SCE-06 V.02 Testimony...26 projects which support SCE’s commitment to Operational & Service Excellence. 27 B. Summary of O&M and Capital Request 28 In this volume of testimony, SCE

Application No.: A.19-08- Exhibit No.: SCE-06, Vol. 2 Witnesses: T. Frierson

J. Ghiloni J. Jiang K. Landrith A. Li M. Peacore R. Ramos R. Sekhon J. Smolk R. Swartz S. Tran

(U 338-E)

2021 General Rate Case

Enterprise Planning & Governance

PUBLIC VERSION

Before the

Public Utilities Commission of the State of California

Rosemead, California August 30, 2019

SCE-06, Vol. 2: Enterprise Planning & Governance

Table Of Contents

Section Page Witness

-i-

II. INTRODUCTION .............................................................................................1 A. Li

A. Content and Organization of Volume ....................................................1

B. Summary of O&M and Capital Request ................................................1

II. FINANCIAL OVERSIGHT AND TRANSACTIONAL PROCESSING ...................................................................................................4

A. Overview ................................................................................................5

1. Regulatory Background/Policies Driving SCE’s Request .......................................................................................6

2. Compliance Requirement ...........................................................6

B. 2018 Decision ........................................................................................7

1. Comparison of Authorized 2018 to Recorded ...........................7

C. O&M Forecast .......................................................................................8

1. Accounting, Financial Compliance, and Financial Reporting....................................................................................9

a) Work Description ...........................................................9

b) Need for Activity .........................................................10

c) Scope and Forecast Analysis .......................................10

(1) Historical Variance Analysis ...........................10

(2) Forecast ............................................................11

d) Basis for O&M Cost Forecast ......................................13

2. Vendor Discount and Other Miscellaneous Payments ..................................................................................14

a) Work Description .........................................................14

b) Scope and Forecast Analysis .......................................15



Table Of Contents (Continued)


-ii-

(2) Forecast ............................................................16

c) Basis for O&M Cost Forecast ......................................17

3. Participant Credits and Charges ...............................................18




(2) Forecast ............................................................21


4. 3rd-Party Non-Energy Billing and Decommissioning Credits ......................................................................................23




(2) Forecast ............................................................25


5. Franchise Fees ..........................................................................26




(2) Forecast ............................................................29


III. INSURANCE ...................................................................................................31 J. Jiang

A. Overview ..............................................................................................32

1. Regulatory Background/Policies .............................................33




-iii-

B. 2018 Decision ......................................................................................34

1. Comparison of 2018 Authorized to 2018 Recorded ................34

C. O&M Forecast .....................................................................................35

1. Property Insurance Expense .....................................................35

a) Activity Description .....................................................35

(1) Non-Nuclear Property Insurance .....................35

(2) Blanket Crime Insurance..................................36

(3) Nuclear Property Insurance..............................36

b) Historical Variance Analysis .......................................37

2. Liability Insurance Expense .....................................................38

a) Activity Description .....................................................39

(1) Wildfire Liability Insurance .............................39

(2) Non-Wildfire General Liability Insurance ..........................................................41

(3) Fiduciary Liability insurance ...........................42

(4) D&O Liability Insurance .................................42

(5) Workers’ Compensation ..................................43

(6) Cyber Liability Insurance ................................43

(7) Nuclear Liability Insurance ..............................43

(8) Miscellaneous Liability Insurance and Surety Bonds .............................................44

b) Historical Variance Analysis .......................................44

D. Proposal to Accelerate Recovery of Previously Authorized Wildfire Liability Insurance .................................................................46 A. Li




-iv-

IV. LEGAL ............................................................................................................49 R. Swartz

A. Overview ..............................................................................................49

1. O&M Request ..........................................................................50 S. Tran

2. Risk Factors, Safety, Reliability and Connection with RAMP ..............................................................................50

3. Compliance Requirements .......................................................51 R. Swartz S. Tran

4. Comparison of Authorized 2018 to Recorded .........................51 S. Tran

B. Law ......................................................................................................52 R. Swartz

1. Overview of Activities .............................................................52


3. Law Sub-Work Activities ........................................................54 R. Swartz

a) In-House Legal Resources and Corporate Governance Support ....................................................54

(1) Activity Description .........................................54

(2) Need for Activity .............................................54

(3) Historical Variance Analysis ...........................55 S. Tran

(4) Forecast ............................................................55

b) Outside Counsel ..........................................................56 R. Swartz


(2) Oversight and Monitoring of Outside Counsel ............................................................56

(3) Scope and Cost Forecast ..................................58 S. Tran


(5) Forecast ............................................................58




-v-

c) Corporate Governance Miscellaneous Expenses .....................................................................59 R. Swartz


(2) Need for Activity .............................................59



(5) Forecast ............................................................60

d) Director Compensation ................................................60 R. Swartz

C. Claims ..................................................................................................62 R. Ramos


2. Need for Activity .....................................................................63


4. Claims Sub-Work Activities ....................................................64 R. Ramos

a) Claims Administration & Property Insurance Expenses .....................................................................64



(3) Forecast ............................................................65

b) Claims - Injuries & Other Damages ............................66 R. Ramos




(4) Forecast ............................................................67

c) Claims Write-Offs .......................................................67 R. Ramos





-vi-



(4) Forecast ............................................................68

D. Workers’ Compensation ......................................................................69 J. Smolk


2. Need for Activity .....................................................................69

3. Comparison of Authorized 2018 to Recorded ........................69 S. Tran

4. Workers’ Compensation Sub-Work Activities ........................70 J. Smolk

a) Workers’ Compensation Administration ....................70


(2) RAMP Integration ............................................71



(5) Forecast ............................................................73

b) Workers’ Compensation Injuries and Damages ......................................................................73 J. Smolk


(2) Scope and Forecast ..........................................74 S. Tran


(4) Forecast ............................................................74

V. BUSINESS AND FINANCIAL PLANNING .................................................75 J. Ghiloni

A. Overview ..............................................................................................75

1. Regulatory Background/Policies Driving SCE’s Request .....................................................................................76

2. Compliance Requirements .......................................................76




-vii-

B. 2018 Decision ......................................................................................76

1. Comparison of Authorized 2018 to Recorded .........................76

C. O&M Forecast .....................................................................................78

1. Business Planning ....................................................................79


(1) Strategic Planning ............................................79

(2) Business Planning & Performance Management .....................................................80

