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CALIFORNIA UTILITIES' REGULATORY MATTERS | 3 Months Ended
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Mar. 31, 2015
Notes to Consolidated Financial Statements [Abstract] |
Sempra Utilities' Regulatory Matters | NOTE 10. CALIFORNIA UTILITIES' REGULATORY MATTERS We discuss regulatory matters affecting our California Utilities in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report, and provide updates to those discussions and details of any new matters below. JOINT MATTERS CPUC General Rate Case (GRC) The CPUC uses a general rate case proceeding to prospectively set rates sufficient to allow the California Utilities to recover their reasonable cost of operations and maintenance and to provide the opportunity to realize their authorized rates of return on their investment. The California Utilities filed their 2016 General Rate Case (2016 GRC) applications in November 2014. These filings requested revenue requirement increases of $133 million and $256 million for SDG&E an d SoCalGas, respectively, over their 2015 revenue requirements. In February 2015, the CPUC issued a scoping memo setting the schedule for the proceeding, including the issuance of a proposed decision by the end of 2015. In March 2015, the California Utilit ies revised their requests to make various updates and reflect the impact of the Tax Increase Prevention Act signed into law in December 2014. At SoCalGas, this resulted in a reduction of $10 million compared to its original request, or a total revenue req uirement in 2016 of $2.342 billion. This is an increase of $246 million or 12 percent over 2015, excluding the impact of the 2015 revenue requirement increase discussed below under “Increase to CPUC-Authorized Annual Revenue Requirement.” At SDG&E, the Mar ch 2015 revised request result ed in a reduction of $6 million compared to its original request, or a total revenue requirement in 2016 of $1.905 billion. This is an increase of $111 million or 6 percent over 2015. Th is increase includes an adjustment of $1 6 million to the comparable 2015 estimated revenue requirement since the November 2014 filings. The ORA served its report and testimony in the 2016 GRC on April 24, 2015. The California Utilities are in the process of analyzing the ORA’s report and financial model. T he ORA recommends an increase of $70 million (3.3 percent over 2015) in 2016 compared to SoCalGas’ request of a $246 million increase. The ORA further recommended increases for SoCalGas of $76 million (3.5 percent) and $78 million (3.5 percent) in 2017 and 2018, respectively. With regard to SDG&E, the ORA recommends a $62 million (3.5 percent less than 2015) decrease in 2016 compared to SDG&E’s request for a $111 million increase. In 2017 and 2018, the ORA recommends increases of $61 million (3.5 percent) and $63 million (3.5 percent), respectively. In addition, the ORA recommends that SDG&E and SoCalGas continue a four-year rate case cycle (2016-2019), rather than adopt a three-year cycle. Testimony from other interv ening parties is due on May 15, 2015 with ten days of public participation hearings from May 12 through June 10, 2015. The California Utilities plan on filing rebuttal testimony to the ORA’s and other intervenors’ testimony by June 12, 2015. We provide add itional information regarding the 2016 GRC in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report. Natural Gas Pipeline Operations Safety Assessments In June 2014, the CPUC issued a final decision in the Triennial Cost Allocation Proceeding (TCAP) addressing SDG&E’s and SoCalGas’ Pipeline Safety Enhancement Plan (PSEP). Specifically, the decision: approved the utilities’ model for implementing PSEP; approved a process, including a reasonableness review, to determine the amount that the utilities will be authorized to recover from ratepayers for the interim costs incurred through the date of the fina l decision to implement PSEP, which is recorded in the regulatory accounts authorized by the CPUC as noted above; approved balancing account treatment, subject to a reasonableness review, for incremental costs yet to be incurred to implement PSEP; and esta blished the criteria to determine the amounts that would not be eligible for cost recovery, including: certain costs incurred or to be incurred searching for pipeline test records, the cost of pressure testing pipelines installed after July 1, 1961 for w hich the company has not found sufficient records of testing, and any undepreciated balances for pipelines installed after 1961 that were replaced due to insufficient documentation of pressure testing. As a result of this decision, SoCalGas recorded an af ter-tax earnings charge of $5 million in 2014 for costs incurred in prior periods for which SoCalGas was disallowed recovery. After taking the amounts disallowed for recovery into consideration, as of March 31, 2015, SDG&E and SoCalGas have recorded PSEP c osts of $4 million and $104 million, respectively, in the CPUC-authorized regulatory account. In regard to requesting recovery from customers for PSEP costs incurred and recorded in accordance with the TCAP decision, SDG&E and SoCalGas are authorized to fi le an application with the CPUC for recovery of such costs up to the date of the TCAP decision and then annually for costs incurred through the end of each calendar year beginning with the period ending December 31, 2015. SoCalGas and SDG&E currently expec t to file such applications no later than the third quarter of the year following and would expect a decision from the CPUC approximately 12 to 18 months following the date of the application (i.e., a decision on the recovery of costs recorded in the PSEP regulatory accounts as of December 31, 2015 would be expected by mid-2017). In response to this significant delay in receiving the authority to recover PSEP costs incurred from customers, in October 2014, SDG&E and SoCalGas filed a petition for modificati on with the CPUC requesting authority to begin to recover PSEP costs from customers in the year in which the costs are incurred, subject to refund pending the results of a reasonableness review by the CPUC, instead of in a subsequent year. This request is pending at the CPUC. In December 2014, SDG&E and SoCalGas filed an application with the CPUC for recovery of $0.1 million and $46 million, respectively, in costs recorded in the regulatory account through June 11, 2014. We expect a decision on this applica tion in the first half of 2016. In July 2014, the ORA and TURN filed a joint application for rehearing of the CPUC’s June 2014 final decision. The ORA and TURN alleged that the CPUC made a legal error in directing that ratepayers, not shareholders, be res ponsible for the costs associated with testing or replacing transmission pipelines that were installed between January 1, 1956 and July 1, 1961 for which the California Utilities do not have a record of a pressure test. In November 2014, the CPUC denied th e ORA and TURN request for rehearing of the decision adopting the PSEP. In December 2014, ORA and TURN sought rehearing of the CPUC’s decision on rehearing. In late December 2014, SoCalGas and SDG&E filed their opposition to this second application for reh earing, and are continuing to implement PSEP in accordance with the June 2014 CPUC decision. In March 2015, the CPUC issued a decision denying ORA’s and TURN’s second request for rehearing, but keeping the record in the proceeding open to admit additional evidence on the limited issue of pressure testing of pipelines installed between January 1, 1956 and July 1, 1961. As part of this review, the CPUC will allow parties to submit additional evidence relevant to this narrow issue to ensure a complete record, with no additional discovery allowed. The ORA and TURN filed their responses on May 1, 2015. We provide additional information regarding these rulemaking proceedings and the California Utilities’ PSEP in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report. Southern Gas System Reliability Project In December 2013, SoCalGas and SDG&E filed a joint application with the CPUC seeking authority to recover the full cost of the Southern Gas System Reliability Project. Also known as the North-South Gas Project, the project will enhance reliability on the southern portions of the California Utilities’ integrated natural gas transmission system (Southern System). The estimated cost of the project, as originally filed, is between $800 million to $850 million. As originally proposed, the project consisted of three components: 1) constructing an approximately 60-mile, 36-inch natural gas transmission pipeline between the SoCalGas Adelanto compressor station and the Moreno pressure limiting station; 2) upgrading the Adelanto compressor station; and 3) constructing an approximately 31-mile, 36-inch pipeline from the Moreno pressure limiting station to a pressure limiting station in Whitewater. In November 2014, the California Utilities revised the scope of the proposed project to only include connecting the Adelanto compressor station and Moreno pres sure limiting station with approximately 65 miles of 36-inch pipeline and upgrading the Adelanto compressor station, and eliminating the Moreno-Whitewater pipeline. T he estimated cost of the revised project, including updated cost estimates, remains unchanged from the original cost estimate of between $800 million and $850 million, while providing comparable benefits for customers. In March 2015, the CPUC issued a revised scoping ruling establishing a schedule, directing that the Moreno-Whitewater portion of the original project be excluded from scope and that any other future proj ects would be addressed separately. If approved by the CPUC and subject to environmental permitting, g iven the revised project scope and updated schedule in this proceeding, the project could commence construction in 2017 and be in service by the end of 2019. We provide addition al information about the project in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report. Utility Incentive Mechanisms The CPUC applies performance-based measures and incentive mechanisms to all California investor-owned utilities, under which the California 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 14 of the Notes to Consolidated Financial S tatements in the Annual Report, and below. Natural Gas Procurement In February 2015, the CPUC issued a final decision approving SoCalGas’ application for a gas cost incentive mechanism (GCIM) award of $13.7 million for natural gas procured for its core cus tomers during the 12-month period ending March 31, 2014. SoCalGas recorded this award in the first quarter of 2015. SDG&E MATTERS SONGS We discuss regulatory and other matters related to SONGS in Note 9. P ower Procurement and Resource Planning Cleveland National Forest Transmission Projects SDG&E filed an application with the CPUC in October 2012 for a permit to construct various transmission line replacement projects in and around the Cleveland National Forest (CNF). The proposed projects will replace and fire-harden five existing transmission lines and six existing distribution lines at an estimated cost of between $400 million and $450 million. As directed by the CPUC, SDG&E filed an amended application in June 2013 to provide notice of certain alternatives proposed by the U.S. Forest Service (USFS) in connection with SDG&E’s request for a Master Special Use Permit (MSUP). USFS approval of the MSUP will establish land rights and conditions for SDG&E’s continued operation and maintenance of facilities located within the CNF. CPUC approval is not requi red for the MSUP, even though construction of the projects is subject to review by both the USFS and CPUC. A draft environmental impact report (EIR/EIS), developed jointly by the CPUC and USFS, was issued in September 2014 and a final EIR/EIS is expected i n the second quarter of 2015. SDG&E currently expects a CPUC decision on the transmission projects in the second half of 2015 and then expects the various phases of this project to be placed in service starting in 2016 and continuing through the end of the project in 2019. Sycamore-Peñasquitos Transmission Project In March 2014, the CAISO selected SDG&E, as a result of a competitive bid process, to construct the Sycamore-Peñasquitos 230-kilovolt (kV) transmission project, which will provide a 16.7-mile transmission connection between SDG&E’s Sycamore Canyon and Peñasquitos substations. In July 2014, the CPUC notified SDG&E that the application requesting a Certificate of Public Conve nience and Necessity (CPCN) to construct the line, which was filed with the CPUC in April 2014, is complete. The estimated $120 million to $150 million project was identified by the CAISO and a state task force as necessary to ensure grid reliability given the closure of SONGS. The project will also serve to strengthen renewable energy infrastructure in the region. In October 2014, SDG&E filed a request with th e Federal Energy Regulatory Commission (FERC) seeking, among other things, a 100 basis point return on equity (ROE) adder for this project. In April 2015, FERC issued an order granting SDG&E’s request for 100 percent abandoned plant cost recovery, but denying an ROE adder for the project. SDG&E expects a CPUC decision on the project in the first half of 20 16, with the line expected to be in service in mid-2017. South Orange County Reliability Enhancement SDG&E filed an application with the CPUC in May 2012 requesting a CPCN for the South Orange County Reliability Enhancement project, as we discuss in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report. A draft environmental report was issued in the first quarter of 2015, and SDG&E expects a final CPUC decision on the estimated $400 million to $500 million project in the first half of 2016. As the project is planned in phases, SDG&E currently expects the entire project to be in service in 2020. SOCALGAS MATTERS Triennial Cost Allocation Proceeding (TCAP) – Adoption of Seasonal Factors The TCAP decision issued by the CPUC in June 2014 for SoCalGas included, among other