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SEMPRA UTILITIES' REGULATORY MATTERSPOWER PROCUREMENT AND RESOURCE PLANNINGSunrise Powerlink Electric Transmission LineIn December 2008, the CPUC issued a final decision authorizing SDG&E to construct a 500-kilovolt (kV) electric transmission line between the Imperial Valley and the San Diego region (Sunrise Powerlink). This line is designed to provide 1,000 MW of increased import capability into the San Diego area. This CPUC decision approved SDG&E's request to construct the Sunrise Powerlink along a route that would generally run south of the Anza-Borrego Desert State Park. The decision also approves the environmental impact review conducted jointly by the CPUC and the Bureau of Land Management (BLM) and establishes a total project cost cap of $1.9 billion, including approximately $190 million for environmental mitigation costs. In January 2009, the BLM issued its decision approving the project, route and environmental review. The CPUC decision requires SDG&E to adhere to certain commitments it made during the application process, as follows:<ul><li style="margin-left:9.35px;list-style:square;">not to contract, for any length of term, with conventional coal generators to deliver power via the Sunrise Powerlink;</li><li style="margin-left:9.35px;list-style:square;">if any currently approved renewable energy contract that is deliverable via the Sunrise Powerlink fails, to replace it with a viable contract with a renewable generator located in the Imperial Valley region; and</li></ul><ul><li style="margin-left:9.35px;list-style:square;">voluntarily raise SDG&E's Renewables Portfolio Standard Program goal (discussed below under "Renewable Energy") to 33 percent by 2020.</li></ul>After the issuance by the CPUC of its final decision, the Utility Consumers Action Network (UCAN) and the Center for Biological Diversity/Sierra Club (CBD) applied for rehearing of the final decision. After the CPUC denied these rehearing applications, in August 2009, UCAN and the CBD jointly filed a petition with the California Supreme Court challenging the CPUC's decision with regard to implementation of the California Environmental Quality Act (CEQA). UCAN also filed a petition with the California Court of Appeal (Court of Appeal) challenging the decision on other legal grounds, which the Court of Appeal denied in August 2010. The UCAN/CBD appeal will be addressed by the California Supreme Court now that the Court of Appeal has dismissed UCAN's first petition. In addition, three appeals of the BLM decision were filed with the Interior Board of Land Appeals (IBLA) by individuals, a community organization, and the Viejas Indian tribe. The Viejas Indian tribe withdrew its appeal and the IBLA denied the other two appeals. Opponents who filed the BLM appeals also filed a lawsuit in Federal District Court for declaratory and injunctive relief regarding Sunrise Powerlink. The complaint alleges that the BLM failed to properly assess the environmental impacts of the approved Sunrise Powerlink route and the related potential development of renewable resources in east San Diego County and Imperial County. The complaint requests a declaration that the BLM violated federal law in approving Sunrise Powerlink and an injunction against any construction activities.  On October 25, 2010, the court granted SDG&E's motion to dismiss the complaint in its entirety for want of standing; the plaintiffs filed an amended complaint on November 5, 2010. In September 2010, the CPUC and BLM jointly approved the final Project Modification Report, accepting all of the proposed modifications to the approved route and finding that no additional environmental studies are required. In October 2010, the United States Forest Service (USFS) issued a decision rejecting all pending appeals and reaffirming its July 2010 decision approving the segment of Sunrise Powerlink's route within its jurisdiction. The USFS is expected to issue a special use permit to SDG&E by year-end, which will allow SDG&E to begin construction on USFS land. On October 22, 2010, the CBD and the plaintiffs in the Federal District Court suit against BLM filed an application for rehearing with the CPUC challenging its approval of the Project Modification Report. The CPUC summarily rejected this application for rehearing as contrary to the CPUC's rules. On October 25, 2010, the BLM federal court plaintiffs filed an appeal with the IBLA challenging the BLM's approval of the Project Modification Report. This appeal was accompanied by a motion for a stay of construction of the project, which SDG&E opposed on November 4, 2010. SDG&E will also oppose the IBLA appeal.Sunrise Powerlink costs will be recovered in SDG&E's Electric Transmission Formula Rate, where SDG&E must demonstrate to the Federal Energy Regulatory Commission (FERC) that