(3) Financial Planning ...........................................80




(2) Forecast ............................................................82


2. Corporate Services ...................................................................84


(1) Financing..........................................................84

(2) Risk Management ............................................84

(3) Tax ...................................................................85

(4) Trust Investment ..............................................86




(2) Forecast ............................................................87




-viii-


3. Modeling, Analysis and Forecasting ........................................89


(1) Long-Term Energy Forecasting .......................90

(2) Integrated Resource Planning (IRP) ................90

(3) Fundamental Modeling ....................................91

(4) Planning and Environmental Analytics ..........................................................91

b) Need for Activity Including Risk Avoided ..................91



(2) Forecast ............................................................93


4. Digital and Process Transformation .........................................94 M.Peacore R.Sekhon


(1) Continuous Improvement.................................95

(2) Digital Accelerator ...........................................96

(3) Business Transformation .................................97

b) Need for Activity Including Risk Avoided ..................99

c) Scope and Forecast Analysis .....................................100

(1) Historical Variance Analysis .........................100

(2) Forecast ..........................................................101

d) Basis for O&M Cost Forecast ....................................102

D. Capital Expenditures- Digital Accelerator .........................................102




-ix-

1. Costs and WBS Indicator of Project or Program and Capital Forecast .....................................................................102

2. Project or Program Description .............................................103

3. Need for Capital Project or Program Including Risk Avoided ..................................................................................103

4. Historical Expenditures ..........................................................104

5. Basis for Capital Expenditures Forecast ................................104

VI. SUPPLY CHAIN MANAGEMENT .............................................................105 K. Landrith T. Frierson

A. Overview ............................................................................................105

1. Regulatory Background/Policies Driving SCE’s Request ...................................................................................106

2. Compliance Requirement .......................................................106

B. 2018 Decision ....................................................................................108

1. Comparison of Authorized 2018 to Recorded .......................108

C. O&M Forecast ...................................................................................110

1. Work Description ...................................................................110

a) Need for Activity .......................................................112

b) Comparison of Authorized 2018 to Recorded ....................................................................113

c) Scope and Forecast Analysis .....................................113

(1) Historical Variance Analysis .........................113

(2) Forecast ..........................................................115

d) Basis for O&M Cost Forecast ....................................116

D. Capital: Supply Chain Management Warehouse and Material Management ........................................................................116 K. Landrith




-x-

1. COS-00-SC-FE Warehouse and MaterialManagement ...........................................................................116

2. Project or Program Description .............................................117

3. Need for Capital Project or Program Including RiskAvoided ..................................................................................118

4. Comparison of Authorized 2018 to Recorded .......................119

5. Basis for Capital Expenditure Forecast ..................................119

Appendix A Selected Portions of the Direct Testimony in SCE’s Wildfire Expense Memorandum Account (WEMA) Application

Appendix B REDACTED IN ENTIRETY SCE WEMA SCE-01C Appendix B CONFIDENTIAL

Appendix C Confidentiality Declaration

1

I. 1

INTRODUCTION 2

A. Content and Organization of Volume 3

In this volume, Southern California Edison (SCE) presents its Test Year 2021 forecast of 4

Operations and Maintenance (O&M) expenses and 2019-2023 capital expenditures forecast for 5

Enterprise Planning & Governance activities. The testimony in this volume details the activities 6

primarily managed in various Enterprise Support organizations at SCE. The Business Planning Elements 7

(BPEs) within this volume are primarily managed by (1) Finance, (2) Risk, (3) Legal, (4) Business and 8

Financial Planning and (5) Supply Chain Management. If approved, the funding request supported in 9

this volume will allow SCE to continue its efforts to provide financial governance oversight, minimize 10

unexpected property losses, mitigate unexpected costs and risks, uphold our commitment to procure 11

materials and services from diverse business enterprises, while leveraging new technologies like 12

computer automation and machine learning to identify new improvement opportunities and solutions, 13

thus allowing SCE to provide safe, reliable, affordable, and clean power to our customers. This volume 14

of testimony summarizes the scope of work, key drivers for the work, and any regulatory mandates that 15

impact the level of O&M and capital request to the Enterprise Planning & Governance Volume. 16

The following BPEs will be discussed within this volume: 17

Chapter II consists of Financial Oversight and Transactional Processing 18

Chapter III consists of Insurance 19

Chapter IV consists of Legal 20

Chapter V consists of Business and Financial Planning 21

Chapter VI consists of Supply Chain Management 22

This volume of testimony includes analysis of (1) O&M and capital funding authorized in the 23

2018 General Rate Case (GRC) compared to recorded amounts in 2018, and (2) the 2021 Test Year 24

O&M labor and non-labor forecast relative to historical spending. The volume also describes capital 25

projects which support SCE’s commitment to Operational & Service Excellence. 26

B. Summary of O&M and Capital Request 27

In this volume of testimony, SCE presents its request for $952.291 million (Constant dollars) in 28

O&M expense for the 2021 Test Year and $34.964 million in capital expenditures for 2019-2023 to 29

effectively perform its functions to ensure public safety, operational excellence, and policy 30

2

advancement. In this GRC, there will be two pie charts each showing the O&M expenses and capital 1

expenditures for this volume. 2

Figure I-1 Enterprise Planning & Governance O&M 2021

(Constant $Million)

3

Figure I-2 Enterprise Planning & Governance Capital

Expenditures 2019-2013 (Total Company Only $Million)

4

II. 1

FINANCIAL OVERSIGHT AND TRANSACTIONAL PROCESSING 2

The Financial Oversight and Transactional Processing business planning element (BPE) consists 3

primarily of the following activities: (1) Accounting, Financial Compliance and Financial Reporting, 4

(2) Vendor Discount and Other Miscellaneous Payments, (3) Participant Credits and Charges, (4) 3rd-5

Party Non-Energy Billing and Decommissioning Credits, (5) Franchise Fees, as well as (6) Insurance. 6

Although Insurance is a part of this BPE, it is discussed separately in detail in the next chapter (Chapter 7

III) of this volume. 8

This chapter supports SCE’s efforts to (1) adhere to and fulfill financial compliance and 9

reporting requirements, (2) meet our contractual billing and reporting obligations with government 10

agencies, jointly owned facility partners and 3rd-parties, and (3) provide cost savings through optimizing 11

our vendor discount program. The costs are primarily driven by accounting related activities, as well as 12

activities associated with maintenance and governance of various types charges and credits, such as: 13

franchise fees, vendor discounts and participant credits and charges. 14

Section A provides an overview of the activities included in the Financial Oversight and 15

