SDG&E’s Proposal to Implement AB 920 July 9, 2010

Slide 2 Proposal: Guiding Principles SDG&E developed its Net Surplus Compensation proposal with the following objectives in mind: –Compliance with AB 920 Compensation for the value of net surplus electricity and RPS eligible RECs offered by the customer No cost shifting to other customers –Compliance with other applicable state and federal laws Eligible customers are automatically considered QFs; under SDG&E’s proposal no jurisdictional issues if the Net Surplus Compensation rate is set at avoided cost –Low implementation costs Small surpluses anticipated given NEM program requirement that the generation system be sized to meet customer load –Ease of customer understanding and participation Net Surplus Compensation program is designed as an extension of SDG&E’s existing NEM program –Transparency in the calculation of compensation Proposal leverages an avoided cost rate already adopted by the CPUC

Slide 3 Proposal: Electricity Compensation Pricing for Electricity: SDG&E proposes a net surplus compensation rate for excess kWh based on a 12-month rolling average of the Short Run Avoided Cost (SRAC) energy rate –Includes time-of-delivery considerations – directly for commercial and industrial customers with time-of-use meters and indirectly for others Advantages: –The SRAC energy rate is approved by the CPUC and is used to pay other small power producers for electricity –The SRAC energy rate meets the FERC’s “avoided cost” requirement for wholesale rates set by the CPUC –SRAC is a short term rate to match NEM program’s use of current retail rates –Consistent with requirement in AB 920 for no cost shifting since it provides an acceptable measure of energy prices SDG&E would have incurred but for the net surplus energy production of the customer-generators –The SRAC time of delivery periods are consistent with the time of use periods already in customer rates –12 month average consistent with when excess kWh generated and corresponds with the NEM customer’s 12-month true-up period

Slide 4 Proposal: REC Compensation Pricing for Renewable Energy Credit (REC): SDG&E proposes to pay for RECs associated with the net surplus electricity that are offered by the customer and can be applied to the Renewable Portfolio Standard (RPS) –Until a competitive market price for RECs in CA is available, an interim price would be established annually based on the most recent Market Price Referent Greenhouse Gas Adder –The REC price would be 0.8 cents/kWh based on the most recently adopted MPR Advantages: –Consistent with current prices for RECs in the voluntary market –Will not set a market price in the new REC market

Slide 5 Proposal: Implementation Implementation: Net Surplus Compensation amount would first be applied to the outstanding account balance and the remaining amount would be rolled over as a bill credit unless the customer requests cash compensation. –Net Surplus Compensation would be calculated the same regardless of whether the customer chooses cash or credit compensation SDG&E anticipates the ability to implement its proposal by January 1, 2011 SDG&E estimates minimal implementation costs if its proposal is adopted –SRAC energy rates are already used to calculate payments for QFs –A proposed adjustment factor for residential and non-TOU customers is already calculated –Interim REC price is already calculated –Each customer’s net surplus kWh is already tracked in the billing system

Slide 6 Proposal: Eligibility for Net Surplus Compensation Eligibility: Customers must have generated more energy than they consumed at the end of their 12-month true-up period and have remaining generation bill credits on their account in order to receive net surplus compensation. –AB 920 does not provide for compensation unless the customer has excess kWh –If a customer has used up all bill credits at the end of the year, the customer has already been compensated for excess generation at the full retail rate Compensation in addition to payment at the full retail rate would cause additional cost shifting to non-participating customers beyond current NEM

Slide 7 Sample Calculation