This just in from TVGuide.com:

The mystery surrounding the setting of the Grey's Anatomy spin-off has been solved — by me!!
Per one very well-placed mole, the hospital where Addison will accept her new job will be located in (drumroll, please… ) Los Angeles! That's right, Doc Montgomery's going Hollywood!
Which makes perfect sense given what else I know about the top-secret offshoot. Sources confirm that plastic surgery and psychiatry (two L.A. staples) will play as prominent roles in the show as Addison's chosen field of neonatology. In fact, according to a source who read the script for the pilot, er, I mean the "enhanced two-hour Grey's episode with a potential for afterlife," there are multiple scenes set in a shrink's office and another scene involving a pampered Beverly Hills princess contemplating a chemical peel with her hot plastic surgeon (Tim Daly, perhaps?).
Oh, and my spy also points out the show takes advantage of its setting in another way. "There's sex, sex and more sex," whispers my mole. "I thought I was reading an episode of Nip/Tuck!"
OK, just to recap, here's what we currently know about Grey's 2.0:
Who: Kate Walsh, Tim Daly, Taye Diggs, Amy Brenneman, Chris Lowell, Merrin Dungey and Paul Addelstein.
What: Grey's Anatomy spin-off. I mean "enhanced two-hour Grey's episode with a potential for... " Oh, forget it. Grey's spin-off.
Where: Los Angeles.
When: Special two-hour May sweeps episode of Grey's "with potential... " No, I'm just not typing that again.
Why: Mo' money, natch!