Transactional Processing work area (excluding Insurance). 16

Section B provides an overall comparison of the 2018 authorized O&M expenses in this work 17

area to the recorded. 18

Section C includes the details supporting O&M expenses forecasts related to the Financial 19

Oversight and Transactional Processing work area (excluding Insurance). 20

Section C. 1 includes the details supporting the Accounting, Financial Compliance and Financial 21

Reporting forecast of $24.2 million of 2021 Test Year expenses, a $2.1 million increase relative to 2018 22

recorded (in 2018 dollars). The increase is primarily due to the resolution of greater than normal 23

employee turnovers occurred in 2018. 24

Section C. 2 includes the details supporting the Vendor Discount and Other Miscellaneous 25

Payments forecast of $(11.2) million of 2021 Test Year expenses, a decrease of $3.5 million over the 26

2018 recorded (in 2018 dollars). The decrease is primarily the result of higher than normal Vendor 27

Discount payments made in 2018. 28

Section C. 3 includes the details supporting the Participant Credits and Charges forecast of $22.8 29

million of 2021 Test Year expenses, an increase of $3.4 million over the 2018 recorded (in 2018 30

dollars). Participant Credits and Charges related activities represents the expenses and credits associated 31

5

with joint ownership projects that SCE either shares the costs incurred by the co-participants, or charges 1

to the co-participants of the costs incurred by SCE. The increase is due primarily to the higher forecast 2

Pension and Benefits (P&B) expenses at the Palo Verde Nuclear Generating Station (PVNGS) for the 3

2021 Test Year. P&B loading rates generally fluctuate year over year, and the rates at PVNGS are 4

provided by Arizona Public Service, the operating agent and majority owner of PVNGS. 5

Section C. 4 includes the details supporting the 3rd-Party Non-Energy Billing and 6

Decommissioning Credits forecast of $(1.3) million of 2021 Test Year expenses, keeping flat with the 7

2018 recorded (in 2018 dollars). 3rd-Party Non-Energy Billing and Decommissioning Credits mainly 8

represent SCE’s Administrative & General (A&G) credits (i.e. contra-expenses) charged to third parties 9

for customer requested construction projects. This section also includes the aggregate amount of San 10

Onofre Nuclear Generating Station (SONGS) A&G decommissioning credits recorded in 2015 and 11

2016. SCE charges such A&G credits to the SONGS Nuclear Decommissioning Trust in accordance 12

with the Decommissioning Agreement dated April 23, 2015. In 2017, SCE refined the SONGS A&G 13

decommissioning credits bookkeeping practice and began to allocate the A&G decommissioning credits 14

to various operation units where the costs originally incurred. As a result, SONGS A&G 15

decommissioning credits have not been recorded and forecasted under this section after 2016. 16

Section C.5 includes the details supporting the Franchise Fees forecast of $81.4 million of 2021 17

Test Year expenses, an increase of $27.8 million over the 2018 recorded (in 2018 dollars). 18

Franchise Fees result from agreements between municipal governments and SCE to allow placement 19

and maintenance of utility facilities in public rights of way. Franchise Fees are calculated based on 20

SCE’s franchise fee factor, which is applied to SCE’s revenues to determine Franchise Fees in our 2021 21

Test Year. 22

A. Overview 23

In this chapter SCE justifies the 2021 Test Year forecast of $115.9 million in O&M expenses, for 24

the Financial Oversight and Transactional Processing BPE (excluding Insurance). 25

The Financial Oversight and Transactional Processing BPE (excluding Insurance) consist 26

primary of (1) Accounting, Financial Compliance and Financial Reporting, (2) Vendor Discount and 27

Other Miscellaneous Payments, (3) Participant Credits and Charges, (4) 3rd-Party Billing and 28

Decommissioning Credits, and (5) Franchise Fees. The costs are primarily driven by accounting related 29

activities, as well as activities associated with maintenance and governance of various types charges and 30

credits, such as: franchise fees, vendor discounts and participant credits and charges. This BPE supports 31

6

SCE’s efforts to (1) adhere to and fulfill financial compliance and reporting requirements, (2) meet our 1

contractual billing and reporting obligations with government agencies, jointly owned facility partners 2

and 3rd-parties, and (3) provide cost savings through optimizing our vendor discount program. 3

1. Regulatory Background/Policies Driving SCE’s Request 4

Financial Oversight and Transactional Processing BPE (excluding Insurance) manages 5

SCE’s adherence to and fulfillment of financial compliance and reporting requirements established by a 6

multitude of regulatory governing bodies, including: 7

U.S. Securities and Exchange Commission (SEC) 8

California Public Utilities Commission (CPUC) 9

Federal Energy Regulatory Commission (FERC) 10

California Franchise Tax Board (FTB) 11

State and federal legislation 12

SCE’s Financial Oversight and Transactional Processing BPE (excluding Insurance) 13

interprets the regulations, policies, and guidance issued by these bodies so that SCE remains compliant. 14

These efforts have grown over time as the volume and complexity of financial regulations and oversight 15

have increased. 16

2. Compliance Requirement 17

In Section 5.4 of Decision No. 19-05-020 (SCE’s 2018 GRC Decision), SCE and the 18

Small Business Utility Advocates (SBUA) entered into two joint exhibits and stipulations, SCE-SBUA–19

1 and SCE-SBUA-2. SCE’s commitment in Exhibit SCE-SBUA-2 (i.e., the Joint Exhibit And 20

Stipulations Resolving Various Small Business Contracting And Customer Service-Related Issues 21

Between Southern California Edison Company And Small Business Utility Advocates) affects this BPE. 22

Pursuant to SCE-SBUA-2 SCE commits to offering a variety of payment options that can help small 23

businesses maintain positive cash flow to sustain their operations: 24

(i.) SCE agrees to provide options of varying periods and discount values based on 25

the particular needs of the small business suppliers and subject to SCE’s business 26

requirements. 27

(ii.) SCE agrees to offer potential electronic disbursement options, such as Automated 28

Clearing House (ACH) and credit card, to expedite the timing of payment for 29

small business suppliers upon request and subject to SCE’s business 30

requirements. 31

7

SCE is in compliance with the above requirements as it offers a wide variety of discount 1

options to assist businesses with optimizing their cash flow needs. We currently have 32% of small 2

business suppliers participating in the Vendor Discount program. SCE also has enrolled all requesting 3

parties into its ACH and credit card programs, which consisted of 83% of the payment methods in 2018. 4

