverse effects on operating results;
• events related to City of Portland, Oregon investigations with regard to rates charged by the Company, and any attempt by the City of Portland to set rates for PGE customers located within the City of Portland;
• final resolution of matters related to the Bonneville Power Administration Residential Exchange Program payments;
• changes in weather, hydroelectric, and energy market conditions, which could affect PGE's ability and cost to procure adequate supplies of fuel or purchased power to serve its customers;
• wholesale energy prices (including the effect of FERC price controls) and their effect on the availability and price of wholesale power purchases and sales in the western United States;
• the failure to complete major generating plants on schedule and within budget;
• weather conditions that directly influence customer demand for electricity and damage to PGE facilities from major storms;
• the effectiveness of PGE's risk management policies and procedures and the creditworthiness of customers and counterparties;
• operational factors affecting PGE's power generation facilities;
• increasing local, national, and international concerns regarding global warming and climate change, including proposed regulations that could result in requirements for additional pollution control equipment or significant emissions fees or taxes, particularly with respect to coal-fired generation facilities, to mitigate carbon dioxide and other gas emissions, including regional haze and mercury emissions affecting the Company's thermal generating plants;
• changes in, and compliance with, environmental and endangered species laws and policies;
• financial or regulatory accounting principles or policies imposed by governing bodies;
• residential, commercial, and industrial growth and demographic patterns in PGE's service territory;
• the loss of any significant customer, or changes in the business of a major customer, that may result in changes in demand for PGE services;
• the ability of PGE to access the capital markets to support requirements for working capital, construction costs, and the repayment of maturing debt;
• capital market conditions, including interest rate fluctuations and capital availability;
• changes in PGE's credit ratings, which could have an impact on the availability and cost of capital;
• new federal, state, and local laws that could have adverse effects on operating results;
• legal and regulatory proceedings and issues;
• employee workforce factors, including strikes, work stoppages, and the loss of key executives;
• general political, economic, and financial market conditions; and
• terrorist activities.

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, PGE undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

General - PGE maintains its focus on providing safe and reliable electric service to its customers and achieving strong financial performance. The ongoing strength of Oregon's economy has contributed to customer growth and increasing demand for electricity within the Company's service territory. The Company continues to pursue its commitment to renewable energy as it proceeds with construction of new wind generation facilities at the Biglow Canyon Wind Farm. Such efforts align with Oregon's new Renewable Energy Standard, adopted by the 2007 legislature, which requires that PGE and other large electricity providers serve at least 25% of their retail load from renewable resources by the year 2025. PGE will continue to explore new generating resources and additional energy efficiency opportunities, consistent with its Integrated Resource Plan (IRP), to meet the growing energy needs of customers. For further information, see "Integrated Resource Plan" and "Renewable Energy Standard" in "Financial and Operating Outlook" of this Item 2.

The most recent Oregon biennial legislative session included additional enacted legislation that could affect PGE or its customers. Among the actions taken were an expansion of the Business Energy Tax Credit program, a mechanism for financing customer-owned renewable energy generation facilities, goals for statewide carbon emission reductions, a requirement that the Environmental Quality Commission revise the manner in which it adopts rules that are stricter than federal rules, and dedication of refunds under the provisions of the corporate income tax kicker for a "rainy day" account.

On June 18, 2007, the Enron Disputed Claims Reserve (DCR) sold substantially all of its remaining holdings of PGE common stock in a public offering, with all of PGE's common stock now publicly traded. For further information, see "Ownership of PGE" in "Financial and Operating Outlook" of this Item 2.

Customers - Oregon's economy continued to expand in the first half of 2007, with the state's 5.0% seasonally adjusted unemployment rate in May the lowest since April 2000. Oregon's non-farm employment (seasonally adjusted) reached a new record high in May 2007, 1.2% above a year ago. Sustained economic growth is expected to require continued investment in generation, transmission and distribution facilities to meet increased energy requirements of PGE's customers.

