230 Haas Rebuttal Testimony July 20 2007

Application of SAN DIEGO GAS & ELECTRIC )
COMPANY for authority to update its gas and )

electric revenue requirement and base rates )
effective January 1, 2008 (U 902-M). )
Application of SOUTHERN CALIFORNIA GAS )
COMPANY for authority to update its gas revenue )
requirement and base rates )
effective January 1, 2008 (U 904-G). )
Application No. 06-12-009 / 06-12-010

Exhibit No.: (SDG&E/SCG-230)
REBUTTAL TESTIMONY
OF MONICA P. HAAS
TO UCAN AND FEA
ON BEHALF OF SAN DIEGO GAS & ELECTRIC COMPANY AND
SOUTHERN CALIFORNIA GAS COMPANY
BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF CALIFORNIA
JULY 20, 2007
SDG&E/SCG Doc # 205115 Rebuttal: July 2007

TABLE OF CONTENTS
I. SUMMARY ........................................................................................................... 1
II. MULTI-FACTOR ALLOCATION .................................................................... 2
III. UCAN’S USE OF 2006 ACTUALS ..................................................................... 2
IV. SEMPRA’S RESPONSE TO SPECIFIC RECOMMENDATIONS................ 3
A. Communications & Investor Relations ............................................................. 3
B. Finance Division ............................................................................................... 7
C. Human Resources............................................................................................ 18
D. Legal Division................................................................................................. 23
E. Benefits............................................................................................................ 32
F. Insurance.......................................................................................................... 33
V. RESPONSE TO FEA RECOMMENDATION ................................................ 43
SDG&E/SCG Doc #205115 i Rebuttal: July 2007

1 REBUTTAL TESTIMONY
2 OF MONICA P. HAAS
3 ON BEHALF OF SDG&E
4
5 I. SUMMARY
6 All dollar amounts described in this testimony are stated in escalated $2008.
7 Sempra’s Corporate Center presented a total forecast budget for Test Year 2008
8 of $309.589 million, of which it expected to allocate $75.604 million to SDG&E and
9 $70.348 million to Southern California Gas Company (SCG), representing a combined
10 47% of the forecast. Most of the arguments and responses in this rebuttal discuss
11 Sempra’s combined allocations of both companies, referred to as the Utilities.
12 UCAN’s proposals include reducing Sempra’s pre-allocation forecast to $276.952
13 million, plus allocation changes and disallowances that would lower the Utilities’
14 allocation from $145.940 million to $110.758 million, a reduction of $35.182 million, or
15 24% less, not including their support of additional requested reductions by DRA.
16 UCAN’s $35.182 million reduction includes:
17 • $ 4.341 million for functions UCAN believes do not benefit SEU
18 • $ 1.319 million impact from UCAN’s revised Multi-Factor formula
19 • $ .755 million impact from other proposed allocation changes
20 • $26.578 million due to lower-than-forecast 2006 spending
21 • $ 2.189 million disagreement over cost of the MyInfo system
22 In addition, Sempra responds to UCAN’s Report on Selected Results by William
23 B. Marcus, in which he recommends changes to certain Administrative & General
24 Expenses in addition to those proposed by Overland. Mr. Marcus’ comments mainly
25 reinforce Overland’s recommendation to disallow travel costs incurred by Sempra’s
26 Board of Directors for the 2005 Annual Meeting. Sempra refers to it response within this
27 rebuttal testimony in which it agrees with UCAN to remove those costs. Secondly, Mr.
28 Marcus goes further than Overland’s recommendations for D&O Insurance, and suggests
29 that only 50% of the premiums be charged to ratepayers. Sempra has addressed this issue
30 in its rebuttal testimony to DRA and refers UCAN to that response.
31 The following testimony is Sempra’s response to UCAN’s proposals as prepared
32 by Overland Consulting.
SDG&E/SCG Doc #205115 1 Rebuttal: July 2007
1
2 II. MULTI-FACTOR ALLOCATION
3 UCAN proposes to revise the forecast year Multi-Factor percentages, using 2004-
4 2006 data for trending (rather than Sempra’s five-year trend), selecting different financial
5 totals than those used by Sempra, and excluding key adjustments that make the statistics
6 comparable. Their result is a reduction of allocation percentages to the combined
7 Utilities from 75% to 69% in 2008.
8 Sempra disagrees with UCAN’s approach to the Multi-Factor. The factors used
9 to prepare these GRC forecasts are the same as those that have been used historically and
10 are embedded in the actual allocations presented in our workpapers, and they were
11 without dispute in the last Cost of Service decision. Furthermore, the trend line was
12 consistent with Sempra’s overall business growth expectations at the time of the filing.
13 Actually, since the filing Sempra has sold some significant Global business assets which
14 will have an impact on the formula and result in higher actual allocation percentages to
15 the Utilities in the near future. The non-updated Multi-Factor rates used in this GRC are
16 therefore likely understated, and we reject UCAN’s attempt to further reduce them by
17 introducing an update that is not permitted by the Commission’s Rate Case Plan.
18
19 III. UCAN’S USE OF 2006 ACTUALS
20 The majority of UCAN’s recommendations are based on their contention that
21 2006 recorded information should be used instead of Sempra’s 2006 forecast. Sempra’s
22 forecasting approach uses a zero based methodology validated by an adjusted long-term
23 trend analysis. Adjustments are based on historical unusual events or for known or
24 expected future events. This methodology captures natural business cycles and
25 normalizes for ordinary year-to-year favorable and unfavorable variances in spending
26 levels. UCAN, on the other hand, relied almost exclusively on 2006 actual data as the
27 basis for their reductions. It is generally known that the Commission’s Rate Case Plan
28 explicitly denies applicants the opportunity to update its case but for very limited reasons,
29 thus UCAN should likewise not be be allowed to introduce new data. Allowing UCAN
30 to introduce 2006 results into the case while denying Sempra the same opportunity to
31 present an update of changed circumstances all but ensures data “cherry picking” by
32 UCAN and results in a one sided, inaccurate presentation to the Commission.

1 Notwithstanding these objections, Sempra did attempt to respond to UCAN’s inquiries
2 for 2006 recorded information. Finally, although it is difficult to find any forecast that is
3 100% correct, it is amazing that Sempra’s 2006 actual Utilities allocations in total were
4 within 1% of its forecast. Yet, UCAN seeks to disallow $26 million of costs over this
5 issue.
6 Sempra objects to UCAN’s approach and has had to use valuable time during its
7 abbreviated rebuttal period to research and evaluate random variances cited by UCAN as
8 examples of over-inflated forecasts. Nevertheless our detailed rebuttal will provide
9 explanations and facts that demonstrate the superficiality of UCAN’s systematic
10 approach and in nearly all cases will find their recommendations unacceptable. Except
11 for a few revisions, Sempra maintains that its overall allocation forecasts are reasonably
12 representative of Test Year costs.
13
14 IV. SEMPRA’S RESPONSE TO SPECIFIC RECOMMENDATIONS
15 (All $’s stated as $2008 Escalated)
16
17 A. Communications & Investor Relations
18
19 1. VP of Communications & Investor Relations (A-01.01)
20 Sempra has proposed a total Utilities allocation of $335,000, while UCAN revises
21 the amount to $149,000, a reduction of $186,000 or 56%. UCAN’s recommendation
22 includes a pre-allocation reduction in total test period costs of $165,000 plus an overall
23 reduction in the cost allocation rates for 2008.
24
25 a) Test Period Costs
26 UCAN’s pre-allocation adjustment is based on using an escalated average of 2005
27 and 2006 actual spending. As discussed in the opening sections of this testimony, we
28 reject such an approach to individual cost centers, as business needs and costs vary from
29 year to year, and making narrow, two-year updates only for selected departments would
30 not build to Sempra’s overall test year requirements.
31 Sempra is willing, however, to re-examine its 2008 forecasts and for this area
32 recognizes that the level of travel in 2005 was likely higher than would be considered

1 typical. We have proposed to reduce our forecast for this cost center. Our forecast
2 included incremental costs for Travel and Events (see UCAN DR-09, Q3) of $53,000 and
3 $24,000 respectively, which we still expect to be necessary, but not on top of Base Year.
4 Sempra therefore proposes a reduction of $86,000 ($77,000 on an escalated basis),
5 resulting in a lower allocation to SDG&E of $19,000 and SCG of $22,000 using the
6 forecast allocation method Comm-0375.
7
8 b) Utility Cost Allocation
9 While UCAN agrees with the weighted-average methodology of Comm-0375,
10 they take exception to Sempra’s exclusion of the costs for its Staples Center sponsorship
11 contract in the formula. While retained non-labor costs for Advertising are included, it’s
12 because the decisions for that spending do require the oversight of the VP, and so it is fair
13 to consider such costs in a weighted average of the VP’s time. However, the fixed,
14 single-payment Staples contract takes no incremental management time on his part, so it
15 is logical not to include it in the formula, again to ensure a fair weighting. Sempra rejects
16 UCAN’s recommendation to change this allocation.
17
18 2. Investor Relations (A-02.01)
19 Sempra has proposed a total Utilities allocation of $1.644 million, while UCAN
20 revises the amount to $917,000, a reduction of $727,000 or 44%. UCAN’s
21 recommendation includes a pre-allocation reduction in total test period costs of $319,000
22 plus an overall reduction in the cost allocation rates for 2008.
23
32 typical. As we have proposed to reduce our forecast for the VP’s travel costs, we shall

1 also reduce our forecast for this department. Our forecast included incremental costs for
2 Travel and Events (see UCAN DR-09, Q4) of $52,000 and $15,000 respectively, which
3 we still expect to be necessary, but not on top of Base Year costs that already contain
4 higher-than-normal travel and meeting costs. Sempra therefore proposes a reduction of
5 $75,000 ($67,000 on an escalated basis), resulting in a lower allocation to SDG&E of
6 $26,000 and SCG of $30,000 using the forecast Multi-Factor Basic allocation method.
7
9 UCAN also recommends a change to the allocation methodology used by Investor
10 Relations. Rather than the Multi-Factor Basic, which has a total 2008 Utilities allocation
11 of 75%, UCAN has devised a new formula based on the total Assets, or capitalization, of
12 each business unit. Such a formula would lower the total Utilities allocation to 49%
13 Although Sempra is in favor of using a causal-beneficial allocation method
14 wherever possible, we don’t agree that UCAN’s suggestion is reasonable for Investor
15 Relations. An IR function is necessary for publicy held companies and the costs for this
16 area are relatively fixed. Again, to be clear, none of these functions are perfomed by the
17 Utilities. All of it is performed at Corporate Center, and in the absence of a Corporate
18 Center, the Utilities would have to create and staff their own departments to provide these
19 services at significant additional cost. We reject UCAN’s proposal to further discount
20 these services.
21
22 4. Employee Communications (A-04.02)
23 For this non-labor area, Sempra has proposed a total utility allocation of
24 $419,000, while UCAN revises the amount to $227,000, a reduction of $192,000 or 46%.
25 UCAN’s recommendation includes a pre-allocation reduction in total test period costs of
26 $213,000, with no revision to cost allocation rates.
27

3 The reduction for this cost center is an example of why UCAN’s short-sighted
4 averaging method ignores the detailed zero-based budgeting and analysis that went into
5 developing 2008 forecasts. While it is true that spending on video programs and other
6 materials for Employee Communications was far lower than expected for 2006, it should
7 be noted that the Communications Director was unexpectedly out on medical leave
8 during a part of the year, and then retired soon after. The vacant position was not filled
9 until late in 2006, and the new Director intends to fulfill the goals originally set out for
10 this department. The level of expense may have been deferred into 2007-2008, but
11 Sempra maintains its Test Year forecast is valid and reasonable.
12
13 5. Financial Communications (A-04.03)
14 For this non-labor area, Sempra has proposed a total Utilities allocation of
15 $582,000, while UCAN revises the amount to $463,000, a reduction of $119,000 or 20%.
16 UCAN’s recommendation includes a pre-allocation increase in total test period costs of
17 $59,000 offset by an overall reduction in cost allocation rates for 2008.
18
25 We reject UCAN’s proposal.
26
28 UCAN also recommends a change to the allocation methodology used by
29 Financial Communications. Rather than the Multi-Factor Basic, which has a total
30 Utilities allocation of 75%, UCAN suggests that the existing “CFO” methodology, which
31 is the weighted average calculation used by Sempra’s EVP/Chief Financial Officer,
32 would be more in alignment with its purpose. Such a formula would lower the total

1 Utilities allocation to 55%. There is no evidence that this is a more appropriate
2 methodology, and in fact, the cost of producing an annual report is fixed and would be
3 borne by the Utilities in the absence of a holding company structure. We maintain that
4 the Utilities’ 75% share of this required governance cost is fair and reasonable.
5
6 B. Finance Division
7
8 1. Functions That Benefit the Holding Company
9 UCAN claims certain Finance functions are purely corporate-level accounting,
10 planning and budgeting that the Utilities already perform for themselves, and should not
11 need to purchase from the Corporate Center. As such, they propose to disallow $4.341
12 million in allocations to the Utilities.
13 UCAN cites a 1986 Pacific Bell decision to indicate that functions that exist
14 primarily for the benefit of the holding company are not recoverable from ratepayers, and
15 they refer to a 1999 PG&E decision as reinforcement, although that decision is actually
16 about the incremental formation costs of a holding company, not the ongoing
17 management of a shared-services organization. Nevertheless, the Corporate Center’s
18 functions that UCAN has determined serve only the holding company are itemized
19 below.
Sempra Cost Center Disallowed
WP Ref SEU
Amount
B-03.01 SVP/Controller $ 359,000
B-03.02 Director of Financial Reporting $ 211,000
B-03.03 Financial Reporting $ 569,000
B-03.07 Director of Financial Accounting $ 220,000
B-03.08 Parent & Sundry Accounting $ 658,000
B-04.01 Director of Corporate Planning $ 125,000
B-04.02 Budget & Performance Measurement $ 233,000
B-04.03 Financial Planning $ 190,000
B-04.04 Financial Systems & Reporting $ 228,000
B-07.02 Corporate Tax $ 1,548,000
Total $ 4,341,000
20
21 While UCAN acknowledges that these functions are duplicative, we dispute their
22 contention that they do not primarily or directly benefit the Utilities. Generally, the
23 functions listed are responsible for maintaining the financial integrity of the company.
1 They set financial and accounting policy, develop and publishing SEC reports, ensure
2 consolidated financials comply with GAAP and SEC rules, and prepare consolidated long
3 and short-term plans for Sempra’s Board of Directors, rating agencies, and market
4 analysts. This work is not duplicative, is required by publically held companies, and
5 would need to be performed by the Utilities in the absence of the holding company
6 structure. A more detailed response to each function follows.
7
8 • SVP/Controller (B-03.01)
9 As stated in Monica Haas’ testimony, Sempra’s SVP and Controller has the
10 overall responsibility for maintaining the financial integrity of the Sempra
11 Energy companies. The Controller is responsible for ensuring the integrity of
12 consolidated GAAP reporting, coordinating with external auditors, SEC
13 reporting, and working with rating agencies and market analysts on technical
14 GAAP issues. These responsibilities are not duplicative and would need to be
15 performed in the absence of a holding company structure. In comparison, the
16 work performed by the Utilities Controller is focused on preparing utility
17 financial statements for CPUC and FERC. Furthermore, the Controller is
18 responsible for accounting research and bank reconciliations (Accounting
19 Controls). These functions are located only at the Corporate Center and would
20 need to be performed in the absence of a holding company structure; therefore
21 Sempra believes the allocated costs represent a necessary and reasonable
22 expense to SEU.
23 • Financial Reporting (B-03.03)
24 Corporate Center’s Financial Reporting group has the primary responsibility

25 to prepare and file financial reports required by the US Securities and
26 Exchange Commission (SEC). The Utilities’ group may also compile
27 separate financial reports for regulatory filings with the CPUC and FERC, but
28 the Corporate group prepares all their financial disclosures and maintains
29 records supporting all filings. In addition, the Corporate group consults with
30 Utilities management on technical accounting and disclosure matters. These
31 are important services that effectively supplement the Utilities reporting
32 departments.
1 • Director of Financial Reporting (B-03.02)
2 The Director provides the leadership and staff management for the Financial
3 Reporting group described in B-03.03.
4 • Parent & Sundry Accounting (B-03.08)
5 This department performs accounting functions for Sempra Parent to support
6 its shared services that in turn benefit all business units. The group records
7 journal entries for Tax Services, monitors labor overhead loaders, maintains
8 accounting records for shared fixed assets and depreciation expense, facilitates
9 intercompany billing, and journalizes consolidating entries. They also
10 perform Sundry accounting on the wind-up of various Pacific Enterprises and
11 Enova entities, which were managed by the Utilities prior to the formation of
12 Sempra. If Corporate Center’s shared services were not centralized, the
13 Utilities would need to add staff to carry out these essential functions.
14 • Director of Financial Accounting (B-03.07)
15 The Director provides leadership and staff management of the Parent &
16 Sundry Accounting department as well as the Accounting Controls
17 department (B-03.09), which provides bank reconciliation and escheatment
18 services that are not challenged by UCAN. To the extent UCAN recognizes
19 these services as necessary functions, the Director’s costs should also be
20 allocated.
21 • Budget & Performance Measurement (B-04.02)
22 The Utilities has a group that performs cost-center level budgeting and
23 variance analysis, but they do so only for departments located at the Utilities.
24 The Corporate Budget & Performance Measurement group serves Corporate
25 Center departments. Corporate Center represents a large organization of
26 shared service functions, most of which provide direct benefits to the Utilities,
27 and they require budget support to be well-managed. The department also
28 facilitates the billing of allocations to all business units, and on a cyclical basis
29 supports regulatory filings such as for this GRC. In addition, the Corporate
30 Center group consolidates current-year financial data from the Utilities and
31 other business units so that management can provide consolidated one-year
32 “Outlooks” to the Sempra Board of Directors and earnings guidance to outside
1 business analysts. The Utilities group cannot perform this essential financial
2 function.
3 • Financial Planning (B-04.03)
4 The Utilities has a group that develops financial plans and overall financial
5 performance analysis, but they do so only for the Utilities and the Utilities’
6 management. The Corporate Financial Planning group compiles five-year
7 plans from the Utilities and other business units so that management can
8 provide consolidated Plans to the Sempra Board of Directors and long-term
9 earnings guidance to outside business analysts and rating agencies. The
10 Utilities group cannot perform this essential financial function.
11 • Financial Systems & Reporting (B-04.04)
12 The Utilities have a Financial Systems department which supports the
13 Utilities’ cost accounting system and distributed SAP functions, allowing
14 them to prepare stand-alone financial statements for the Utilities. That
15 department also maintains utility-only account tables, schedules operations,
16 and administers user security. The Corporate group has responsibility for
17 different systems (or different uses of common systems), all of which benefit
18 the Utilities as well. These include the overall administration of the Hyperion
19 Financial Management (HFM) consolidation system and the Business
20 Warehouse reporting tool, and including training and implementation support.
21 These systems have many Utility users; the Corporate group serves an
22 essential service that the Utilities would have to replicate were they not
23 provided centrally by Corporate Center.
24 • Director of Corporate Planning (B-04.01)
25 The Director provides leadership and staff management of the functions
26 described above in B-04.02, B-04.03, and B-04.04.
27 • Corporate Tax (B-07.02)
28 This cost center is only one of several groups that form an overall team to
29 prepare consolidated tax returns for Sempra. The purpose of different cost
30 centers with dedicated staff is primarily to match allocation methodologies
31 with time spent. For example, the Utility Tax group is responsible for
32 preparing, on behalf of the Utilities, stand-alone returns and estimated tax
1 payments. Conversely, the Corporate Tax cost center is responsible for the
2 GAAP tax provision, regulatory reports, tax audits and ensuring conformity
3 with IRS, SEC, and SOX 404 standards. The work performed by the
4 Corporate Tax group is a oversight function that would have to be performed
5 regardless of the holding company structure.
6
7 Although UCAN disputes the appropriateness of allocating these functions to the
8 Utilities, they do suggest an alternate scenario in which it would accept a slight reduction
9 in the allocation rates used for these cost centers. Sempra declines to respond to alternate
10 scenarios in this testimony.
11
12 2. Cost Centers Using the Multi-Factor
13 UCAN proposes to revise the forecast year Multi-Factor percentages, using 2004-
14 2006 data for trending (rather than Sempra’s five-year trend), selecting different financial
15 totals than those used by Sempra, and excluding key adjustments that make the statistics
16 comparable. Their result is a reduction of allocation percentages to the combined
17 Utilities from 75% to 69% in 2008. UCAN identified certain Finance cost centers as
18 being subject to the Multi-Factor change.
19 o Accounting Research (B-03-04)
20 o Internship Program (B-03-06)
21 o Accounting Controls (B-03-09)
22 o SOX Coordinator (B-03-10)
23 o Cash Management (B-05-02)
24 o Finance Director (B-05-03)
25 o Property Taxes (B-07-06)
26 By Sempra’s calculation, UCAN’s formula would result in a reduction to the total
27 Utilities allocation of $182,000 for the cost centers listed here. Others that use the Multi-
28 Factor method are addressed in the specific recommendations further in their report.
29 As expressed in the introduction to this testimony, Sempra finds UCAN’s change
30 to the Multi-Factor elements without merit, and disagrees with any related reductions
31 included in their proposals.
32

1 3. VP - Audit Services (B-02.01)
2 Sempra has proposed a total utility allocation of $211,000, while UCAN revises
3 the amount to $273,000, an increase of $62,000. UCAN’s recommendation includes a
4 pre-allocation increase in total test period costs of $108,000, with no revision to cost
5 allocation rates.
6
14
15 4. Audit Services (B-02.02)
16 For this department, Sempra has proposed a total utility allocation of $2.771
17 million, while UCAN revises the amount to $2.361 million, a reduction of $410,000 or
18 15%. UCAN’s recommendation includes a pre-allocation reduction in total test period
19 costs of $714,000, with no revision to cost allocation rates.
20
22 UCAN lowered only the Labor forecast by reviewing Audit Services’ historical
23 and 2006 year-end staffing levels, and concluding that the department would not achieve
24 the Test Year staffing requested. Then, despite their gratuitous increases for the Audit
25 Services VP and other some cost centers, they decline to give any weight to the fact that
26 Audit Services has spent double its Non-Labor budget for contract workers in an effort to
27 maintain sufficient staffing for the current workload. Detailed explanations were
28 provided in data request UCAN-028 (Question 1) that illustrated this point. They have
29 also ignored the fact that total 2006 spending in Audit Services was already in excess of
30 its 2007 forecast, so there is no evidence to conclude that 2008 levels are unrealistic. We
31 reject this proposal.
32

1 5. SVP/Controller (B-03.01)
2 Sempra has proposed a total Utilities allocation of $359,000, while UCAN
3 disallows the entire amount. UCAN’s recommendation actually includes a pre-allocation
4 reduction in total test period costs of $153,000 but then includes the department as one of
5 the functions that have no benefit to the Utilities. (See Finance Item 1 above).
6
8 Although UCAN did not dispute any of the other cost centers it included for
9 blanket disallowance in Item 1 above, they made an adjustment for the SVP/Controller
10 based on their review of 2006 actual data. Their report illustrates again the danger in
11 using 2006 data that Sempra had no opportunity to review for comparability with the
12 structure that existed for the GRC filing. UCAN has misinterpreted cost center table
13 changes Sempra made after the retirement of its Controller and the transfer of the Global
14 Assistant Controller to the Corporate Center (although his assistant remained at Global).
15 Sempra re-used and re-named some cost centers for efficiency, and those changes have
16 no material effect on our forecast, yet UCAN assumed they would. We again caution
17 UCAN against using 2006 data as an update method. There is no basis for this
18 adjustment, even without UCAN’s disallowance of the allocation.
19
20 6. Rotation Program (B-03.05)
21 For this department, Sempra has proposed a total utility allocation of $391,000,
22 while UCAN revises the amount to $220,000, a reduction of $171,000 or 44%. UCAN’s
23 recommendation includes a pre-allocation reduction in total test period costs of $200,000,
25

1 The Rotation Program is a cost-effective method of recruiting finance and
2 accounting trainees that are needed for the growing staffing requirements and natural
3 turnover that Sempra faces throughout the Finance division and in its Global business
4 units. The program is perhaps so successful that it is difficult to keep good staff in the
5 program – they are often quickly placed to fill regular vacancies. Recruiting for new
6 college graduates occurs only at certain times of the year, and there is a lot of competition
7 from large CPA and consulting firms for the candidates Sempra would hire. But such
8 conditions do fluctuate, and there is no reason to conclude based on 2006 that the Test
9 Year expense level needed for the Program won’t be met. Sempra therefore rejects
10 UCAN’s reduction.
11
13 As discussed already in this testimony, UCAN proposes to revise the forecast year
14 Multi-Factor percentages, reducing allocation percentages to the combined Utilities from
15 75% to 69% in 2008. Sempra finds UCAN’s change to the Multi-Factor elements
16 without merit, and disagrees with any related reductions included in their proposals.
17
18 7. D&T Fees (B-03.11)
19 For this non-labor cost, Sempra has proposed a total Utilities allocation of $5.038
20 million, while UCAN revises the amount to $4.02 million, a reduction of $1.018 million
21 or 20%. UCAN’s recommendation includes a pre-allocation reduction in total test period
22 costs of $855,000 plus an overall reduction in the cost allocation rates for 2008.
23
30 Sempra is willing, however, to re-examine its 2008 forecasts and for D&T Fees
31 recognizes that the additional work needed for SOX attestation in recent years is now
32 more effectively managed and will not continue at the same level. Consistent with its

1 response to DRA’s report, Sempra proposes a reduction of $760,000, resulting in a lower
2 allocation to SDG&E of $287,000 and SCG of $287,000 using the forecast Multi-Factor
3 Basic allocation method.
4
10
11 8. Risk Management (B-05.06)
16
18 UCAN’s pre-allocation Labor adjustment is based on 2006 spending, and their
19 Non-Labor adjustment uses an escalated average of 2005 and 2006 actual spending. As
20 discussed in the opening sections of this testimony, we reject such an approach to
21 individual cost centers, as business needs and costs vary from year to year, and making
22 narrow, two-year updates only for selected departments would not build to Sempra’s
23 overall test year requirements.
24 In this case, UCAN assumed that 2006 represented a full year of labor, with the
25 hiring of the new Risk Management Administrator. In fact, only seven months of salary
26 are included for that position, so the 2006 budget and the actuals are not comparable.
27 The professional services included in 2006’s forecast was for an Earthquake
28 Vulnerability and Impact Analysis for the Utilities, which they ended up paying for
29 directly, rather than the cost going through the Risk Management department. Such
30 consulting Services are expected to be a recurring type of expense, with plans for other
31 studies such as captive insurer feasibility and loss control engineering surveys. Again,
32 without all the facts, UCAN has proposed a reduction that has no merit.

1
7
8 9. Bank Fees (B-05.07)
11 or 33%. Most of the amounts represent direct-assignments, so there is no proposal to
12 change allocation rates.
13
15 UCAN’s adjustment uses an escalated average of 2005 and 2006 actual spending
16 to reforecast the 2008 Test Year. Again, their reliance on using limited 2005-2006 data is
17 not appropriate. In the case of Bank Fees, the primary costs are 1) bank account service
18 charges and 2) fees associated with short-term lines of credit (LOC). Bank service
19 charges are incurred monthly, and while they can vary depending on volume and average
20 cash balances, the expense is fairly steady. LOC fees, on the other hand, are highly
21 variable. LOC facilities may be renewed anywhere from every one to five years,
22 depending on management’s evaluation of business needs and interest rates. The LOC’s
23 incur ongoing fees based on draws, and also upfront fees that are paid at time of renewal.
24 Although UCAN did not use historical data, the years prior to 2005 show much higher
25 cash-basis fees paid than did 2005 and 2006. Sempra did not renew any lines during
26 those years, but will find it necessary to do so in the 2007-08 time frame, again dependent
27 on the financial climate. Sempra’s forecast already includes a “smoothed” amount for
28 LOC fees and renewals, and bank service charges as of the filing:
5 Year 2008
($ in 000's) 2002 2003 2004 2005 2006 Average Forecast
Line of Credit Fees $ 2,588 $ 1,338 $ 1,868 $ 978 $ 450 $ 1,444 $ 1,515
Bank Service Charges 2,579 2,620 2,609 2,202 2,093 2,421 2,770
Other 2 0 1 4 6 3 3
29 $ 5,169 $ 3,958 $ 4,478 $ 3,184 $ 2,549 $ 3,868 $ 4,288

1
2 While an increase in the size of the Utilities’ LOC was originally planned for
3 2006, it has not yet occurred, leading to a slightly lower average than was used for our
4 forecast. Bank service fees are also lower than historical, due to fee reductions
5 negotiated for electronic banking, offsetting growth pressures in check processing fees.
6 Because of these recent significant fee savings, Sempra is willing to lower its forecast for
7 the Utilities’ charges by $420,000, to the level of its five-year average. This is the only
8 way to fairly capture the renewal expenses Sempra expects in 2008 on an annualized
9 basis. Sempra’s reduction will result in lower direct assignments of $113,000 to SDG&E
10 and $307,000 to SCG.
11
12 10. Trust & Rating Agency Fees (B-05.08)
15 24%. Most of the amounts represent direct-assignments, so there is no proposal to
16 change allocation rates.
17 Consistent with its response to DRA’s report, Sempra acknowledges that certain
18 printing, legal, and audit expenses incurred for debt issuances should not have been
19 included in its GRC request, as these costs were recovered in other proceedings. For this
20 reason Sempra proposes a reduction of $510,000, which will result in lower direct-
21 assignments to SDG&E of $340,000 and SCG of $170,000.
22
23 11. VP – Tax Services (B-07.01)
27 allocation rates.
28

4
5 12. Utility Tax (B-07.03)
9 costs of $208,000, with no revision to cost allocation rates.
10
12 UCAN’s pre-allocation Labor adjustment is based only on 2006 spending, with
13 escalation as its only increase. As discussed in the opening sections of this testimony, we
15 year to year, and making updates only for selected departments would not build to
16 Sempra’s overall test year requirements.
17 For Utility Tax it may be possible to see how UCAN concluded just based on a
18 cursory check of staffing levels as of March 2007 that this cost center would not meet its
19 Test Year labor expense. But it again also illustrates the danger in relying solely on
20 unreviewed data for its recommendations. Sempra researched the Tax Services employee
21 database and found five staff currently working under Utility Tax whose home cost
22 center was incorrect; they were included in Corporate Tax instead. This can happen with
23 new hires that are sometimes coded into the same cost center as the hiring manager, if
24 their tax area is not specified up front. Again we urge that Tax Services be viewed as a
25 whole department, where actual total Utilities allocations in 2006 were within 2.5% of
26 2006 budgeted allocations. We therefore reject UCAN’s proposal to its Test Year as
27 unfounded and based on incomplete data.
28
29 C. Human Resources
30 Human Resources is another area where using unreviewed 2006 actual data to
31 determine test year costs is troubling. Since early 2004 at the outset of MyInfo
32 development, the HR division has gradually restructured itself to accommodate the

1 planned attrition and changing business requirements, realigning functions under
2 different managers. Many cost centers were not simply closed, but partially restaffed and
3 reused, making it difficult to compare historical costs with budget without looking at the
4 division as a whole. However, every one of UCAN’s recommendations in this area
5 shows an over-reliance on current, single cost-center comparisons to the GRC budgets.
6 We categorically reject all of the following adjustments and point to actual 2006
7 Utilities allocations that are in total within 1% of budgeted allocations for the HR
8 division.
9
10 1. Human Resources SVP (C-01.01)
13 includes a pre-allocation reduction in total test period costs of $176,000, with no revision
14 to cost allocation rates.
15 UCAN points to computer replacements and executive compensation consulting
16 in the budget that did not materialize. For planning purposes, all computer and
17 equipment replacements for the HR division are budgeted in the SVP’s cost center, while
18 the actual charges usually go to the recipients’ cost center. The same is often true of
19 consulting expenses, which the SVP prefers to plan for; the actual expense was likely
20 charged to another cost center like Diversity Affairs, whose non-labor was higher than
21 budgeted in 2006.
22
23 2. HR Business Partner (C-02.01)
25 while UCAN revises the amount to $366,000, a reduction of $34,000 of 9%. UCAN’s
26 recommendation does not involve a reduction in test period costs, only a revision of cost
32

1 3. Compensation & Benefits Director (C-05.01)
2 Sempra has proposed a total utility allocation of $1.325 million, while UCAN
3 revises the amount to $1.131 million, a reduction of $194,000 or 15%. UCAN’s
5 with no revision to cost allocation rates.
6 Like the Human Resources SVP, the Director of Compensation & Benefits often
7 includes costs for annual studies in his budget, even though the actuals may be recorded
8 to the Executive Compensation or HR Compliance cost centers – both areas that have
9 higher than budgeted expenses in 2006. Again, UCAN is making selective reductions
10 based on 2006 actuals, without allowing time for Sempra to research every variance.
11
12 4. Compensation (C-05.02)
17 For this department, UCAN notes a large non-labor increase from 2005 to 2006,
18 and makes only a cursory attempt to analyze the reason. They then use an averaging
19 formula, which even after subtracting out a 2006 cost they determined was non-recurring,
20 still resulted in a higher amount than Sempra’s forecast. We reiterate our disagreement
21 with UCAN’s methodology and reject their increase. We would prefer that UCAN view
22 the division spending for 2006 as a whole.
23
24 5. Executive Compensation (C-05.03)
26 the amount to $368,000, a reduction of $27,000 of 7%. UCAN’s recommendation
29 This department exhibited a large variation from budget, due to higher
30 professional services which UCAN acknowledges in its report vary from year to year.
31 We also surmise that the variance is because the services were budgeted for in the
32 Director’s cost center (C-05.01). Nevertheless, UCAN continues with their averaging

1 approach, rationalizing a minor reduction, even though the cost center spending was way
2 above the planned forecast. This is one of many examples of UCAN’s misguided use of
3 2006 data.
4
5 6. HR Compliance (C-05.04)
9 allocation rates.
10 In its report UCAN acknowledges they cannot tell why this cost center’s non-
11 labor costs increased in 2006, although it is again likely due to consulting costs budgeted
12 by the Director (C-05.01). Even so, and without any analysis, UCAN still used its
13 averaging method and came up with an increase. We restate our objection to UCAN’s
14 methodology and reject their adjustment.
15
16 7. Executive & Organizational Development (C-06)
17 Sempra has proposed a total utility allocation of $1.041 million, while UCAN
20 with no revision to cost allocation rates
21 UCAN based its recommendation for this cost center, again out of context with
22 the spending incurred for the division overall. While UCAN correctly notes that
23 spending on development programs has been deferred in recent years, including 2006, it
24 is due to the balancing of resources needed for other critical areas within HR such as
25 Security, which incurred far more expense than their cost center had budgeted.
26
27 8. MyInfo Services (C-07)
31 costs of $2.456 million, with no revision to cost allocation rates.

1 UCAN’s claim that the system costs are too high is unjustified. Their comparison
2 point, against an outdated, fully depreciated system, was simply inappropriate. MyInfo
3 replaced an in-house system that was using outmoded technology, was no longer vendor
4 supported, and was not compliant with new SOX standards. As such, the comparison
5 point is not cost savings compared against historical costs, but rather the lowest
6 replacement cost. Sempra selected the lower-cost solution by co-sourcing with ADP.
7 Alternative purchases like an SAP Payroll system would have cost over twice as much in
8 capital, resulting in much higher depreciation expense yet still needing full in-house staff
9 for processing. Addtionally, it is difficult to compare the costs without looking at all
10 related cost centers, but generally the variances can be attributed to three major reasons:
11 1) Short-term expense-to-capital variances due to capitalized labor during system
12 development;
13 2) Short-term variances throughout HR as projects were put on hold to focus
14 budget dollars and management time on MyInfo;
15 3) Cost mis-alignment as outsourcing costs are accounted for differently. The
16 following table illustrates how the GRC workpapers (unescalated amounts)
17 would have to be adjusted to show comparable costs. The GRC workpapers
18 do not align every pre-implementation cost center, nor do they show the
19 change in labor overheads that occur with fewer FTE’s.

1
2
3 UCAN’s recommended forecast is based on its belief that the MyInfo costs should
4 not be more than the escalated cost of providing the service in 2003, before the
5 implementation. UCAN’s calculation is flawed because it does not take into account the
6 adjustments shown in the table above, which should obviously include labor overheads
7 and any other partial staffing alignments. If UCAN had used $7.487 million as its base
8 point, it would find no reason to reduce Sempra’s 2008 forecast. We therefore reject
9 their adjustment as unwarranted.
10
11 D. Legal Division
12
13 1. Board of Directors (D-01.01)
14 Sempra has proposed a total Utilities allocation of $1.705 million, while UCAN
3
6 and 2006 actual spending, after adjusting out non-recurring expenses. As discussed in
7 the opening sections of this testimony, we reject such an approach to individual cost
8 centers, as business needs and costs vary from year to year, and making narrow, two-year
9 updates only for selected departments would not build to Sempra’s overall test year
10 requirements.
13 typical for the Board. We agree with UCAN’s determination to remove $712,000 as a
14 non-recurring cost ($636,000 on an escalated basis), which will result in lower allocations
15 of $251,000 to SDG&E and $286,000 to SCG, using the forecast Mutlti-Factor Basic
16 allocation method.
17 We do not agree with UCAN’s additional adjustment in which they’ve arbitrarily
18 decided that current Board vacancies will not be filled, which is not the case. Sempra
19 budgeted for recruiting costs, and has recently been successful in appointing a new
20 Director to the Board. Furthermore, the reliance on standard escalation for Director’s
21 fees is not justified. Sempra includes Directors in its annual compensation review for
22 executives, and adjusts their fees in accordance with competitive market studies for
23 major, Fortune 500 companies like Sempra.
24
30
31 2. Corporate Secretary (D-01.02)

5
7 UCAN’s pre-allocation adjustment is based on using an escalated base of 2006 for
8 Labor, and an escalated base of 2005 for Non-Labor, this time not even using an average,
9 but arbitrarily deciding on their preferred data point. As discussed in the opening
10 sections of this testimony, we reject such an approach to individual cost centers, as
11 business needs and costs vary from year to year, and making short-sighted updates only
12 for selected departments would not build to Sempra’s overall test year requirements.
13 In this case UCAN notes that labor expense for both 2005 and 2006 was much
14 lower than the Test Year, os they reduced the forecast to no more than 2006 expense.
15 Without knowing the facts, UCAN has made an incorrect assumption about the salary
16 level in this department. The departing Corporate Secretary retired in mid-2005, and the
17 current Secretary was promoted from the Law Department shortly thereafter. Due to an
18 administrative error, the Secretary’s labor charges continued to go to the Law Department
19 until June of 2006, when it was detected during preparations for this case. Thus, in this
20 cost center, both 2005 and 2006 contain only half a year of labor for the Secretary.
21 For non-labor UCAN believes the Annual Meeting costs itemized in 2006 is
22 incremental expense due to holding the meeting in London in 2006. However, as already
23 identified, the London meeting occurred in 2005. The Corporate Secretary is normally
24 responsible for the Annual Meeting, which was held at the Costa Mesa Hilton in both
25 2004 and 2006, and the expense shown in UCAN’s Table I-4-6 for 2006 is typical. Only
26 the 2005 Annual Meeting was coordinated by an outside firm, and the invoice charged to
27 the Board of Directors cost center (D-01.01). Sempra has already agreed to remove those
28 costs from its forecast year. For UCAN to use 2005 actuals as the forecast for this cost
29 center, would exclude any budget for normal Annual Meeting costs. Both of UCAN’s
30 reductions for this cost center are unfounded.
31

5
6 3. Chief Compliance Officer (D-02.01)
9 recommendation does not involve a reduction in test period costs, only a revision of cost
15
16 4. Business Conduct Director (D-02.02)
21
28 requirements.
29 Regarding software “purchased” in 2006 and not reflected in the base year,
30 UCAN erroneously assumes “It is unlikely this software will be purchased each an(d)
31 every year.” The referenced software was not purchased. Sempra entered into license
32 agreements with service providers for the delivery application and course content, which

1 employees access via the Internet to complete their required ongoing ethics and
2 compliance training. These license agreements have annual ongoing costs above those
3 reflected in both the base year and 2006 actuals and some contract terms did not fully go
4 into effect until implemented in early 2007. We reject UCAN’s proposal.
5
11
12 5. Environmental Compliance Director (D-02.03)
17
24 requirements.
25 For this department UCAN notes the decline in staffing levels (six to four) from
26 the Base Year through first quarter 2007 and recommends a Test Year level based upon
27 2006 actuals (five), adjusted for inflation. This department is actively recruiting and
28 interviewing candidates and plans to fill the two vacancies by year-end 2007. Sempra
29 maintains the forecasted Test Year labor expense is appropriate for this critically
30 important compliance-monitoring role.
31 Due to the travel involved and nature of work in performing environmental and
32 safety audits, non-labor expense is closely tied to the number of personnel performing

1 this function. With the decline in staffing levels from the base year through first quarter
2 2007; a decline in associated non-labor expenses also occurred in 2006 actuals from 2006
3 budget. It is expected that by year-end 2007, the staffing for this department will return
4 to the 2005 full-staff level and therefore an associated increase in non-labor expenses
5 would be expected. However, in light of evolving efficiencies in completing its field
6 audits, travel expenses of the group have been become more cost-efficient. Accordingly,
7 we are willing to lower travel expenses by $25,000 in the forecast year which will result
8 in lower allocations of $9,000 to SDG&E and $10,000 to SCG, using the forecast Mutlti-
9 Factor Basic allocation method.
10
16
17 6. EVP/General Counsel (D-03.01)
22
29 requirements.
30 Nevertheless, we have been willing to re-examine our forecasts for each
31 department and where it appears there may be truly non-recurring or incorrect
32 assumptions included, we will accept or propose adjustments. Sempra cannot, on a zero-

1 based level, substantiate the nature of every travel, event or consulting cost the General
2 Counsel might incur in the Test Year. Reviewing the budget for 2006 indicates there
3 could be at least one duplicate line item, and so Sempra would accept UCAN’s reduction
4 as a reasonable adjustment, resulting in lower allocations of $93,000 to SDG&E and
5 $84,000 to SCG, using the forecast Law-141 allocation method.
6
7 7. Law Department (D-04.01)
9 million, while UCAN revises the amount to $14.288 million, a reduction of $1.551
10 million or 10%. UCAN’s recommendation includes a pre-allocation reduction in total
11 test period costs of $2.259 million, with no revision to cost allocation rates.
12
19 requirements.
20 For the Law Department, UCAN has concluded based only on actual staffing
21 levels for recent years that Sempra’s forecast labor needs are overstated. UCAN made a
22 similarly erroneous assumption with Audit Services. Given the competition from large
23 private law firms, corporations like Sempra have difficulty recruiting attorneys and
24 support staff at the required level of quality and experience. While Sempra strives to
25 cost-effectively provide legal support with in-house staff, the reality is that many vacant
26 positions are filled with contract labor or balanced with outside counsel (in a separate
27 cost center). UCAN also points out “energy crisis” related travel expenses that should
28 not be part of its “averaging”, but Sempra has already shown an adjustment for such costs
29 in its workpaper MPH-WP-285, not including it in the forecast. UCAN also seems to
30 disregard any need for rising legal support to the Utilities for their capital expansion and
31 electric procurement activity that will involve regulatory, commercial, contractual, and

1 environmental matters. There is no basis for UCAN to maintain the same level of legal
2 service as was incurred in 2005 and 2006.
3
4 8. Outside Legal Services (D-04.02)
5 For this non-labor cost, Sempra has proposed a total Utilities allocation of
6 $13.656 million, while UCAN revises the amount to $8.153 million, a reduction of
7 $5.503 million or 40%. Most of the amounts represent direct-assignments, so there is no
8 proposal to change allocation rates.
9
11 UCAN’s pre-allocation adjustment is based on using an escalated average of 2005 and
12 2006 actual spending, after adjusting out what they consider non-recurring costs.
13 Throughout this testimony, Sempra has expressed its objection to such an approach, and
14 it is particularly unmeaningful for forecasting Outside Legal costs. The following
15 arguments will illustrate the problems with UCAN’s methodology.
16
17 • UCAN believes it can properly forecast Test Year legal expenses by
18 subtracting “nonrecurring” cases from the 2005 list of legal matters and
19 escalating. Sempra emphatically rejects this approach. First, it assumes that
20 legal cases can be defined as either recurring or nonrecurring. This is a
21 misconception since clearly all legal cases are based on transient
22 circumstances and, once resolved, do not recur. UCAN used the 2005 listing
23 of specific legal matters to pick out nonrecurring cases, and although they
24 complained the listing lacked sufficient case descriptions, such information is
25 irrelevant since all the cases will likely be resolved by 2008. It appears that
26 UCAN simply selected the highest-cost matters and arbitrarily labeled them
27 “nonrecurring” as a means of reducing their base as much as possible.
28 • Sempra does agree that its defense of “energy crisis” matters over the 2003-
29 2005 period should be considered nonrecurring due to the unprecedented size
30 and circumstance of this litigation. Sempra spent over $50 million for
31 SDG&E and SCG’s combined defense during that time frame. We already
32 did remove these costs from our trend analysis and estimate of future costs,

1 and stated so in workpapers and in response to data request UCAN-33, Q1,
2 which clearly showed the calculation. That the cases were on the 2005 list of
3 matters requested by UCAN had nothing to do with our trend forecast.
4 • The trend analysis Sempra performed resulted in a test year forecast of
5 $39.424 (escalated) of which $13.656 million, or 35%, would be charged to
6 the Utilities. There is nothing vague or speculative about our forecast, as
7 UCAN’s report implies. Although we cannot know what cases will arise,
8 Sempra expects that environmental issues such as permitting and site analysis
9 and land right-of-way will be a large part of its future matters, resulting from
10 the Utilities robust capital program.
11 • UCAN stated on page I-4-19 of its report that, “Sempra billed $20.3 million in
12 “energy crisis” lawsuit and other “resolved” litigation expenses (such as the
13 Hurlic pension plan litigation) to SDG&E and SCG in the base year. Sempra
14 acknowledges in workpapers that these base year litigation and lawsuit
15 expenses should be removed because they were “resolved in 2005/2006.”
16 This is a misrepresentation of facts. Sempra provided a detailed history of
17 Outside Legal costs by matter as requested by UCAN in data requests.
18 However, Sempra did not acknowledge at any point that litigations such as
19 ‘Hurlic pension plan litigation’ should be removed from the trend calculation.
20 • UCAN also refers to Sempra’s Evaluation of Change workpaper MPH-WP-
21 285 as the source for its belief that Sempra would remove the above
22 mentioned matters from the trend analysis. Item 1 on this workpaper
23 summarizes the net change between 2005 and 2008 as, “Increase in Global
24 Retained due to new development; additional SDG&E cost for environmental
25 issues; resolution of major Utility lawsuits such as Encanto, Ingersoll-Rand,
26 and Hurlic Pension.” These were three separate drivers that attempted to
27 explain at a high level the change between base year actual costs and test year
28 forecasts that resulted from the trend analysis. Issues currently being litigated
29 will have been resolved and new, yet unknown, matters will take their place.
30 UCAN mistakenly assumes all of the increase at SDG&E was attributed to
31 environmental issues.
32
1 Sempra’s forecast was based on a properly adjusted historical trend analysis of
2 actual Outside Legal costs by business unit. It was not assembled by adding the projected
3 cost of individual matters, as UCAN seems to indicate in its testimony. There is no way
4 that Sempra can know about actual future matters; historical case levels are the best
5 reference. Sempra rejects this attempt by UCAN to rebase its Outside Legal forecast
6 using erroneous assumptions and methods.
7
8 9. Regulatory Policy (D-04.03)
10 the amount to $223,000, a 6% reduction of $14,000. UCAN’s recommendation includes
11 a pre-allocation reduction in total test period costs of $28,000, with no revision to cost
13
20
21 E. Benefits
22
23 1. Payroll/Labor Loaders (H-01, H-02, H-03)
24 To the extent UCAN’s proposals result in a reduction of labor expense in the
25 forecast year, a portion of cost in the Benefits section would also decrease. Expenses for
26 health and welfare benefits, pension, non-executive ICP, and payroll tax are handled as
27 percentage loaders on each dollar of labor. UCAN has calculated the impact on Benefits
28 from their proposals, resulting in an additional $2.693 million reduction. As Sempra
29 rejects their forecast changes, the Benefits reductions should also be disregarded.
30
31 2. Supplemental Executive Retirement Plan (H-04)

1 UCAN has a specific disagreement with the amount forecast for SERP at the
2 Corporate Center, again referring to 2006 actuals. The basis for Sempra’s SERP forecast
3 was addressed in testimony by Joyce Rowland and Joe Householder.
4
5 None of the other Benefits amounts included in Corporate Center’s costs and
6 allocations were directly disputed by UCAN, however their report states their support of
7 the recommendations made by DRA. Again, rebuttal to those issues is covered by
8 witnesses Joyce Rowland and Joe Householder.
9
10 F. Insurance
11
12 Property Insurance
13 1. Primary Property Insurance (I-01.03)
14 For this insurance, Sempra has proposed a total Utilities allocation of $2.662
17 costs of $980,000, combined with a direct-assignment adjustment.
18
20 UCAN attempted to re-forecast Sempra’s insurance costs on its own starting with
21 2006 actual premiums. While we have already stated our objection to re-basing forecasts
22 on unreviewed data, we can show that had their approach used correct assumptions, their
23 resulting forecast would be very consistent with Sempra’s original submittal. Following
24 is our response to UCAN’s specific recommendations:
25
26 Market Conditions – In their report, UCAN makes light of what they describe as
27 a “hurricane surcharge”, referring to the higher premiums Sempra expects not only as a
28 result of the 2005 hurricane season, but also based on numerous reports that such storms
29 were just the beginning of a decade of hurricanes striking the U.S. [see Jan. 29, 2007
30 article – Business Insurance]. UCAN implies that the condition is fictional or akin to a
31 nonrecurring item. Sempra notes that despite a mild 2006 hurricane season, hurricane
32 experts continue to predict an above-average trend for catastrophic hurricane losses. Dr.

1 William Gray of the Department of Atmospheric Sciences at Colorado State University
2 predicts an above-average hurricane season for 2007, putting the probability of a Cat 3 or
3 higher hurricane making landfall on the US coastline at 74%. That is well above the
4 long-term average of 52% [see attached CSU and NOAA 2007 Atlantic Hurricane Season
5 Forecasts]. This report is only one example of many more that were provided to UCAN
6 through data requests (UCAN-9, Q8). These outside reports place extreme pressure on
7 all business insurance costs, and Sempra maintains that pressure has already materialized
8 in 2006 property premiums.
9 Global Power Plants Sold in 2006 – UCAN intended to subtract from 2006
10 premiums the portion attributable to Sempra’s sold power plants , to properly exclude
11 them from the forecast basis. However, although Sempra provided supporting invoices
12 for the sold facilities in response to their data request UCAN-9, Question 8-I, UCAN
13 appears to have mis-interpreted the amount for Coleto Creek (using the $480,000
14 premium refund in 2006, rather than the $343,000 net premium), and subtracted an
15 incorrect total of $505,000. The correct amount would have been $368,000.
16 Property Growth – UCAN declined to use Sempra’s calculated growth rate
17 of 11%, claiming that it was dramatically inflated by large Global acquisitions, even
18 though the workpaper showed those acquisitions were excluded (UCAN-9, Q8-D).
19 Instead, UCAN referred to property values shown on the Allocation Method workpaper
20 (MPH-WP-627) that contained no change in values between 2005-2008 other than asset
21 sales and additions. Those static values were intended only to calculate allocation ratios
22 between business units, and contained no escalation. Regardless, UCAN used the 2.5%
23 change at the Utilities (that was only the result of adding Palomar) as their growth rate for
24 all Sempra property values. UCAN recognizes the relationship of property value growth
25 to premium escalation, which is the same methodology that Sempra used, but their 2.5%
26 growth rate is groundless.
27 The following tables shows that if UCAN’s 2006-based methodology is
28 employed, but corrected for the sold assets premium and the 11% growth rate, it results in
29 a projection that is within $18K of Sempra’s forecast:

Primary Property Insurance (I-01.03)
Sempra's Revised Forecast
2006 2007 2008
2006 Actual Premium Paid 4,965,000
Subtract: Premium for sold assets (386,243)
Property value growth at 11% 4,578,757 5,082,420 5,641,486
Sempra's Revised Forecast 5,082,420 5,641,486

Sempra's Original Forecast 5,099,000 5,660,000
1 Proposed Reduction (16,580) (18,514)
2
3 This projection, using 2006 actuals that have the storm premium increases built
4 in, and asset sales and purchases resolved, illustrates that Sempra’s original 11% growth
5 assumption was valid. The revised forecast is so consistent with Sempra’s original
6 submittal, there is no basis for a reduction. We therefore reject UCAN’s adjustment.
7
8 2. Excess Property Insurance (I-01.04)
12 costs of $1.206 million plus an overall reduction in the cost allocation rates for 2008.
13
15 Like Primary Property Insurance, UCAN bases its recommendations starting with
16 2006 actual premiums, and again Sempra disagrees with rebasing the forecast on
17 unreviewed actuals. UCAN also makes a number of incorrect statements in its report,
18 misinterpreting our filed workpaper presentations of Global’s plant sales and the Palomar
19 addition. Rather than correct every item, we refer instead to their projection starting with
20 2006 actuals that have Palomar added and Global asset sales included.
21 UCAN indicates that property growth is a reasonable basis for estimating future
22 premiums. However, as illustrated in the Primary Property section (I-01.03), UCAN’s
23 2.5% growth rate was based on a flawed assumption. If Sempra’s 11% growth rate,
24 which is based on historical, comparable property values, is applied to UCAN’s

1 calculation, it would result in a projection that is within $93K of Sempra’s forecast, as the
2 following table shows:
Excess Property Insurance - 1100-0404
Hypothetical Forecast Using UCAN's Methodology
Asset 2006 2007 2008
2006 Actual Premium Paid 12,607,000
Subtract: Non-recurring Payment (6,486,000)
"Recurring" 2006 Premium at 11%
growth rate 6,121,000 6,794,310 7,541,684
Sempra's 2008 Forecast 7,449,000

3 Difference (Sempra less UCAN) (92,684)
4
5 Additonally, this projection, even with 2006 asset sales and purchases included,
6 continues to show that Sempra’s original 11% growth assumption was valid. The revised
7 forecast is so consistent with Sempra’s original submittal, there is no basis for a
8 reduction. We therefore reject UCAN’s adjustment.
9
11 Excess Property Insurance is currently allocated by covered business units based
12 on their insured property values. UCAN seeks to revise the allocation method for Excess
13 Property by adding “risk factors” in the same manner that the Primary Property allocation
14 has done. UCAN’s calculation reduces the Utilities total allocation rate from 54% to
15 39%, which they think is fair because Global property is inherently riskier than utility
16 property.
17 One of the primary reasons the Primary Property “risk factors” cannot be used
18 to weight Excess Property is that they take into account Business Interruption (BI)
19 insurance which is included in the premiums for Global business units. The Utilities do
20 not take this coverage. And since BI insurance is not an element of Excess Property
21 coverage, those risk factors are not applicable to the Excess Property allocation.
22 Sempra rejects UCAN’s recommendation for this allocation change.
23
24 3. Property Crime Insurance (I-01.05)
25 For this insurance, Sempra has proposed a total Utilities allocation of $453,000,
3
5 For the 2006-07 year, Sempra’s Risk Management was able to obtain favorable
6 terms for this policy type, compared to expectations at the time our filing was prepared.
7 Thus, we acknowledge that the forecast for 2008 is likely higher than will be needed to
8 maintain this coverage. Although Sempra disagrees with UCAN’s 2005-2006 averaging
9 methods, in this case, our own new estimate would yield a similar result. Thus we accept
10 UCAN’s adjustment to remove $156,000, which will result in lower allocations of
11 $55,000 to SDG&E and $63,000 to SCG, using the forecast Mutlti-Factor Basic
12 allocation method.
13
19
20 4. Property Insurance Broker Fees (I-01.07)
21 For the broker fees, Sempra has proposed a total Utilities allocation of $151,000,
25
27 The following items are recorded in Cost Center 1100-0407:
28 • Broker Fees for property insurance policies placed in the United States:
29 Sempra pays its broker a fixed fee for brokerage services related to Property
30 Insurance policies placed in the United States. This fee of $200,000 has not
31 changed for past several years and Sempra does not forecast any increase for

1 test year. This cost center contains no broker fees for policies placed in
2 Mexico.
3 • Settlement Refund: On January 31, 2005 Marsh & McLennan Companies, Inc.
4 (MMC) entered into an agreement with the New York State Attorney General
5 and the Superintendent of the New York State Insurance Department that
6 resolved the actions that were commenced against MMC and Marsh Inc.
7 Under the settlement agreement, MMC established an $850 million fund to
8 compensate clients nationwide. Marsh’s clients are eligible to receive a pro
9 rata portion of the fund based on the premium and the amount of estimated
10 Market Service Agreement revenue recorded by Marsh between January 1,
11 2001 and December 31, 2004. (See letter in attachments) Sempra received /
12 will receive its share of this fund in four installments beginning 2005 and
13 ending 2008. Sempra records this distribution to its Broker Fees cost centers
14 (1100-0407 for Property and 1100-0436 for Liability) in proportion to
15 underlying broker fees in these cost centers. This is a one-time event and the
16 settlement payments are known to stop after 2008. Therefore, Sempra
17 excluded this item from its forecast request as explained on workpaper MPH-
18 WP-502.
19
20 Although Sempra provided copies of invoices to support its claims, UCAN disregarded
21 Sempra’s explanation of this item and proceeded to conclude that the actual broker fees
22 paid in recent years were lower than $200,000. Sempra requests that the Commission
23 reject UCAN’s argument on this issue.
24
30
31 Liability Insurance

1 As an introduction, it’s important to understand that, rather than increasing for
2 inflation, rates for liability insurance are cyclical and are impacted by three major drivers:
3 1) market conditions, 2) company profile, and 3) claims history.
4
5 • Market Conditions: Sempra indicated in its testimony and reiterates here that
6 nearly all commercial insurance policies -- property and liability -- are funded by
7 investment companies engaged in “reinsurance”. This commercial reinsurance
8 market suffered heavy losses from the 2005 hurricanes and is likely to recover
9 their losses by demanding higher fees for all types of insurance. At the time
10 Sempra’s GRC forecast was prepared, the recent industry-wide losses were
11 generally expected to create hard market conditions characterized by double-digit
12 rate increases for several years in all lines of insurance. Fortunately, recent policy
13 renewals have proved that the market conditions are not as severe as forecasted.
14 This is attributed to new entrants into commercial reinsurance markets, increasing
15 competition and offsetting the normal rate pressure.
16
17 • Company Profile: UCAN believes that Sempra’s foreign business units carry a
18 higher level of risk and that this risk is subsidized by the Utilities. Sempra’s
19 Global unit does own investments outside of the United States, mainly in Mexico,
20 Chile, and Peru. However, liability insurance for these foreign businesses is
21 obtained under separate fronted programs, and all premiums related to the
22 coverage are paid in these foreign countries. No foreign premiums are paid out of
23 Corporate Center or allocated to the Utilities in any way, and there is no impact
24 from those foreign policies on Sempra’s forecast for this GRC.
25 • Claims History: Historically, the majority of liability claims have been against the
26 Utilities, and there is no reason to believe that the growth of Global businesses will
27 change this trend. Whereas Global operations tend to be located in remote areas,
28 minimizing their exposure to third-parties, the Utilities operations are embedded
29 throughout high-population areas and have by far the largest number of employees
30 in contact with customers. Unlike the Utilities, Sempra’s Global business units
31 have never had an insurance-paid claim.
32
1 There is no evidence that the existence of Sempra’s Global business units are
2 placing any disproportionate pressure on forecasted Liability insurance, either through
3 foreign expansion or claims risk. Sempra does believe that hard market conditions exist
4 and will continue for some time. Although the mitigating influences that are currently
5 keeping premiums lower could evaporate in volatile financial markets, Sempra is willing
6 to lower its forecast escalation rate for certain policies:
Liability Insurance Trend
Actual Actual Actual Actual
($ '000) 2003 2004 2005 2006
I-02.01 Liability Ins - Songs Nuclear $ 491 $ 247 $ 274 $ 298
I-02.02 Liability Ins - Songs Mesa 218 313 293 231 *
I-02.04 Liability Ins - Excess Liability 6,796 9,766 10,281 11,134
I-02.05 Liability Ins - Ca Excess Workers Comp 1,280 1,478 1,465 1,759
I-02.07 Liability Ins - Employment Practices 767 - 77 2
I-02.08 Liability Ins - Fiduciary Liability 543 1,203 2,025 2,057
Total $ 10,095 $ 13,007 $ 14,415 $ 15,481
Year-Over-Year Percentage Change 28.8% 10.8% 7.4%
7 * Adjusted for late 2006 invoice paid in 2007
8
9 Although Sempra generally disagrees with the use of 2006 recorded data, we have
10 included it here as a reference point for our revised forecast. UCAN’s proposal of
11 averaging 2005 and 2006 premiums is short-sighted. Their approach would only allow
12 Sempra a recovery that is less than its 2006 actual expense, in an environment where
13 premiums are clearly rising. Based on the trend shown in this chart, Sempra recommends
14 that a 7 percent annual increase factor be applied between the base year and the test year.
15 Sempra further recommends applying this same 7 percent rate of annual increase to D&O
16 premiums. The following table summarizes our proposed 2008 pre-allocation cost for the
17 liability insurance policies.
Liability Insurance Forecast
Actual Forecast Forecast GRC Forecast Proposed
($ '000) 2006 2007 2008 2008 Reduction
I-02.01 Liability Ins - Songs Nuclear $ 298 $ 320 $ 344 $ 450 $ (106)
I-02.02 Liability Ins - Songs Mesa 231 248 266 426 (160)
I-02.03 Liability Ins - D&O 4,965 5,332 5,727 6,607 (880)
I-02.04 Liability Ins - Excess Liability 11,134 11,958 12,843 14,045 (1,202)
I-02.05 Liability Ins - Ca Excess Workers Comp 1,759 1,889 2,029 1,983
I-02.07 Liability Ins - Employment Practices 2 - - 102 (102)
I-02.08 Liability Ins - Fiduciary Liability 2,057 2,209 2,373 3,515 (1,142)
Total $ 20,446 $ 21,957 $ 23,582 $ 27,128 $ (3,592)
18
19
5
6 5. SONGS Nuclear Liability (I-02.01)
7 For this insurance, Sempra has proposed a SDG&E allocation of $450,000, while
8 UCAN revises the amount to $298,000, a reduction of $152,000 or 34%.
9 Sempra’s revised forecast of $344,000 would lower the allocation by $106,000 to
10 SDG&E.
11
12 6. SONGS Mesa Liability (I-02.02)
13 For this insurance, Sempra has proposed a SDG&E allocation of $426,000, while
14 UCAN revises the amount to $293,000, a reduction of $133,000 or 31%.
15 Sempra’s revised forecast of $266,000 would lower the allocation by $160,000 to
16 SDG&E.
17
18 7. D&O Insurance (I-02.03)
23 Sempra proposes to reduce its forecast by $880,000, which would result in lower
24 allocations of $310,000 to SDG&E and $353,000 to SCG, using the forecast Multi-Factor
26
27 8. Excess Liability Insurance (I-02.04)

1 Sempra proposes to reduce its forecast by $1.202 million, which would result in
2 lower allocations of $424,000 to SDG&E and $483,000 to SCG, using the forecast Multi-
4
5 9. California Excess Workers Comp (I-02.05)
9 costs of $1.482 million with no revision to cost allocation rates.
10 The 7% escalation rate discussed above results in a very similar forecast as
11 Sempra’s original proposal. Therefore Sempra proposes no change to its forecast.
12
13 10. Fiduciary Liability (I-02.08)
18 Sempra proposes to reduce its forecast by $1.142 million, which would result in
19 lower allocations of $403,000 to SDG&E and $459,000 to SCG, using the forecast Multi-
21
22 Executive Umbrella (I-02.09), and Liability Brokers Fees (I-02.11)
23 Although UCAN did not discuss these items in their summary of
24 recommendations or in their detail report, reductions for these policy types and fees are
25 shown in their Table I-6-1, an additional Utilities allocation reduction of $48,000. No
26 rationale was provided for these reductions; therefore, Sempra rejcts them in total.
27
28 Employment Practices (I-02.07)
29 Although UCAN did not discuss this policy in their summary of
30 recommendations or in their detail report, a reduction was shown in their Table I-6-1 of
31 $49,000 to Utilities. Since preparing the GRC forecast, this coverage has been combined
32 with Sempra’s Excess Liability policy and therefore Sempra requests no recovery for

1 2008, a reduction of $102,000 from its previous forecast, which would result in lower
2 allocations of $36,000 to SDG&E and $41,000 to SCG, using the forecast Multi-Factor
4
5 V. RESPONSE TO FEA RECOMMENDATION
6 In the testimony of Hugh Larkin, Jr., the FEA recommends a reduction for
7 Property Insurance as recorded by SDG&E in Account 924. FEA proposes a 2.1%
8 escalation rate from the base year amount. As Account 924 contains various types of
9 property insurance policies, Sempra refers to its rebuttal testimony to UCAN’s
10 recommendations for Insurance. Sempra’s calculations demonstrated that its original
11 forecast was valid, and thus rejects any recommendation for reduction.
12 This concludes my rebuttal testimony.

Appendix
SDG&E/SCG Doc #205115 Rebuttal: July 2007

INDEX
PAGE
UCAN Data Request 9 Question 3 ..................................................................................................... 1
UCAN Data Request 9 Question 4 ..................................................................................................... 3
UCAN Data Request 28 Question 1 ................................................................................................... 6
Workpaper MPH-WP-285: Evaluation of Change for Outside Legal................................................. 9
UCAN Data Request 9 Question 8-I................................................................................................... 12
UCAN Data Request 9 Question 8-D ................................................................................................. 14
Workpaper MPH-WP-502: Evaluation of Change for Broker Fees.................................................... 16
Letter from Marsh detailing settlement payments (dated May 20, 2005) ........................................... 17
Print Article: CSU and NOAA 2007 Atlantic Hurricane Season Forecast ......................................... 20
Print Article: Jan 29 2007 Business Insurance.................................................................................... 21
Allocation Workpaper: Multi-Factor Basic ........................................................................................ 23
Allocation Workpaper: COMM-0375................................................................................................. 24
Allocation Workpaper: CFO............................................................................................................... 25
Allocation Workpaper: Primary Property ........................................................................................... 26
Allocation Workpaper: Excess Property............................................................................................. 27
SDG&E/SCG Doc #205115 i Rebuttal: July 2007


230 Haas Rebuttal Testimony July 20 2007

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Application of SAN DIEGO GAS & ELECTRIC )

COMPANY for authority to update its gas and )

Application No. 06-12-009 / 06-12-010

BEFORE THE PUBLIC UTILITIES COMMISSION

JULY 20, 2007

SDG&E/SCG Doc # 205115 Rebuttal: July 2007

II. MULTI-FACTOR ALLOCATION .................................................................... 2

III. UCAN’S USE OF 2006 ACTUALS ..................................................................... 2

IV. SEMPRA’S RESPONSE TO SPECIFIC RECOMMENDATIONS................ 3

A. Communications & Investor Relations ............................................................. 3

B. Finance Division ............................................................................................... 7

V. RESPONSE TO FEA RECOMMENDATION ................................................ 43

SDG&E/SCG Doc #205115 i Rebuttal: July 2007

SDG&E/SCG Doc #205115 2 Rebuttal: July 2007

SDG&E/SCG Doc #205115 3 Rebuttal: July 2007

SDG&E/SCG Doc #205115 4 Rebuttal: July 2007

SDG&E/SCG Doc #205115 5 Rebuttal: July 2007

SDG&E/SCG Doc #205115 6 Rebuttal: July 2007

24 Corporate Center’s Financial Reporting group has the primary responsibility

SDG&E/SCG Doc #205115 11 Rebuttal: July 2007

SDG&E/SCG Doc #205115 12 Rebuttal: July 2007

SDG&E/SCG Doc #205115 13 Rebuttal: July 2007

SDG&E/SCG Doc #205115 14 Rebuttal: July 2007

SDG&E/SCG Doc #205115 15 Rebuttal: July 2007

SDG&E/SCG Doc #205115 16 Rebuttal: July 2007

SDG&E/SCG Doc #205115 17 Rebuttal: July 2007

SDG&E/SCG Doc #205115 18 Rebuttal: July 2007

SDG&E/SCG Doc #205115 19 Rebuttal: July 2007

SDG&E/SCG Doc #205115 20 Rebuttal: July 2007

SDG&E/SCG Doc #205115 21 Rebuttal: July 2007

SDG&E/SCG Doc #205115 22 Rebuttal: July 2007

SDG&E/SCG Doc #205115 24 Rebuttal: July 2007

SDG&E/SCG Doc #205115 25 Rebuttal: July 2007

SDG&E/SCG Doc #205115 26 Rebuttal: July 2007

SDG&E/SCG Doc #205115 27 Rebuttal: July 2007

SDG&E/SCG Doc #205115 28 Rebuttal: July 2007

SDG&E/SCG Doc #205115 29 Rebuttal: July 2007

SDG&E/SCG Doc #205115 30 Rebuttal: July 2007

SDG&E/SCG Doc #205115 32 Rebuttal: July 2007

SDG&E/SCG Doc #205115 33 Rebuttal: July 2007

SDG&E/SCG Doc #205115 34 Rebuttal: July 2007

Sempra's Revised Forecast 5,082,420 5,641,486

1 Proposed Reduction (16,580) (18,514)

SDG&E/SCG Doc #205115 35 Rebuttal: July 2007

Sempra's 2008 Forecast 7,449,000

SDG&E/SCG Doc #205115 37 Rebuttal: July 2007

SDG&E/SCG Doc #205115 38 Rebuttal: July 2007

7 * Adjusted for late 2006 invoice paid in 2007

SDG&E/SCG Doc #205115 41 Rebuttal: July 2007

SDG&E/SCG Doc #205115 42 Rebuttal: July 2007

SDG&E/SCG Doc #205115 43 Rebuttal: July 2007

SDG&E/SCG Doc #205115 Rebuttal: July 2007

UCAN Data Request 9 Question 3 ..................................................................................................... 1

UCAN Data Request 9 Question 4 ..................................................................................................... 3

UCAN Data Request 28 Question 1 ................................................................................................... 6

UCAN Data Request 28 Question 8 ................................................................................................... 7

Workpaper MPH-WP-285: Evaluation of Change for Outside Legal................................................. 9

UCAN Data Request 33 Question 1 ................................................................................................... 10

UCAN Data Request 9 Question 8-I................................................................................................... 12

UCAN Data Request 9 Question 8-D ................................................................................................. 14

Workpaper MPH-WP-502: Evaluation of Change for Broker Fees.................................................... 16

Print Article: Jan 29 2007 Business Insurance.................................................................................... 21