such costs were prudently incurred. The total amount invested by SDG&E in the Sunrise Powerlink project as of September 30, 2010 was $447 million, which is included in Property, Plant and Equipment on the Condensed Consolidated Balance Sheets of Sempra Energy and SDG&E. SDG&E expects the Sunrise Powerlink to be in commercial operation in the second half of 2012.We provide additional information concerning Sunrise Powerlink in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.Renewable EnergyCertain California electric retail sellers, including SDG&E, are required to deliver 20 percent of their retail energy sales from renewable energy sources beginning in 2010. The rules governing this requirement, administered by both the CPUC and the California Energy Commission (CEC), are generally known as the Renewables Portfolio Standard (RPS) Program. In September 2009, the Governor of California issued an Executive Order which set a target for each California utility to procure 33 percent of their annual electric energy requirements from renewable energy sources by 2020. This Executive Order designates the California Air Resources Board (CARB) as the agency responsible for establishing the compliance rules and regulations under CARB's Assembly Bill 32 authority to regulate greenhouse gas emissions. In September 2010, CARB adopted a requirement known as the California Renewable Energy Standard (RES), which obligates California utilities to procure 33 percent of their annual electric energy requirements from renewable energy sources by 2020. CARB has not yet issued the final version of formal regulations articulating the requirement or detailing how the RES will be implemented.In 2008, the CPUC issued a decision defining flexible compliance mechanisms that can be used to defer compliance with or meet the RPS Program mandates in 2010 and beyond. The decision established that a finding by the CPUC of insufficient transmission is a permissible reason to defer compliance with the RPS Program mandates. This decision also confirmed that any renewable energy procured in excess of the established targets for prior years, currently and in the future, could be applied to any procurement shortfalls in the years 2010 and beyond.SDG&E continues to procure renewable energy supplies to achieve the RPS Program goals and the Executive Order/RES requirements. A substantial number of these supply contracts, however, are contingent upon many factors, including: <ul><li style="margin-left:9.35px;list-style:square;">access to electric transmission infrastructure (including SDG&E's Sunrise Powerlink transmission line); </li><li style="margin-left:9.35px;list-style:square;">timely regulatory approval of contracted renewable energy projects; </li><li style="margin-left:9.35px;list-style:square;">the renewable energy project developers' ability to obtain project financing and permitting; and </li></ul><ul><li style="margin-left:9.35px;list-style:square;">successful development and implementation of the renewable energy technologies. </li></ul>SDG&E believes it will be able to comply with the RPS Program requirements based on its contracting activity and application of the flexible compliance mechanisms. SDG&E's failure to comply with the RPS Program requirements in 2010, or in any subsequent years, could subject it to a CPUC-imposed penalty of 5 cents per kilowatt hour of renewable energy under-delivery up to a maximum penalty of $25 million per year. A determination regarding RES compliance is not possible at this time, as program details are not yet known.Renewable EnergyCertain California electric retail sellers, including SDG&E, are required to deliver 20 percent of their retail energy sales from renewable energy sources beginning in 2010. The rules governing this requirement, administered by both the CPUC and the California Energy Commission (CEC), are generally known as the Renewables Portfolio Standard (RPS) Program. In September 2009, the Governor of California issued an Executive Order which set a target for each California utility to procure 33 percent of their annual electric energy requirements from renewable energy sources by 2020. This Executive Order designates the California Air Resources Board (CARB) as the agency responsible for establishing the compliance rules and regulations under CARB's Assembly Bill 32 authority to regulate greenhouse gas emissions. In September 2010, CARB adopted a requirement known as the California Renewable Energy Standard (RES), which obligates California utilities to procure 33 percent of their annual electric energy requirements from renewable energy sources by 2020. CARB has not yet issued the final version of formal regulations articulating the requirement or detailing how the RES will be implemented.In 2008, the CPUC issued a decision defining flexible compliance mechanisms that can be used to defer compliance with or meet the RPS Program mandates in 2010 and beyond. The decision established that a finding by the CPUC of insufficient transmission is a permissible reason to defer compliance with the RPS Program mandates. This decision also confirmed that any renewable energy procured in excess of the established targets for prior years, currently and in the future, could be applied to any procurement shortfalls in the years 2010 and beyond.SDG&E continues to procure renewable energy supplies to achieve the RPS Program goals and the Executive Order/RES requirements. A substantial number of these supply contracts, however, are contingent upon many factors, including: <ul><li style="margin-left:9.35px;list-style:square;">access to electric transmission infrastructure (including SDG&E's Sunrise Powerlink transmission line); </li><li style="margin-left:9.35px;list-style:square;">timely regulatory approval of contracted renewable energy projects; </li><li style="margin-left:9.35px;list-style:square;">the renewable energy project developers' ability to obtain project financing and permitting; and </li></ul><ul><li style="margin-left:9.35px;list-style:square;">successful development and implementation of the renewable energy technologies. </li></ul>SDG&E believes it will be able to comply with the RPS Program requirements based on its contracting activity and application of the flexible compliance mechanisms. SDG&E's failure to comply with the RPS Program requirements in 2010, or in any subsequent years, could subject it to a CPUC-imposed penalty of 5 cents per kilowatt hour of renewable energy under-delivery up to a maximum penalty of $25 million per year. A determination regarding RES compliance is not possible at this time, as program details are not yet known.Solar Photovoltaic ProgramThe CPUC issued a decision in September 2010 approving a new solar photovoltaic (PV) program for SDG&E. Under the adopted program, SDG&E may develop up to 100 MW of solar PV in its service area, consisting of up to 26 MW of utility owned generation and up to 74 MW of purchased power from independent producers. Individual project size may range up to 5 MW. Over the 5-year program, SDG&E will be allowed to spend up to $100 million in capital costs for the systems it owns, based on an overall cost cap of $3.50 per watt, including a 10-percent contingency factor. A cost cap of $235 per MWh will apply to purchased power under the program. East County SubstationIn August 2009, SDG&E filed an application with the CPUC for authorization to proceed with the East County Substation Project, which will include construction of a new 500/230/138-kV substation, rebuilding of the existing Boulevard Substation and construction of a new 138-kV transmission line connecting the two substations. The project, estimated to cost approximately $280 million, would allow interconnections from new renewable-generation sources and enhance the reliability of electric service to a number of communities. The CPUC and BLM have agreed to prepare a joint environmental impact report and environmental impact statement. A CPUC decision on this project is expected in 2011.GENERAL RATE CASE (GRC)The CPUC uses a general rate case proceeding to prospectively set rates sufficient to allow the Sempra Utilities to recover their reasonable cost of operations and to provide the opportunity to realize an acceptable rate of return on their investments. The Sempra Utilities filed their Notices of Intent (NOI) for the 2012 General Rate Case (2012 GRC) in August 2010. These NOIs are preliminary applications that propose revenue requirement increases of $246 million for SDG&E and $282 million for SoCalGas over their respective 2011 authorized revenue. These increases would equate to increases in rates of 7 percent for SDG&E and 7.4 percent for SoCalGas over their 2010 rates. In October 2010, the CPUC staff completed its review of the NOIs and accepted the proposed filings, enabling both SDG&E and SoCalGas to file their final applications in mid-December 2010. The CPUC is scheduled to issue a decision on each of the final applications in late 2011, with changes in rates to become effective on January 1, 2012. A number of parties have asked the CPUC to delay the filing of SDG&E's and SoCalGas' next GRC applications for at least a year. To date, the CPUC has denied all such requests and has ordered SDG&E and SoCalGas to follow their original GRC schedules.UTILITY INCENTIVE MECHANISMS The CPUC applies performance-based measures and incentive mechanisms to all California utilities, under which the Sempra Utilities have earnings potential above authorized base margins if they achieve or exceed specific performance and operating goals. We provide additional information regarding these incentive mechanisms in Note 16 of the Notes to