8-K: California Regulators Approve Rate Increases for Sempra Utilities, Addressing Wildfire and Safety Costs

The California Public Utilities Commission approved a final decision in the 2024 General Rate Case for San Diego Gas & Electric and Southern California Gas, authorizing revenue increases and cost recovery mechanisms.

Summary

• The California Public Utilities Commission (CPUC) has approved the 2024 General Rate Case (GRC) for San Diego Gas & Electric (SDG&E) and Southern California Gas Company (SoCalGas), both subsidiaries of Sempra.
• The GRC authorizes revenue requirements for 2024 and attrition year adjustments for 2025 through 2027.
• SDG&E's 2024 revenue requirement is set at $2,699 million, a 7.5% increase over 2023, which includes $2,193 million for electric and $506 million for gas operations.
• This increase is net of a $68 million income tax benefit passed through to customers.
• SDG&E's revenue requirements will increase by 5.45%, 4.17%, and 4.11% in 2025, 2026, and 2027, respectively.
• SoCalGas's 2024 revenue requirement is set at $3,806 million, a 9.3% increase over 2023, which is net of a $202 million income tax benefit passed through to customers.
• SoCalGas's revenue requirements will increase by 5.00%, 2.91%, and 2.92% in 2025, 2026, and 2027, respectively.
• The GRC also provides mechanisms for SDG&E and SoCalGas to seek cost recovery for additional projects, including wildfire mitigation and pipeline safety enhancements.
• A decision on SDG&E's Track 2 request for wildfire mitigation costs from 2019-2022 is expected in the first half of 2025.
• SDG&E and SoCalGas will record retroactive impacts of the GRC in the fourth quarter of 2024.
• The Federal Energy Regulatory Commission (FERC) ruled that SDG&E is not eligible for a California ISO adder, resulting in a $120 million charge ($89 million after tax) for Sempra and SDG&E in Q4 2024.
• SDG&E intends to appeal the FERC order in the first quarter of 2025.
• The CPUC has determined that the Aliso Canyon natural gas storage facility is necessary for reliability and has set the maximum working storage level at 68.6 bcf.

Sentiment

Score: 6

Explanation: The document contains both positive and negative elements. The approval of the GRC provides revenue certainty, but the FERC ruling and potential cost increases for customers are negative factors. The overall sentiment is neutral to slightly positive.

Positives

• The GRC provides a clear path for SDG&E and SoCalGas to recover costs for safety, maintenance, and reliability investments.
• The approval of the GRC provides revenue certainty for the utilities for the next three years.
• The CPUC's decision on Aliso Canyon provides clarity on the facility's role in maintaining energy reliability.
• The GRC includes mechanisms for cost recovery of wildfire mitigation and pipeline safety enhancement projects.

Negatives

• The FERC ruling on the California ISO adder will result in a $120 million charge ($89 million after tax) for Sempra and SDG&E.
• SDG&E's Track 2 request for wildfire mitigation costs from 2019-2022 is still pending and will not be resolved until the first half of 2025.
• The increased revenue requirements will likely lead to higher costs for customers.

Risks

• The cost recovery of additional projects and programs is subject to CPUC approval, creating uncertainty.
• The appeal of the FERC order regarding the California ISO adder may not be successful.
• Future CPUC biennial reviews of Aliso Canyon could lead to changes in its operation.
• The company faces risks related to wildfires, regulatory actions, cybersecurity threats, and macroeconomic trends.

Future Outlook

The report includes forward-looking statements regarding future cost recovery, project approvals, and regulatory decisions, which are subject to risks and uncertainties.

Management Comments

• SDG&E believes there is a reasonable basis to appeal the FERC order and intends to do so in the first quarter of 2025.

Industry Context

This announcement is significant for the regulated utility sector in California, as it reflects the ongoing process of rate setting and cost recovery for major infrastructure and safety investments. The outcomes of these rate cases directly impact the financial performance of utilities like SDG&E and SoCalGas, and the costs borne by their customers. The focus on wildfire mitigation and pipeline safety is consistent with broader industry trends and regulatory priorities in California.

Comparison to Industry Standards

• The authorized rate of return for SDG&E and SoCalGas at 7.45% and 7.49% respectively, is within the typical range for regulated utilities, but the specific rate is subject to the cost of capital and regulatory environment in California.
• The revenue increases of 7.5% for SDG&E and 9.3% for SoCalGas are substantial and reflect the significant investments required for infrastructure upgrades and safety measures, which is a common theme for utilities in high-risk areas.
• The FERC ruling on the California ISO adder is a specific issue for SDG&E and highlights the complexities of federal and state regulatory interactions, which can impact the financial performance of utilities.
• The Aliso Canyon decision is a unique situation for SoCalGas, as it involves a major gas storage facility and its role in regional energy reliability, which is not directly comparable to other utilities.

Stakeholder Impact

• Shareholders will benefit from the increased revenue certainty and cost recovery mechanisms.
• Customers will likely face higher rates due to the increased revenue requirements.
• Employees will be impacted by the ongoing projects and programs related to safety and reliability.
• Suppliers and contractors will be involved in the various projects and programs.

Next Steps

• SDG&E will appeal the FERC order in the first quarter of 2025.
• SDG&E expects a decision on its Track 2 request for wildfire mitigation costs in the first half of 2025.
• SDG&E will file a Track 3 request for wildfire mitigation costs in the first half of 2025.
• SDG&E and SoCalGas will file advice letters for certain capital projects upon completion.
• SDG&E and SoCalGas will file applications for cost recovery of specified projects and programs.

Key Dates

Keywords

General Rate Case, CPUC, SDG&E, SoCalGas, Revenue Requirement, Wildfire Mitigation, Pipeline Safety, FERC, Aliso Canyon, Cost Recovery