Total retail energy deliveries for the first half of 2007 increased 1.3% over the same period in 2006 primarily as the result of customer growth. On a weather adjusted basis, retail energy deliveries are up 1.2% from last year. Energy use by all major customer sectors increased in the first half of this year.

The Company added over 11,200 new customers during the past twelve months and now serves approximately 802,000 retail customers. PGE continues to rank well for overall customer satisfaction and recently launched a multi-year effort to increase customer satisfaction and seek input from customers on the Company's decisions and actions.

On May 21, 2007, the Bonneville Power Administration (BPA) notified PGE and six other investor-owned utilities (IOUs) in the Pacific Northwest that it was immediately suspending the Residential Exchange Program payments that the IOUs pass through to their residential and small farm customers in the form of monthly billing credits. Through June 30, 2007, approximately $47 million in benefits had been received by PGE customers. Because these benefits are received from BPA and passed through to PGE's customers, the outcome of this matter is not expected to have a significant effect on the Company's financial results. For further information, see "Residential Exchange Program" in "Financial and Operating Outlook" of this Item 2.

The suspension of such benefits, and the subsequent removal of the Residential Exchange Program credit from residential and small farm customer bills that passes such benefits to customers, has resulted in an approximate 14% average rate increase for those customers. PGE is participating with other IOUs to pursue available options - judicial, regulatory, and legislative - to restore their customers' federal power benefits.

Power Supply - PGE utilizes its own generating resources, along with wholesale market purchases, to meet the energy needs of its customers. The Company has adopted a power cost strategy that extends the terms for which it will enter into purchases and sales of power and fuel. It is expected that this strategy will reduce price volatility for retail customers. The Company's generating facilities performed well in the first half of 2007, as plants operated reliably and cost effectively.

Regional hydro conditions, as measured on the Columbia River at The Dalles, Oregon, are forecast to be below normal for 2007. Stream flows at mid-Columbia hydro projects, with which PGE has long-term power purchase contracts, have been above average and are forecast to be near normal in 2007. Reduced runoff on both the Clackamas and Deschutes rivers, however, has resulted in lower generation from PGE's hydro facilities, with current forecasts projecting continued below normal stream flows for the remainder of 2007.

With the new Port Westward Generating Plant (Port Westward) placed in service in June 2007, PGE continues to deliver on its commitment to add cost-effective resources that supplement the output of existing facilities and reduce dependence on the wholesale energy market.

Construction of Phase I of the Biglow Canyon Wind Farm, which will have an installed capacity of 125 MW, has begun and is expected to be completed by the end of 2007. In June 2007, a stipulation was filed with the OPUC that modified a requested annual revenue requirement increase filed by PGE in March 2007. If approved, new rates are expected to become effective January 1, 2008. Phases II and III are currently in the planning stages. For further information, see "Biglow Canyon Wind Farm" in "Financial and Operating Outlook" of this Item 2.

PGE's plan to meet customers' future electricity needs, as outlined in a new IRP filed with the OPUC on June 29, 2007, includes a diversified portfolio of supply-side and demand-side resources designed to balance cost, price stability, and overall risk. For further information, see "Integrated Resource Plan" in "Financial and Operating Outlook" of this Item 2.

Regulatory Matters - In January 2007, the OPUC issued an order in PGE's general rate case that included new retail rates related to both general and power costs. The order also approved a 2.8% increase for recovery of Port Westward, which became effective on June 15, 2007. Under a process outlined in the order, an intervenor has challenged the Port Westward rate increase, which may result in the incremental revenues being subject to refund. The OPUC staff has indicated its support of the new rates. For further information, see "Port Westward Generating Plant" in "Financial and Operating Outlook" of this Item 2.

In April 2007, PGE submitted to the OPUC its initial filing under the new Annual Power Cost Update Tariff. The filing contained a preliminary forecast of 2008NVPC, which was updated on July 11, 2007. This update projects an approximate 2% overall increase in customer rates. The final forecast of 2008 power costs, and the related change in customer rates, will be submitted in the fourth quarter of 2007. For further information, see "Power Cost Adjustment Mechanism" and "General Rate Case" in "Financial and Operating Outlook" of this Item 2.