Consolidated Financial Statements in the Annual Report, and updates below.Natural Gas ProcurementIn January 2010, the CPUC approved a Gas Cost Incentive Mechanism (GCIM) award of $12 million for SoCalGas' procurement activities during the 12-month period ending March 31, 2009. In June 2010, SoCalGas applied to the CPUC for approval of a GCIM award of $6 million for SoCalGas' procurement activities during the 12-month period ending March 31, 2010. SoCalGas expects a CPUC decision in 2011.Energy Efficiency In December 2009, the CPUC awarded $0.3 million and $2.1 million, net of a 35 percent holdback pending a final true-up in 2010, to SDG&E and SoCalGas, respectively, for their performance during the 2006 – 2008 program period. In February 2010, the Sempra Utilities filed a petition with the CPUC to correct errors in the computation of the awards. If adopted, the changes would increase the awards by $0.4 million for SDG&E and $1.3 million for SoCalGas, net of the 35 percent holdback.An Administrative Law Judge draft decision and a Commissioner alternate decision were issued in September 2010 regarding the final true-up of the energy efficiency incentive earnings for the 2006 – 2008 program period. The draft decision rules that no additional incentive payments are warranted for the final true-up of incentive earnings. The alternate decision approves additional incentive awards of $6 million for SDG&E and $3.9 million for SoCalGas for the final true-up of the amounts held back for prior years' awards, but makes no determination on the petition to correct errors. A final decision is expected by the end of 2010. COST OF CAPITALA cost of capital proceeding determines the Sempra Utilities' authorized capital structure and the authorized rate of return that the Sempra Utilities may earn on their electric and natural gas distribution and electric generation assets.In January 2010, the CPUC approved SDG&E's and the Division of Ratepayer Advocates' (DRA) joint petition to delay SDG&E's next scheduled cost of capital proceeding for two years. With this approval, SDG&E's next cost of capital application is scheduled to be filed in April 2012 for a 2013 test year, consistent with the schedule for cost of capital applications for each of Southern California Edison (Edison) and Pacific Gas and Electric (PG&E).In addition to establishing the authorized rate of return, a cost of capital proceeding also addresses market-based benchmarks to be monitored to determine whether an adjustment to the established authorized rate of return is required during the interim years between cost of capital proceedings. SDG&E's cost of capital benchmark is based on the 12-month average monthly A-rated utility bond yield as published by Moody's for the 12-month period October through September of each fiscal year. If this 12-month average falls outside of the range of 5.02 percent to 7.02 percent, SDG&E's authorized rate of return would be adjusted, upward or downward, by one-half of the difference between the 12-month average and 6.02 percent (SDG&E's benchmark interest rate), effective January 1 following the year in which the benchmark range was exceeded.SoCalGas' cost of capital trigger mechanism identifies two conditions for determining whether a change in the authorized rate of return is required. Both conditions are based on the 30-year Treasury Bond Yields – one being the most recent 12-month rolling average yield and the second being the corresponding 12-month forecasted rolling yield on 30-year Treasury Bonds as published by Global Insights. If both interest rates fall outside a range of 3.88 percent to 6.88 percent, SoCalGas' authorized rate of return would be adjusted, upward or downward, by one-half of the difference between the historical 12-month rolling average yield and 5.38 percent (SoCalGas' benchmark interest rate), effective January 1 following the year in which both conditions were exceeded.At September 30, 2010, neither SDG&E's nor SoCalGas' benchmark ranges have been exceeded.ADVANCED METERING INFRASTRUCTURE In April 2010, the CPUC issued a decision approving SoCalGas' application to upgrade approximately six million natural gas meters with an advanced metering infrastructure (AMI), subject to certain safeguards to better ensure its cost effectiveness for ratepayers. The approved cost of the project is $1.05 billion (including approximately $900 million in capital investment), with SoCalGas being subject to risk/reward sharing for costs above or below this amount. Installation of the meters is expected to begin in late 2012 and continue through 2017. In May 2010, The Utility Reform Network (TURN) and the Utility Workers Union of America (UWUA) Local 132, parties opposing SoCalGas' AMI application, filed an application for rehearing of the CPUC's decision. The application for rehearing is still