matters, the requirement for SoCalGas to apply seasonal factors throughout the year to SoCalGas’ annual authorized revenue for its core natural gas customers effective January 1, 2015. Core customers are primarily residential and small commercial and industrial customers. The seasonal factors adopted are based on the core demand forecast provided by SoCalGas in the TCAP application. Prior to this decision, this annual authorized revenue was recognized ratably over the year. While this “seasonalization” will not impact SoCalGas’ total calendar year revenue or earnings for 2015 or beyond, and does not change the annual total authorized revenue or our earnings from that revenue, it will cause variability in revenue and earnings from quarter to quarter. We expect that as a result of applying the seasonal factors during interim periods to the annual author ized revenue requirement, the core natural gas customer authorized revenue recognized in the first and fourth quarters of each year beginning with 2015 will be higher (approximately 34 percent in the first quarter and 29 percent in the fourth quarter) than that recognized in the second and third quarters of each year (approximately 21 percent in the second quarter and 16 percent in the third quarter). This compares to recognizing 25 percent of the annual authorized revenue in each quarter in prior years. As a result, beginning in 2015, substantially all of SoCalGas’ annual earnings will be recognized in the first and fourth quarters of the year. Seasonalization will not impact interim period cash flows or customers’ bills. However, it should reduce the inte rim period variability in regulatory balancing accounts, as we expect customer billings to more closely align with interim period revenue recognition. This seasonalization is consistent with SDG&E’s natural gas and power distribution authorized revenue tre atment. The CPUC regulatory framework authorizes SoCalGas to recover the actual cost of natural gas procured and delivered to its core customers in rates substantially as incurred. The regulatory framework also permits SoCalGas to recover its cost of opera tions, including depreciation of its fixed assets, in authorized revenue based on estimated annual natural gas demand forecasts approved in the TCAP, and any difference between actual gas demand and the annual natural gas demand approved in the TCAP is rec overed in authorized revenue in the subsequent year. This design, commonly known as “decoupling,” is intended to minimize any impact on SoCalGas’ earnings of chan ges in the cost of natural gas procured and any variability in customer demand for natural gas. The adoption of applying seasonal factors to authorized annual requirement for interim periods does not change the application o f decoupling. Increase to CPUC-Authorized Annual Revenue Requirement In July 2011, SoCalGas updated its testimony in the 2012 GRC to reflect the impact of the extension of temporary bonus depreciation by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 T ax A ct). The 2010 Tax Act’s extension of bonus depr eciation for U.S. federal income tax purposes for years 2010 through 2012 resulted in significant additional tax depreciation deductions. These additional deductions generated U.S. federal net operating losses (NOLs) and the creation of a n NOL-based deferr ed tax asset. The 2012 GRC decision denied recovery of any return associated with the NOL-based deferred tax asset unless an Internal Revenue Service (IRS) Private Letter Ruling (PLR) was obtained, at which point SoCalGas w ould be authorized to file an adv ice letter seeking an increase to its revenue requirement. In February 2015, the IRS issued a PLR that agreed with SoCalGas’ position that the denial of any return on the NOL-based deferred tax asset was a viola tion of tax normalization rules. In March 201 5, SoCalGas filed an advice letter to provide the PLR to the CPUC and request an increase to its authorized GRC revenue requirement for 2012 through 2015 to comply with the normalization requirements as interpreted by the IRS in the PLR. I n April 2015, the CPUC approved SoCalGas’ advice letter. The approved increases to the pretax annual revenue requirement s are $6.4 million for 2012, $6.3 million for 2013, $6.4 million for 2014 and $6.6 million for 2015. The resulting increase to after-tax earnings of an a ggregate of $11.3 million for years 2012 through 2014 and $1.4 million related to the first quarter of 2015 will be recorded in the second quarter of 2015 with the remaining 2015 after-tax earnings of $2.5 million resulting from this being recognized over the last three quarters of the year.

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