PGE is working through the regulatory process to install a system-wide advanced metering infrastructure (AMI) network. The AMI project is expected to provide improved services to customers, achieve operational efficiencies and cost reductions, and serve as a platform for demand side management programs as they become cost effective. PGE filed a tariff with the OPUC, updated in July 2007, for approval to move this project forward. If approved, the Company expects full deployment by the end of 2010. For further information, see "Advanced Metering Infrastructure" in "Financial and Operating Outlook" of this Item 2.

Regional haze and mercury issues may require that PGE make modifications to its thermal generating facilities. The Environmental Protection Agency (EPA) has authority under the Clean Air Act to regulate greenhouse gases (including carbon dioxide), and both Oregon and Montana have tightened controls on mercury emissions, which could have an impact on both the Boardman and Colstrip plants. Although the full impact of future remediation measures is not yet determinable, it is expected that they will result in increased expenditures and be reflected in the Company's revenue requirements.

The Energy Policy Act of 2005 provided the Federal Energy Regulatory Commission (FERC) broad authority to review, approve and enforce national and regional electric reliability standards. Such standards, the majority of which apply to PGE, became effective on June 18, 2007. PGE has submitted mitigation plans to the Western Electricity Coordinating Council related to those standards with which the Company was not yet in compliance.

Pursuant to FERC Order 890, which became effective on July 14, 2007, PGE made a compliance filing to incorporate into its Open Access Transmission Tariff (OATT) the non-rate terms and conditions contained in the order. PGE will submit additional compliance filings to incorporate other new OATT provisions.

Financial Performance - Operating results for the first half of 2007 were markedly improved from the first half of last year due to improved margins on higher retail energy deliveries. Results for the first half of 2006 were adversely affected by the approximate $52 million incremental cost of replacing the output of Boardman, which was out of service for repairs. Results for the first half of 2007 include the positive impacts of a $20 million deferral of Boardman replacement power costs for future rate recovery, as approved by the OPUC. The settlement between PGE and certain California parties related to wholesale energy transactions in the western markets during 2000-2001 resulted in a $6 million increase to pre-tax income and an approximate $28 million cash settlement, which was received in June 2007.

On May 2, 2007, PGE's Board of Directors declared a quarterly common stock dividend of 23.5 cents per share, a 4.4% increase over the previous quarterly dividend.

PGE issued $170 million of First Mortgage Bonds in May 2007 under an agreement reached late last year and plans to issue $130 million of First Mortgage Bonds by October 1, 2007 under an April 2007 agreement. The Company maintains its investment grade bond ratings and stable operating cash flow, with adequate liquidity available through both its $400 million credit facility (which was extended for an additional year) and access to the commercial paper market. Such sources, along with the Company's ability to issue long-term debt and equity securities, are expected to sufficiently provide for continued capital and operating requirements, including investment in renewable energy from the Biglow Canyon project and the proposed AMI project.

The following review of PGE's results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. Due to seasonal fluctuations in electricity sales, as well as the price of wholesale energy and natural gas costs, quarterly operating earnings are not necessarily indicative of results to be expected for calendar year 2007.

PGE's net income in the second quarter of 2007 was $46 million, or $0.73 per diluted share, compared to $27 million, or $0.43 per diluted share, in the second quarter of 2006. The improved results were primarily attributable to increased margins on energy sales, as power costs in the second quarter of 2007 reflect the return of Boardman to full operation. Also contributing to the increase in earnings was the approximate $8 million after tax impact of adjustments related to SB 408, with a potential collection from customers recorded in the second quarter of 2007 and a potential customer refund recorded in the second quarter of 2006.

The following table summarizes Operating Revenues and Energy Sold and Delivered for the second quarter of 2007 and 2006: