In December 2002, the City Council approved revised terms to SDG&E's Franchise that included the following changes:

SDG&E would continue to pay the 3% franchise fee, and would change the definition of gross receipts to include paying the franchise fee on all revenues collected from any surcharges implemented by CPUC or statute. With the revised definition of gross receipts, the existing 1.9% electric surcharge embedded in rates would be increased to 2.25% and the existing 1.0% gas surcharge would be increased to 1.03%. In addition, an undergrounding surcharge is paid directly to the City with the quarterly remittance of franchise fees. The undergrounding surcharge only applies to the electric portion of revenues and is in addition to the current electric surcharge. The collection of this surcharge began in January 2003 when the first quarterly remittance was paid in the May 2003 payment to the City. The amount of the surcharge was calculated to the required 4.5% of gross receipts minus any amount of undergrounding allocations which may be embedded within the electricity rates. The embedded amount is 1.15% (approximately $10 million). Thus, the Underground surcharge is 3.53% of gross receipts (approximately $40 million per year). Combined with the 2.25% electric surcharge, the total electricity surcharge to City of San Diego customers of SDG&E is 5.78% and displayed in the same manner on electricity bills that the previous 1.9% was displayed. SDG&E continues to pay 3% franchise fees on all of these surcharge revenues.

Before any such surcharge was enacted, the City of San Diego supported and advocated an "Advice Letter" (PDF) submitted by SDG&E to the CPUC supporting such action. The CPUC is required to implement any additional surcharge on ratepayers. SDG&E submitted an "Advice Letter" to the CPUC for a January 2003 implementation to increase the current electric surcharge from 1.9 to 2.25%, increase the gas surcharge from 1.0 to 1.03% and collect an undergrounding surcharge of 3.53%. The "Advice letter" to the CPUC advocated that in order to meet the City's objective of increasing the current amount of undergrounding being done in San Diego above what was previously agreed to, SDG&E would support the City by submitting an "Advice Letter" to the CPUC asking to increase the electric surcharge on the residents of the City of San Diego from 1.9% to 5.78% with the condition that the City use 3.53% of the additional surcharge solely for undergrounding projects within its geographic territory, and the remainder of the .35% be used as an increase to the 1.9% electric franchise fee surcharge with 1.15% embedded in rates.