B. 2018 Decision 5

1. Comparison of Authorized 2018 to Recorded 6

Table II-1 below compares the amounts authorized by the Commission in the 2018 GRC 7

to 2018 recorded O&M spend for Financial Oversight and Transactional Processing BPE (excluding 8

Insurance). 9

Table II-1 Financial Oversight and Transacational Processing1

O&M Expenses for 2018 – Authorized versus Recorded (Constant 2018 $000)

The majority of the variance between SCE’s 2018 recorded amount and the authorized 10

amount came from three areas: (1) Participant Credits and Charges, (2) Vendor Discount and Other 11

Miscellaneous Payments, and (3) 3rd-Party Non-Energy Billing and Decommissioning Credits. 12

The $2.5 million lower Participant Credits and Charges recorded than authorized was due 13

primarily to lower than expected P&B loading rates in the Palo Verde Nuclear Generating Station 14

(PVNGS). Th reduced P&B rates are directly related to new personnel replacing the retiring workforce 15

are hired with less benefits due to years of service. 16

The $2.8 million higher Vendor Discount and Other Miscellaneous Payments recorded 17

than authorized was due to a vendor discount enrollment campaign SCE launched during 2018, which 18

contributed to the greater than expected vendor discount in 2018. 19

1 Refer to WP SCE-07 Vol 1, Authorized to Recorded.

8

The $5.3 million lower credits (i.e. contra-expenses) in 3rd-Party Non-Energy Billing and 1

Decommissioning Credits than authorized was due to the 2017 SONGS A&G decommissioning credits 2

bookkeeping practice change mentioned above. When the 2018 GRC request was filed, SONGS A&G 3

decommissioning credits were still aggregately recorded in this BPE, and therefore, we requested an 4

aggregated amount of SONGS A&G decommissioning credits of $(6.5) million for 2018 as part of this 5

BPE. After allocating SONGS A&G decommissioning credits to various operating units in 2017, we do 6

not aggregately record SONGS A&G decommissioning credits into this BPE anymore. This led to the 7

difference in recorded and authorized amounts in this BPE. 8

C. O&M Forecast 9

Figure II-3 Financial Oversight and Transactional Processing

Recorded 2014-2018/Forecast 2019-2021 (Constant 2018 $000)

2014 2015 2016 2017 2018 2019 2020 2021Labor $15,556 $14,974 $14,215 $12,522 $11,884 $12,299 $12,233 $12,179

Non-Labor $15,062 ($1,880) ($2,184) $11,904 $7,377 $13,869 $13,417 $11,765Other $66,023 $59,978 $55,957 $60,080 $60,005 $78,742 $85,127 $91,990

Total Expenses $96,641 $73,071 $67,989 $84,506 $79,266 $104,910 $110,777 $115,935

Ratio of Labor to Total 16% 20% 21% 15% 15% 12% 11% 11%

Recorded Forecast

($20,000)

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2014 2015 2016 2017 2018 2019 2020 2021

Labor Non-Labor Other

9

1. Accounting, Financial Compliance, and Financial Reporting 1

Figure II-42 Accounting, Financial Compliance, and Financial Reporting


a) Work Description 2

The Accounting, Financial Compliance, and Financial Reporting activities are 3

responsible for essential financial activities, including: maintaining SCE’s accounting systems and 4

accounting data integrity; managing day-to-day transactional accounting for various aspects of SCE’s 5

business, which includes but is not limited to capital assets accounting and depreciation, revenue and 6

regulatory accounting, power procurement accounting, employee benefit accounting, billing and 7

financial accounting/reporting functions associated with joint ownership projects, and various types of 8

non-energy cost billings and credits; advising various departments within SCE on accounting and 9

financial reporting compliance with the Generally Accepted Accounting Principles in the United States 10

(U.S. GAAP) and the FERC Uniform System of Accounts (FERC USoA), as well as other ratemaking 11

policies of the CPUC and the FERC; identifying and designing internal controls over financial reporting 12

and monitoring the effectiveness of those controls; providing timely corporate reporting of financial 13

2 Refer to WP SCE-06 Vol. 2 Book A, pp. 1-6, Accounting, Financial Compliance and Financial Reporting.

10

statements and other financial and operational information to various external agencies; as well as 1

managing the corporate disbursement functions (excluding corporate payroll). The costs for work 2

performed for Corporate Payroll is discussed in Exhibit SCE-6, Volume 3 Employee Benefits, Training 3

& Support. 4

SCE’s 2021 Test Year Forecast for the Accounting, Financial Compliance and 5

Financial Reporting activities is $24.2 million as shown in Figure II-4 above. 6

b) Need for Activity 7

Necessary accounting and financial reporting activities are dictated by SCE’s 8

efforts to safely provide reliable and affordable electric services to all of its customers. In addition, as a 9

regulated utility, SCE is subject to various laws and regulations at the local, state, and federal levels, 10

including many that require the tracking and reporting of SCE’s financial performance and maintaining 11

effective internal controls over financial reporting. SCE reports on various aspects of its financial 12

performance to the regulatory agencies listed in Section A. Overview, 1. Regulatory 13

Background/Policies Driving of this chapter. 14

The activities under Accounting, Financial Compliance, and Financial Reporting 15

lead SCE’s efforts to interpret the regulations, policies, and guidance issued by the regulatory and 16

governing bodies discussed above so that SCE remains compliant. These efforts have grown over time 17

as the volume and complexity of financial regulations and oversight have increased. 18

c) Scope and Forecast Analysis 19

(1) Historical Variance Analysis 20

(a) Labor 21

As shown in Figure II-4 above, labor costs decreased over 2014-22

2018. SCE has been able to continuously reduce the labor costs in this area through SCE’s corporate 23

Operational Excellence initiatives despite a substantial increase in work load during the historical 24

period. Labor costs steadily decreased by 3-5% each year over 2014-2016, and further reduced by 12% 25

in 2017 compared to 2016 as the cost savings through corporate Operational Excellence initiatives fully 26

materialized. However, SCE experienced greater than expected employee turn-over during 2018, which 27

drove the labor costs further down by 5% for 2018 compared to 2017. This labor cost decrease in 2018 28

is not sustainable, and SCE will need to fill the open positions. This is further discussed below in 29

(2) Forecast, (a) Labor. 30

11

(b) Non-Labor 1

As shown in Figure II-4 above, non-labor costs kept relatively flat 2

over 2014 – 2017. The $3.6 million decrease from 2017 to 2018 was primarily due to the following two 3

factors: (1) A timing change where SCE started to record the external audit fees during the year when 4

the audit field work was performed, instead of accruing the external audit fees for the year that the audit 5

was related to. This accounted for roughly $1 million of the decrease. (2) Another $1 million decrease 6

pertain to the delay in process improvement initiatives during 2018 due to greater than expected 7

employee turn-over occurred in 2018. The rest of the variances came from a number of fluctuations that 8

are individually and in aggregate immaterial. 9

(2) Forecast 10

(a) Labor 11

For Test Year 2021, we forecast labor expenses of $12.2 million 12

for this area, an increase of $ 0.3 million over 2018 recorded. This represents an increase in personnel of 13

staff due to the greater than expected employee turn-over occurred in 2018. As discussed above in 14

(1) Historical Variance Analysis, (a) Labor, the cost savings through corporate Operational Excellence 15

initiatives were fully materialized in 2017. The further labor reduction in 2018 is not sustainable as 16

discussed below. 17

The workload captured under Accounting, Financial Compliance 18

and Financial Reporting has been rapidly and steadily increasing since 2016 when SCE filed its 2018 19

GRC Application (A. 16-09-001), especially during the past two years. Roughly 45 new balancing and 20

memorandum accounts have been approved and implemented since the beginning of 2017, representing 21

more than one third of the current population of the balancing and memorandum accounts we manage on 22

a day-to-day basis. Quite a few of these newly implemented balancing and memorandum accounts also 23

include capital expenditures, which means besides tracking the incurred costs, we also need to manage 24

these accounts over the lives of the capital expenditures to track depreciation, property and income 25

taxes, as well as return. This further increased the workload related to the accounting and reporting. 26

In addition, many of these newly implemented balancing and memorandum accounts are significantly 27

more complex than the existing accounts. For example, Power Charge Indifference Memo Account 28

(PCIA) and Portfolio Allocation Balancing Account (PABA) require SCE to track power procurement 29

costs in more than 20 different vintages by contract year (the number of vintages will grow with each 30

year going by until the existing contracts expire), and simultaneously track all customers in a similar 31

12

number of vintages but sorted by the year when the customers become unbundled customers through 1

joining one of the Community Choice Aggregations (CCAs), or remain as bundled customers. 2

The tracking, allocation, accounting, and reporting of these accounts are far more complicated than any 3

of the balancing and memorandum accounts that SCE had dealt with in history. Furthermore, with the 4

recent wildfire mitigation efforts, several new wildfire related balancing and memorandum accounts 5

have been and will be established in 2018 and early 2019, with various activities, including capital 6

expenditures, tracked under each account. Significant amount of accounting and reporting work has 7

been introduced as a result. 8

In addition, the Financial Accounting Standards Board (FASB), the 9

accounting standard-setting body whose primary purpose is to establish and improve U.S. GAAP, has 10

been very active in recent years and issued many new accounting pronouncements. Two major new 11

accounting pronouncements, namely, Accounting Standards Codification (ASC) 606 Revenue From 12

Contracts With Customers, and ASC 842 Leases, went into effect on January 1, 2018 and January 1, 13

2019, respectively. Both pronouncements require an U.S. entity to ensure the completeness and accuracy 14

of the existing population of in-scope contracts, continue to track any addition, deletion, and 15

amendments to the current population, and perform accounting assessments based on the new 16

accounting requirements over all in-scope contracts, including reassessing certain existing contracts. 17

The corresponding financial reporting requirements have also been significantly expanded and 18

enhanced. Given that: (1) ASC 606 governs all aspects of revenue recognition, one of the most critical 19

and fundamental accounting concepts under U.S. GAAP, and (2) ASC 842 implementation introduced 20

roughly $1 billion3 additional assets and liabilities into our balance sheet, the implementation of these 21

two new accounting pronouncements created profound on-going impact on the accounting, internal 22

control and reporting workload captured under this area. 23

Despite all the growth in work volume, SCE was able to 24

significantly reduce the labor costs in this area during the historical period, as discussed in more details 25

in (1) Historical variance Analysis, (a) Labor, and in 2017, successfully fulfilled the cost savings goals 26

established by the corporate Operational Excellence initiative. We will continue to pursue additional 27

cost savings and productivity improvement opportunities. However, as discussed above, the labor costs 28

reduction in 2018 was caused by greater than expected employee turn-over, which is not sustainable. 29

3 Refer to WP SCE-06 Vol. 2 Book A, pp. 7-8, New Accounting Guidance – Accounting Guidance Adopted.

13

Therefore, we must add additional personnel of staff to manage the increasing workload. We are 1

working on bringing the labor costs level back to the 2017 level by the end of 2019, and plan to keep it 2

relatively flat with 2019 spending level through 2021 Test Year forecast. 3

(b) Non-Labor 4

For Test Year 2021, we forecast non-labor expenses of $12.1 5

million. This mainly consists of third-party audit fees, contingent workers to fill in the temporary 6

vacancies, as well as financial compliance related and ad-hoc process improvements related projects. 7

This increase of $1.8 million over 2018 recorded levels is primarily driven by the following two factors: 8

First, as mentioned above in (1) Historical Variance Analysis, 9

(b) Non-labor, SCE implemented an accounting change in 2018 which artificially reduced 2018 external 10

audit fee expenses by roughly $1 million. This is merely a timing change that does not represent a 11

decrease in external audit fee spend, as the audit fees will be recorded and paid in 2019. 12

Second, due to the significant shortage of personnel of staff caused 13

by the greater than expected employee turn-over in 2018, we focused on conducting and completing the 14

normal work activities and delayed certain ad-hoc improvement and/or enhancement projects. As such, 15

our 2018 project related spending was roughly $0.4 million, more than 50% lower than the average 16

spending over 2014-2017. We expect to resume the spending on projects starting 2019, such as: 17

PowerPlant upgrade, Runbook/BlackLine upgrade, Lease software stabilization, after refilling the 18

greater than expected staff vacancies we experienced in 2018. As such, the forecast spending for 2021 19

Test Year is $0.6 million higher than the 2018 actual spending. 20

d) Basis for O&M Cost Forecast 21

For labor costs, 2018 costs level plus cost adjustments is the basis for the forecast, 22

and our 2021 Test Year forecast is $0.3 million higher than 2018. This is because, as discussed in detail 23

in (2) Forecast, (a) Labor above, the reduction in labor costs during 2018 from previous years was 24

caused by greater than expected employee turn-over, which is not sustainable. We must add additional 25

personnel of staff to manage the increasing workload. 26

For non-labor costs, again, 2018 costs level plus cost adjustments is the basis for 27

the forecast. This resulted in a 2021 Test Year forecast that is $1.8 million higher than 2018. 28

