8-K: CPUC Proposes Lower Returns for Sempra Subsidiaries

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

Summary

• The California Public Utilities Commission (CPUC) issued proposed decisions on November 14, 2025, affecting San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas), both Sempra subsidiaries.
• For SDG&E's 2024 General Rate Case (GRC) Track 2, the CPUC proposed to approve $1,036 million of the $1,472 million requested for wildfire mitigation plan costs incurred from 2019-2022.
• This includes approving $91 million in operation and maintenance (O&M) costs (denying $193 million) and $945 million in capital costs (denying $242 million).
• The proposed decision authorizes 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 the remaining $431 million of this revenue requirement from 2026 through 2028, following interim collections of $194 million in 2024 and $96 million in 2025.
• For the 2026-2028 Cost of Capital proceeding, the CPUC proposed to maintain the 52% equity layer for both SDG&E and SoCalGas.
• The proposed decision authorizes a return on common equity that is 35 basis points lower than the current authorized return for both SDG&E and SoCalGas.
• SDG&E's proposed total weighted return on rate base is 7.39%, and SoCalGas's is 7.49%.

Sentiment

Score: 3

Explanation: The proposed decisions are largely negative for Sempra's subsidiaries, with significant denials of requested cost recovery for wildfire mitigation and a reduction in the authorized return on common equity. While some costs were approved, the overall financial impact is unfavorable compared to the company's requests.

Positives

• CPUC approved a significant portion ($1,036 million) of SDG&E's requested wildfire mitigation plan costs.
• The reauthorization of the cost of capital mechanism through 2028 provides some regulatory predictability.
• The capital structure with a 52% equity layer was maintained, which can be seen as stable.

Negatives

• CPUC denied $436 million of SDG&E's requested wildfire mitigation plan costs.
• SDG&E's requested revenue requirement for ongoing capital-related costs was reduced by $427 million, from $1,148 million to $721 million.
• The proposed decision lowers the authorized return on common equity by 35 basis points for both SDG&E and SoCalGas, which will impact profitability.
• Specific O&M costs ($193 million) and capital costs ($242 million) were denied for SDG&E, impacting areas like drone assessments, community engagement, vegetation management, and aviation firefighting.

Risks

• Potential liability for California wildfires, regardless of fault, and any inability to recover all or a substantial portion of costs from insurance, wildfire funds, or customer rates.
• Adverse decisions, denials of cost recovery, audits, investigations, inquiries, ordered studies, regulations, denials or revocations of permits, consents, approvals or other authorizations, renewals of franchises, and other actions, including the failure to honor contracts and commitments, by regulatory bodies like the CPUC.
• Changes to capital expenditure plans and their potential impact on rate base or other growth.
• Litigation, arbitration, property disputes, and other proceedings.
• Cybersecurity threats, including by state and state-sponsored actors, of ransomware or other attacks on systems or the systems of third parties with which business is conducted, including the energy grid or other energy infrastructure.
• The availability, uses, sufficiency, and cost of capital resources and the ability to borrow money or otherwise raise capital on favorable terms and meet obligations, which can be affected by actions by credit rating agencies to downgrade credit ratings, instability in the capital markets, and fluctuating interest rates and inflation.
• The impact on affordability of SDG&E's and SoCalGas's customer rates and their cost of capital and on SDG&E's, SoCalGas's, and Sempra Infrastructure's ability to pass through higher costs to customers due to volatility in inflation, interest rates, and commodity prices and the imposition of tariffs.
• The impact of climate policies, laws, rules, regulations, trends, and required disclosures, including actions to reduce or eliminate reliance on natural gas, increased uncertainty in the political or regulatory environment for California natural gas distribution companies, the risk of nonrecovery for stranded assets, and uncertainty related to emerging technologies.
• Weather, natural disasters, pandemics, accidents, equipment failures, explosions, terrorism, information system outages, or other events, such as work stoppages, that disrupt operations, damage facilities or systems, cause the release of harmful materials or fires, or subject to liability for damages, fines, and penalties, some of which may not be recoverable through regulatory mechanisms or insurance or may impact the ability to obtain satisfactory levels of affordable insurance.
• The availability of electric power, natural gas, and natural gas storage and transportation capacity, including disruptions caused by failures in the transmission grid or pipeline and storage systems or limitations on the injection and withdrawal of natural gas from storage facilities.
• Oncor Electric Delivery Company LLC's ability to reduce or eliminate its quarterly dividends due to regulatory and governance requirements and commitments.

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 also authorized to collect the remaining $431 million of its Track 2 revenue requirement from 2026 through 2028. The company notes 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. These proposed decisions reflect the ongoing regulatory scrutiny on utility cost recovery, particularly for wildfire mitigation, and the determination of appropriate returns on equity. A reduction in authorized ROE and denial of cost recovery for certain expenses could set a precedent or reflect a broader trend of tighter regulatory environments for utilities in California, potentially impacting their financial performance and investment attractiveness. The focus on wildfire mitigation costs highlights the significant challenges and financial burdens utilities face in a state prone to such events.

Comparison to Industry Standards

• The proposed 35 basis point reduction in Return on Common Equity (ROE) for SDG&E and SoCalGas suggests a more stringent regulatory stance compared to historical trends or potentially other less wildfire-prone or politically sensitive jurisdictions.
• California's regulatory environment, particularly concerning wildfire liability and cost recovery, is often considered among the most challenging for utilities in the U.S., making direct comparisons difficult without specific data from other states' GRC outcomes.
• The denial of specific O&M and capital costs, such as for drone assessments and enhanced vegetation management, indicates a detailed level of regulatory oversight that may differ from other states where utilities have more discretion in cost recovery for safety-related investments.
• The maintenance of a 52% equity layer in the capital structure is within a reasonable range for regulated utilities, though the authorized ROE applied to that equity is a key determinant of profitability.

Stakeholder Impact

• Shareholders: Potential negative impact due to lower authorized returns on equity and denied cost recovery, which could reduce future earnings and dividends.
• Customers (SDG&E & SoCalGas): May see slightly lower rate increases than initially proposed by the utilities due to denied cost recovery and lower authorized returns, potentially improving affordability.
• Employees: No direct impact mentioned, but long-term financial performance could indirectly affect employment stability or growth.
• Regulators (CPUC): The decisions reinforce the CPUC's role in balancing utility financial health with customer affordability and safety investments.
• Creditors: Lower profitability could marginally increase credit risk, though the regulated nature of utilities generally provides stability.

Next Steps

• SDG&E and SoCalGas are evaluating the Proposed Decisions.
• Comments on the Proposed Decisions are due December 4, 2025.
• Reply comments are due December 9, 2025.
• The CPUC may vote on the Proposed Decisions at its earliest scheduled meeting on December 18, 2025.

Key Dates

Recommendation

The proposed CPUC decisions are clearly negative, reducing cost recovery and authorized returns for Sempra's key California utility subsidiaries. This will likely pressure earnings. However, these are *proposed* decisions, and there's a comment period before a final vote. The utilities are evaluating the PDs, suggesting they may advocate for modifications. Given the regulatory uncertainty and the potential for some adjustments, a 'hold' recommendation is appropriate to await the final CPUC decision and the company's response, rather than an immediate 'sell' which might be premature if the final outcome is less severe. The long-term regulated nature of the business still provides some stability.

Keywords

Sempra, SDG&E, SoCalGas, CPUC, General Rate Case, GRC, Cost of Capital, Wildfire Mitigation, Utility Regulation, Return on Equity, Rate Base, California Utilities, Energy Regulation, Financial Reporting