4. SDG&E's Costs Associated with its PPA with OMEC

SDG&E and DRA disagree regarding the treatment of certain costs associated with SDG&E's PPA with the Otay Mesa Energy Center (OMEC). SDG&E states that, pursuant to D.06-09-021,⁵ it may recover through the ERRA, subject to a cap, the costs associated with equity rebalancing, required by its compliance with Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board Interpretation No. 46 (FIN 46 (R)).⁶ Based on this GAAP requirement, SDG&E states that it is the primary beneficiary of the power produced at OMEC, therefore it must consolidate the financial statements of OMEC with its own.⁷ This consolidation results in SDG&E's reported capital structure differing from its authorized capital structure. Specifically, this consolidation results in the equity component of SDG&E's reported consolidated capital structure being lower than its authorized capital structure, which is used for ratesetting.⁸ This rebalancing accounts for this difference between the two capital structures, so that SDG&E implicitly recovers its authorized rates.

In support of its request, SDG&E provided its 2009 and 2010 SEC 10-K reports,⁹ both of which include a discussion of its compliance with FIN 46 (R). We also reviewed SDG&E's 2011 SEC 10-K report, which confirms its continued compliance with FIN 46(R).

Based on DRA's review of D.06-09-021 and D.07-12-049,¹⁰ DRA contends that SDG&E does not have Commission authority to recovery equity rebalancing costs associated with the OMEC PPA. In particular, DRA concludes that D.06-09-021 only authorized a cap on rebalancing costs associated with the OMEC PPA; that a future showing was required to recovery rebalancing costs, which SDG&E has not provided; and that D.07-12-049 denied institution of an automatic equity rebalancing mechanism requested by SDG&E, thereby overturning the Commission's authorization of the OMEC PPA recovery of equity rebalancing costs in D.06-09-021.

We do not agree with DRA's interpretation of D.06-09-021 and D.07-12-049. In Ordering Paragraphs 3 and 4 of D.06-09-021, we granted SDG&E authority to recover equity rebalancing costs through the ERRA, as we explained above, and capped such recovery at specific dollar amounts for each year from 2009 through 2018:

3. SDG&E is authorized to record the costs of this Revised PPA in the Electric Resource Recovery Account and other appropriate accounts, depending on the cost allocation mechanism that is ultimately adopted for the Otay Mesa plant.

4. SDG&E is authorized to recover the costs, subject to the agreed upon caps and potential future adjustment to SDG&E's capital structure, associated with the equity re-balancing SDG&E deems necessary due to filing and reporting requirements of FIN 46(R) and the consolidation of the OMEC financial data with SDG&E's quarterly and annual financial statements to the Securities and Exchange Commission.

We also ruled that "future evidence"¹¹ would only be considered if/when SDG&E no longer had to increase its equity to comply with FIN 46 (R). Therefore, as long as SDG&E is required to comply with FIN 46 (R), our authority granted in D.06-09-021 to rebalance its capital structure remains in effect. Also, D.06-09-021 did not require any further submissions by SDG&E to recover the equity rebalancing costs it was authorized. It is also evident from the excerpts from SDG&E's SEC 10-K's¹² that SDG&E is still required to comply with FIN 46(R).

Although we denied SDG&E's request to authorize an automatic equity rebalancing mechanism in D.07-12-049, we did not make or otherwise address any revisions to the existing rebalancing authority associated with the OMEC PPA which we granted in D.06-09-021.¹³ Given SDG&E's continued need to comply with FIN 46(R), the authority we granted SDG&E in D.06-09-021 to recover equity rebalancing costs associated with the OMEC PPA, and the inapplicability of D.07-12-049 regarding the equity rebalancing costs associated with the OMEC PPA, we find that SDG&E's request for continued recovery of equity rebalancing costs associated with the OMEC PPA is reasonable and should be authorized. We remind SDG&E that its recovery of costs associated with equity rebalancing of the OMEC PPA must be within the cap autheorized in D.06-09-021.

⁵ See D.06-09-021 at Ordering Paragraph 4.

⁶ See D.06-09-021 at 9-10.

⁷ Exhibit SDGE-4 at KJD-7 through -14.

⁸ The authorized capital structure is a major component in the determination of the rates charged to utility customers.

⁹ Exhibits SDGE-5 and SDGE-6 provide excerpts from SDG&E's SEC 10-K reports for 2009 and 2010. SDG&E's SEC 10-K reports were audited by Deloitte & Touche LLP. These excerpts include a discussion of SDG&E's inclusion of OMEC financial statements in its consolidated statements, details regarding OMEC, and the support for its consolidation in accordance with GAAP.

¹⁰ D.07-12-049 addresses the 2008 ratemaking returns on common equity and returns on rate base for SDG&E, Southern California Edison Company, and Pacific Gas and Electric Company.

¹¹ See D.06-09-021 at 10.

¹² Exhibit SDGE-5 and -6.

¹³ See D.07-12-049 at 39-41, 52 and 55.