The increase is driven primarily by, as discussed in details in (2) Forecast, (b) Non-labor above, (1) an 29

artificially reduction of external audit fee by roughly $1 million in 2018 due to a timing change; and 30

(2) a temporary reduced ad-hoc improvement and/or enhancement projects spending of roughly $0.6 31

14

million in 2018 due to the significant shortage of personnel of staff caused by the greater than expected 1

employee turn-over in 2018. The remaining roughly $0.2 million increase is due to spending level 2

fluctuations across various activities that are individually and in aggregate immaterial. 3

2. Vendor Discount and Other Miscellaneous Payments 4

Figure II-54 Vendor Discount and Other Miscellaneous Payments



The majority of the dollars captured under this section represents the non-labor 6

vendor payment discounts SCE receives through SCE’s Accounts Payable (AP) Vendor Discount 7

program. This activity also captures non-labor miscellaneous credits and charges SCE received and/or 8

paid during the historical period. 9

As part of the normal course of the business, SCE negotiates numerous terms and 10

conditions with suppliers. In some cases, SCE successfully negotiates early payment discount terms 11

under its AP Vendor Discount program, where SCE receives a small discount on each invoice that is 12

paid within a pre-specified number of days from when the invoice has been received. This activity also 13

captures other miscellaneous credits and payments received and paid during the historical period. 14 4 Refer to WP SCE-06 Vol. 2 Book A, pp. 9-14, Vendor Discount and Other Miscellaneous Payments.

15

Since these miscellaneous credits and payments are all non-recurring activities, we do not forecast any 1

of such miscellaneous credits and payments for the 2021 Test Year. 2

The labor costs recorded in the historical period are reallocated to where the labor 3

resides for the 2021 Test Year. Therefore, we do not forecast labor costs for the 2021 Test Year under 4

Vendor Discount and Miscellaneous Payments activity. 5

SCE’s 2021 Test Year forecast for the Vendor Discount and Miscellaneous 6

Payments activity is $(11.2) million as shown in Figure II-5 above. 7

b) Scope and Forecast Analysis 8

SCE’s AP Vendor Discount program displays SCE’s commitment to operational 9

and service excellence. SCE offers competitive tiered terms to its suppliers, which allows suppliers to 10

receive payment earlier than the standard 60-day term. This program not only assists the suppliers with 11

optimizing their cash flows, but also provides a benefit to SCE’s customers by reducing SCE’s O&M 12

cost. Although we experienced a significant growth in this area during 2018 as a result of an enrollment 13

campaign, vendor discount payments vary significantly from year to year as suppliers opt in and out of 14

discount terms depending on their business cash flows. 15

As discussed above in a) Work Description, since other miscellaneous credits and 16

payments are all non-recurring activities, we do not forecast any miscellaneous credits and payments for 17

the 2021 Test Year. 18

Also as discussed above in a) Work Description, since we reallocated labor costs 19

to where the labor resides for the 2021 Test Year, we do not forecast labor costs for the 2021 Test Year 20

under the Vendor Discount and Miscellaneous Payments activity. 21


The details by component (Non-Labor only) are as follows in Table II-2. 23

16

Table II-2 Vendor Discount and Other Miscellaneous Payments (Non-Labor) Recorded

2014-2018 / Forecast 2021 (Constant 2018 $ millions)

As shown in Table II-2 above, SCE’s Vendor Discount activities were 1

relatively flat between 2014-2017. The greater than historical Vendor Discount in 2018 was due to the 2

implementation of the Operational Excellence initiatives around SCE’s AP Vendor Discount program to 3

improve vendor payment terms and implement automated payment discount systems. In particular, SCE 4

launched an enrollment campaign during 2018, which contributed to the increase in vendor discount 5

during 2018. As a result, Vendor Discounts increased to $(14.7) million in 2018. 6

Also as shown in Table II-2 above, Other Miscellaneous Payments 7

activities fluctuated over 2014 – 2018. The most significant amount is the $(6.6) million credit in 2016, 8

which is primarily due to a non-recurring roughly $5 million California State and Local Tax (SALT) 9

refund that SCE received in 2016 as a result of the State of California Board of Equalization audit, 10

covering periods from July 1, 2008 to December 31, 2011. The rest of the amounts across the years over 11

2014 - 2018 are related to various one-off activities that are individually and in aggregate immaterial. 12

(2) Forecast 13

As mentioned above in a) Work Description, as all miscellaneous credits 14

and payments are non-recurring activities, we do not forecast any miscellaneous credits and payments 15

for 2021 Test Year. We also do not forecast labor costs for the 2021 Test Year, as labor costs are 16

reallocated to where the labor resides. As such, this section only focuses on SCE’s AP Vendor Discount 17

forecast for the 2021 Test Year. 18

SCE’s AP Vendor Discount program will continue in the 2021 Test Year. 19

As discussed in (1) Historical Variance Analysis, SCE’s Vendor Discounts increased significantly to 20

$(14.7) million in 2018 due to an enrollment campaign launched in 2018. SCE however does not expect 21

the Vendor Discount payments remain at this level into the 2021 Test Year, as Vendor Discount 22

payments vary significantly from year to year. SCE’s historical trend shows that customers opt in and 23

17

out of discount terms depending on their business cash flow needs, and participation rate may drop 1

significantly after the initial campaign year. For example, SCE’s most recent Vendor Discount campaign 2

prior to the 2018 one was held in 2015. As shown in Table II-2 above, the historical trend displays a 3

decline in participation rate in 2016 after the initial campaign year, and a further decline in 2017 back to 4

the 2014 level. It is not optimal to launch Vendor Discount campaigns as frequent as annually, from 5

both SCE’s internal cost and benefit consideration, as well as from supplier relationship management 6

perspective. As such, we expect to see declines in Vendor Discount program participation in between of 7

vendor discount campaigns, and therefore, we believe a forecast based upon a past five-year average of 8

such costs is a reasonable representation of future costs. As such, we forecast the vendor discount for 9

2021 Test Year at $(11.2) million, keeping it flat with the five-year average between 2014-2018, as 10

shown in Table II-2 above. 11

c) Basis for O&M Cost Forecast 12

The five-year average projection is the basis for the AP Vendor Discount forecast. 13

Vendor Discount payments vary significantly from year to year as suppliers opt in and out of discount 14

terms depending on their business cash flows. The higher than historical average Vendor Discounts in 15

2018 was the result of a discount enrollment campaign launched in 2018. As we experienced 16

historically, we expect a decline in participation by the 2021 Test Year. Our forecast is based upon a 17

past five-year average of such costs, which we believe to be a reasonable representation of future costs 18

based on our historical experience. 19

18

3. Participant Credits and Charges 1

Figure II-65 Participant Credits and Charges



As shown in Figure II-6 above, this section of testimony discusses the participant 3

credits and charges for SCE’s jointly owned facilities. 4

SCE owns majority interests in the San Onofre Nuclear Generating Station 5

(SONGS),6 the Mohave Generating Station (Mohave, a coal-fired station)7 and the Eldorado 6

transmission facility (Eldorado).8 Since SCE is the majority owner and the operating agent of SONGS, 7

5 Refer to WP SCE-06 Vol. 2 Book A, pp. 15-32, Participant Credits and Charges 925 / 926 / 930.

6 SCE owns 78.21 percent of SONGS with San Diego Gas & Electric (SDG&E) and the City of Riverside sharing in the remaining 21.79 percent.

7 SCE owns approximately 56 percent of Mohave, with Nevada Power Company (NPC), Salt River Project (SRP) and the Los Angeles Department of Water and Power (DWP) co-owning the remaining approximately 44 percent.

8 SCE owns approximately 62 percent of Eldorado with NPC, SRP and DWP co-owning the remaining approximately 38 percent.

2014 2015 2016 2017 2018 2019 2020 2021Labor

Non-Labor $13,337 $12,290 $11,516 $12,284 $13,010 $12,202 $12,200 $12,200Other $11,416 $6,400 $6,587 $7,988 $6,374 $10,556 $10,554 $10,554

Total Expenses $24,753 $18,691 $18,103 $20,272 $19,383 $22,757 $22,754 $22,754

Ratio of Labor to Total - - - - - - - -

Recorded Forecast

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2014 2015 2016 2017 2018 2019 2020 2021


19

Mohave, and Eldorado, SCE bills the non-operating owners (Co-Participants) their shares of the 1

operating costs (Administrative &General (A&G) and Pension & Benefits (P&B) expenses) to operate 2

these facilities in accordance with the individual Operating Agreements. SCE records the A&G and 3

P&B amounts billed to the Co-Participants as participant credits (i.e. contra-expenses). 4

On April 23, 2015, SCE entered into the SONGS Decommissioning Agreement 5

with the SONGS Co-Participants. After this, both SCE’s, as well as the Co-Participants’, shares of these 6

costs have been recovered through the SONGS Nuclear Decommissioning Trust. This is discussed in 7

detail in Section C.4 3rd-Party Non-Energy Billing and Decommissioning Credits below, and therefore, 8

this section does not include any discussion related to the SONGS participant credits. 9

In June 2005, Mohave ceased operations. Later in 2009, the owners of Mohave 10

announced the decision to decommission the station and remove the generating facility from the site. 11

After 2011, the participant credits associated with Mohave operations decreased significantly over the 12

years, when a majority of the decommissioning activities were complete. 13

As the operating agent of Eldorado, SCE bills the non-operating owners their 14

share of the operating costs. 15

SCE is also a non-operating agent and owns a minority interest in the Palo Verde 16

Nuclear Generating Station (PVNGS),9 where SCE receives requests for reimbursement of participant 17

costs from the operating agent and majority owner. A portion of A&G and P&B costs incurred by 18

Arizona Public Service (APS) for operating PVNGS are billed to SCE and are recorded as participant 19

charges (i.e. expenses) under this activity. 20

In addition, SCE also incurs participant charges for SCE’s share of A&G and 21

P&B costs incurred (i.e. expenses) on participating in Los Angeles Department of Water and Power 22

(LADWP)’s Pacific DC Intertie Transmission Facilities (PDCITF), where SCE is a transmission 23

participant and must pay its share of these costs. 24



As shown in Figure II-6 above, the amounts of participant credits and 27

charges fluctuated over 2014 -2018. The details by facility is as follows in Table II-3 for A&G, and 28

9 SCE owns approximately 16 percent of PVNGS with Arizona Public Service (APS), El Paso Electric, PNM

(formerly Public Service Company of New Mexico), SRP, and DWP owning the remaining approximately 84 percent.

20

Table II-4 for P&B (credit amounts represent participant credits and debit amounts represent participant 1

charges): 2

Table II-310 Participant Credits and Charges – A&G Recorded 2014-2018

(Constant 2018 $ millions)

Table II-411 Participant Credits and Charges – P&B Recorded 2014-2018


Table II-3 above shows that Participant Credits and Charges – A&G 3

across all facilities had remained relatively consistent over 2014 - 2018. Table II-4 above shows that 4

Participant Credits and Charges – P&B for Other, Net (Mohave, Eldorado and PDCITF combined) had 5

remained relatively consistent over 2014 - 2018, while Participant Credits and Charges – P&B for 6

PVNGS had fluctuated over the years. As SCE’s ownership share of PVNGS remained constant over the 7

years, the fluctuation of P&B participant charges was caused by the fluctuations of the operating 8

activities and the labor charges incurred by the operating agent and majority owner. The general 9

10 Refer to WP SCE-06 Vol. 02 Book A, pp. 15-20, Participant Credits and Charges 930.

11 Refer to WP SCE-06 Vol. 2 Book A, pp. 21-26, Participant Credits and Charges 925; and WP SCE-06 Vol. 2 Book A, pp. 27-32, Participant Credits and Charges 926.

