8-K: CPUC Proposes Lower Cost Recovery for Sempra Subsidiaries

The California Public Utilities Commission issued proposed decisions impacting Sempra's subsidiaries, SDG&E and SoCalGas, by reducing wildfire cost recovery and lowering authorized return on equity.

Summary

• The California Public Utilities Commission (CPUC) issued proposed decisions (PDs) on November 14, 2025, affecting Sempra's subsidiaries, San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas).
• For SDG&E's 2024 General Rate Case (GRC) Track 2, the CPUC PD approved $1,036 million of the requested $1,472 million in wildfire mitigation plan costs incurred from 2019-2022, denying $436 million.
• The PD authorized a total Track 2 revenue requirement of $721 million for 2019-2027, which is $427 million lower than SDG&E's requested $1,148 million.
• SDG&E is authorized to collect $194 million in 2024 and $96 million in 2025, with the remaining $431 million to be collected from 2026-2028.
• For the 2026 Cost of Capital proceeding, the PD proposes to maintain the 52% equity layer in the capital structure for both SDG&E and SoCalGas.
• The PD authorizes a return on common equity (ROE) that is 35 basis points lower than the current authorized ROE for both SDG&E and SoCalGas, effective January 1, 2026, through December 31, 2028.
• The proposed weighted return on rate base is 7.39% for SDG&E and 7.49% for SoCalGas.

Sentiment

Score: 3

Explanation: The proposed decisions are largely negative for Sempra's subsidiaries, with significant reductions in cost recovery and a lower authorized return on equity, indicating a less favorable regulatory environment. While some costs were approved, the overall financial impact is adverse.

Positives

• CPUC PD approved $1,036 million of SDG&E's requested wildfire mitigation plan costs.
• The cost of capital mechanism is reauthorized to continue through 2028, providing some regulatory predictability.

Negatives

• SDG&E's requested wildfire mitigation costs were reduced by $436 million, with $193 million in O&M costs and $242 million in capital costs denied.
• The authorized Track 2 revenue requirement for SDG&E is $427 million lower than requested.
• The proposed return on common equity (ROE) for both SDG&E and SoCalGas is 35 basis points lower than the current authorized ROE, which could impact profitability.

Risks

• Potential liability for damages from California wildfires, regardless of fault, and inability to recover costs from insurance, wildfire funds, or customer rates.
• Adverse decisions, denials of cost recovery, audits, investigations, or other actions by regulatory bodies like the CPUC, which could include failure to honor contracts and commitments.
• Changes to capital expenditure plans and their potential impact on rate base or other growth.
• Changes in laws and regulations, including those related to tax and the energy industry, and evolving economic and political factors.
• Litigation, arbitration, property disputes, and other proceedings.
• Cybersecurity threats, including ransomware or other attacks on systems or energy infrastructure.
• Availability, sufficiency, and cost of capital resources, and ability to borrow on favorable terms, affected by credit rating downgrades, capital market instability, and fluctuating interest rates and inflation.
• Impact on affordability of customer rates and cost of capital for SDG&E and SoCalGas, and their ability to pass through higher costs due to volatility in inflation, interest rates, commodity prices, tariffs, and the cost of meeting demand for lower carbon and reliable energy.
• Impact of climate policies, laws, rules, regulations, and trends, including actions to reduce or eliminate reliance on natural gas, increased uncertainty for California natural gas distribution companies, and risk of non-recovery for stranded assets.
• Weather, natural disasters, pandemics, accidents, equipment failures, explosions, terrorism, information system outages, or other events that disrupt operations, damage facilities, or cause liability for damages, fines, and penalties, which may not be recoverable.
• Availability of electric power, natural gas, and natural gas storage and transportation capacity, including disruptions from transmission grid or pipeline failures.
• Oncor Electric Delivery Company LLC's ability to reduce or eliminate quarterly dividends due to regulatory and governance requirements.

Future Outlook

The proposed decisions, if adopted, will establish the ratemaking capital structures and authorized cost of capital for SDG&E and SoCalGas from January 1, 2026, through December 31, 2028. SDG&E is authorized to collect the remaining $431 million of its Track 2 revenue requirement from 2026 through 2028. The company cautions that forward-looking statements are based on assumptions and involve risks and uncertainties, and future results may differ materially.

Industry Context

The California Public Utilities Commission (CPUC) plays a critical role in regulating investor-owned utilities like SDG&E and SoCalGas, impacting their financial health and ability to recover costs. These proposed decisions reflect the ongoing regulatory scrutiny on utility spending, particularly concerning wildfire mitigation and the cost of capital. The reduction in approved costs and the lower authorized return on equity are consistent with a trend of increasing pressure on utilities to manage costs and demonstrate prudence, especially in high-cost operating environments like California. This also highlights the challenges utilities face in balancing infrastructure investments, safety, and customer affordability under strict regulatory oversight.

Comparison to Industry Standards

• The proposed 35 basis point reduction in Return on Common Equity (ROE) for SDG&E (to 9.88%) and SoCalGas (to 9.73%) places them at the lower end compared to the average authorized ROE for U.S. electric and gas utilities, which often ranges from 9.5% to 10.5% or higher in some jurisdictions. For example, utilities in states with less stringent regulatory environments or lower perceived risks might see ROEs closer to 10.0% to 10.5%.
• The denial of $436 million in wildfire mitigation costs for SDG&E, particularly for O&M and capital expenditures, indicates a more conservative stance by the CPUC compared to some other state commissions that might allow for broader cost recovery for safety-related investments. This reflects California's unique regulatory environment and the significant financial burden of wildfire liabilities.
• The maintenance of a 52% equity layer in the capital structure is relatively standard for regulated utilities, aiming to balance financial stability with cost of capital.

Stakeholder Impact

• Shareholders: Potential negative impact on Sempra's earnings and valuation due to reduced cost recovery for SDG&E and a lower authorized return on equity for both SDG&E and SoCalGas.
• Customers: May see lower rate increases than initially proposed by SDG&E due to denied cost recovery, potentially improving affordability.
• Employees: No direct impact mentioned, but long-term financial pressures could indirectly affect staffing or investment in certain areas.
• Creditors: The lower authorized ROE and reduced cost recovery could slightly increase perceived regulatory risk, potentially impacting future borrowing costs, though the maintained capital structure provides stability.

Next Steps

• SDG&E and SoCalGas are evaluating the Proposed Decisions.
• Comments on the PDs are due by December 4, 2025.
• Reply comments are due by December 9, 2025.
• The earliest CPUC meeting for a vote on the PDs is December 18, 2025.

Key Dates

Recommendation

The proposed decisions from the CPUC are largely negative, reducing cost recovery for SDG&E's wildfire mitigation efforts and lowering the authorized return on equity for both SDG&E and SoCalGas. This indicates a less favorable regulatory environment and could pressure future earnings. However, these are *proposed* decisions, and there's a period for comments and a final vote. The long-term regulated nature of the business provides stability, but the immediate outlook is challenged by these regulatory headwinds. An investor should hold to see the final CPUC decision and assess the full impact before making further moves.

Keywords

Sempra, SDG&E, SoCalGas, CPUC, General Rate Case, Cost of Capital, Wildfire Mitigation, Regulatory Decision, Utility Regulation, Return on Equity, Revenue Requirement, California Utilities, Energy Policy