pending. SDG&E REQUEST FOR AUTHORITY TO INVEST IN WIND FARMIn July 2010, SDG&E filed a request with the CPUC seeking authority to make a tax equity investment in the holding company of a wind farm project in an amount not to exceed $600 million. SDG&E is seeking to treat the investment as a rate-based asset for which it would earn its authorized rate of return. A CPUC decision is expected in 2011.If approved by the CPUC, and after the wind farm project has met all of the conditions precedent set forth in the definitive documents, SDG&E would invest in one or more project holding companies in an amount not to exceed 80% of the project costs (not to exceed an aggregate amount of $600 million) upon the initiation of commercial operation of the project. SDG&E expects the project to be in commercial operation in the second half of 2012.2007 WILDFIRES COST RECOVERY FOR COMPANY FACILITIES In October 2010, the CPUC issued a decision approving a settlement agreement between SDG&E and the DRA, authorizing SDG&E to recover $43 million of capital costs incurred to replace and repair company facilities under CPUC jurisdiction damaged by the October 2007 wildfires. This decision was in response to an application that SDG&E filed with the CPUC in March 2009 seeking to recover $49.8 million of incremental costs ($43 million of capital costs and $6.8 million of operation and maintenance costs), which application was protested by the DRA.SDG&E also incurred $30.1 million of incremental costs for the replacement and repair of company facilities under FERC jurisdiction, which are currently being recovered in SDG&E's electric transmission rates.We discuss recovery of 2007 wildfire litigation costs in Note 10.INSURANCE COST RECOVERYSDG&E filed an application with the CPUC in August 2009 seeking authorization to recover higher liability insurance premiums, which SDG&E began incurring commencing July 1, 2009, and any losses realized due to higher deductibles associated with the new policies. Evidentiary hearings were held in April 2010 and a final CPUC decision is expected by the end of 2010. SDG&E made the filing under the CPUC's rules allowing utilities to seek recovery of significant cost increases incurred between GRC filings resulting from unforeseen circumstances. SDG&E is requesting a $29 million revenue requirement for the 2009/2010 policy period for the incremental increase in its liability and wildfire insurance premium costs above what is currently authorized in rates and proposes a mechanism for recovery of future liability insurance costs incurred in the 2010/2011 policy period and the first six months of the 2011/2012 policy period. The CPUC's rules allow a utility to seek recovery of incurred costs that meet certain criteria, subject to a $5 million deductible per event. SDG&E has asked that the increase in liability insurance costs for the 2009/2010, 2010/2011 and the first six months of the 2011/2012 policy periods be deemed a single event subject to one $5 million deductible. In the nine months ended September 30, 2010 and 2009, SDG&E's after-tax earnings were adversely impacted by $20 million and $5 million, respectively, due to the incremental insurance premiums associated with its wildfire coverage. EXCESS WILDFIRE CLAIMS COST RECOVERYSDG&E and SoCalGas filed an application, along with other related filings, with the CPUC in August 2009 proposing a new mechanism for the future recovery of all wildfire-related expenses for claims, litigation expenses and insurance premiums that are in excess of amounts authorized by the CPUC for recovery in rates. In connection with these filings, SDG&E is seeking the recovery of costs incurred by SDG&E for the 2007 wildfire losses that are in excess of amounts recovered from its insurance coverage and other potentially responsible third parties, as well as similar costs for future wildfires, if and when incurred. The application for a new mechanism for recovery of costs incurred for future wildfires was made jointly with Edison and PG&E. In July 2010, the CPUC approved the utilities' requests for separate regulatory accounts to record the subject expenses while the joint utility application is pending before the CPUC. Several parties protested the original application and, in response, the utilities submitted an amended application in July 2010. A proceeding schedule has not yet been established.We provide additional information about 2007 wildfire litigation costs and their recovery in Note 10. NOTE 9. SEMPRA UTILITIES' REGULATORY MATTERSPOWER PROCUREMENT AND RESOURCE PLANNINGSunrise Powerlink Electric Transmission LineIn December 2008, the CPUC false false false us-types:textBlockItemType textblock This element can be used to encapsulate the entire disclosure for public utilities (including data and tables). 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