21

decrease in P&B costs after 2014 was mainly due to the decreased spend at PVNGS, which was due 1

primarily to reductions in the PVNGS P&B loading rates. This rate is directly related to the aging plant 2

workforce and the amount of attrition over the period. The new personnel replacing the attrited 3

workforce are hired with less benefits than the retiring workforce due to years of service. The actual 4

P&B loading rate decreased from 23.5% in 2014 to 15.4% in 2015. The remaining fluctuations over 5

2015 – 2018 were due primarily to: 1) annual fluctuations in pension, group life insurances and other 6

post-employment benefit charges, and 2) participant charges true-up billed by APS for previous years. 7

(2) Forecast 8

Table II-5 below illustrates Participant Credits and Charges - A&G 9

forecast and Table II-6 below illustrates Participant Credits and Charges - P&B forecast (credit amounts 10

represent participant credits and debit amounts represent participant charges): 11

Table II-512 Participant Credits and Charges – A&G Forecast 2021


12 Refer to WP SCE-06 Vol. 02 Book A, pp. 15-20, Participant Credits and Charges 930.

22

Table II-613 Particpant Credits and Charges – P&B Forecast 2021


For A&G and P&B participant credits reimbursed by the Co-Participants 1

of Mohave and Eldorado, SCE has applied the currently effective contractual A&G and P&B rates set 2

forth in the individual operating agreement of Mohave and Eldorado, respectively, to the 2021 O&M 3

forecasts. The 2021 Test Year A&G and P&B participant credits forecasts are consistent with previous 4

years, as the operating activities are expected to be consistently immaterial. 5

For A&G and P&B participant charges incurred by SCE for PDCITF and 6

PVNGS, SCE has used the effective ownership percentages in PDCITF and PVNGS, respectively, to 7

determine its share of A&G and P&B costs based on the forecast O&M budgets. For PDCITF, the 2021 8

Test Year A&G and P&B participant credits forecasts are consistent with previous years, as the 9

operating activities are expected to be consistent with previous years. For PVNGS, the 2021 Test Year 10

A&G participant costs are expected to be consistent with 2018 as we forecast a similar level of costs for 11

the same scope of work, and the A&G loading rates generally do not fluctuate significantly year to year. 12

The 2021 Test Year PVNGS P&B participant costs are $4.8 million higher than 2018. P&B loading 13

rates fluctuated over the years because of the reasons discussed above in (1) Historical Variance 14

Analysis. The 2021 Test Year increase is due to the timing difference of applying the 2017 actual P&B 15

loading rates provided by APS to forecast the 2021 Test Year.14 16

13 Refer to WP SCE-06 Vol. 2 Book A, pp. 21-26, Participant Credits and Charges 925; and WP SCE-06 Vol. 2

Book A, pp. 27-32, Participant Credits and Charges 926.

14 Refer to WP SCE-06 Vol. 2 Book A, pp. 33-38, Participant Credits and Charges Workpapers.

23


The contractual A&G and P&B rates as set forth in the individual Mohave and 2

Eldorado operating agreements are the basis for the participant credits forecasts. The 2021 Test Year 3

A&G and P&B participant credits forecasts are consistent with previous years, as the operating activities 4

are expected to be consistently immaterial. 5

The effective ownership percentage in PDCIDF and PVNGS are the basis for the 6

participant charges forecasts. For PDCITF, the 2021 Test Year A&G and P&B participant credits 7

forecasts are consistent with previous years, as the operating activities are expected to be consistent with 8

previous years. For PVNGS, it was discussed above in b) Scope and Forecast Analysis, (2) Forecast. 9

4. 3rd-Party Non-Energy Billing and Decommissioning Credits 10

Figure II-715 3rd-Party Non-Energy Billing and Decommission Credits



The majority of the dollars captured under this section represents SONGS A&G 12

decommissioning credits recorded in 2015 and 2016. Additionally, this section also captures 13

15 Refer to WP SCE-06 Vol. 2 Book A, pp. 39-44, 3rd-Party Non-Energy Billing and Decommissioning Credits.

24

miscellaneous 3rd-party non-energy billings and credits. Such non-energy billings and credits are 1

relatively immaterial both individually and in aggregate. 2

As discussed in Section C. 3 Participant Credits and Charges, a) Work 3

Description above, SONGS is one of SCE’s co-owned generation plants, where SCE owns majority 4

interests. The initial activity phase of radiological decommissioning of SONGS began in June 2013. 5

SONGS Decommissioning Agreement16 was officially entered into on April 23, 2015, and SCE 6

established Service Level Agreements17 (SLAs) that govern A&G support services provided to SONGS 7

accordingly. Since the establishment of the SONGS Decommissioning Agreement, SCE has been billing 8

to the SONGS Nuclear Decommissioning Trust (NDT) for SCE’s, as well as the Co-Participants’, 9

respective portions of the decommissioning credits (i.e. contra-expenses). For 2015 and 2016, the entire 10

decommissioning credits were recorded under this activity in aggregate. In 2017, SCE refined the 11

SONGS decommissioning credit bookkeeping practice and started to allocate such A&G 12

decommissioning credits to various operation units where the costs were originally incurred. As a result, 13

nothing has been recorded under this section after 2016, and therefore, no cost forecast is produced for 14

the 2021 Test Year. 15

Other miscellaneous 3rd-party non-energy billings and credits represent SCE’s 16

A&G credits (i.e. contra-expenses) charged to third parties for customer requested construction projects. 17

SCE’s 2021 Test Year Forecast for the 3rd-Party Non-Energy Billing and 18

Decommissioning Credits activity is $(1.3) million as shown in Figure II-7 above. 19



As mentioned above under a) Work Description, the majority of the 22

dollars captured under this section represents SONGS A&G decommissioning credits for 2015 and 23

2016. This activity also captures miscellaneous 3rd-party non-energy billing and credits. The details by 24

component is as follows in Table II-7: 25

16 “SONGS Decommissioning Agreement Among Southern California Edison Company, San Diego Gas &

Electric Company, City of Anaheim, and City of Riverside.”

17 An SLA is an intra-company agreement between SONGS Decommissioning and an SCE organizational unit for the provision of services required to support and sustain the decontamination and dismantlement of SONGS.

25

Table II-7 3rd-Party Non-Energy Billing and Decommissioning Credits Recorded 2014-2018 /

Forecast 2021 (Constant 2018 $ millions)

The SONGS Decommissioning Credits as shown in Table II-7 above were 1

calculated based on the Decommissioning Agreement dated April 23, 2015, and the entire 2

decommissioning credits were recorded under this activity in aggregate for both 2015 and 2016. 3

In 2017, SCE refined the SONGS decommissioning credit bookkeeping practice and began to allocate 4

such A&G decommissioning credits to various operation units where the costs were originally incurred. 5

As a result, SONGS A&G decommissioning credits have not been recorded under this section after 6

2016. 7

The rest of the dollars captured under this section mainly represent SCE’s 8

A&G charges to third parties for customer requested construction projects (relocations, conversions of 9

overhead facilities to underground facilities, added facilities providing non-standard services, and 10

interconnection facilities), which are contra-expenses. Such credits fluctuated year over year between 11

less than $(0.2) million and roughly $(2) million over 2014 – 2018, depending on number of projects 12

requested by customers. 13

(2) Forecast 14

As discussed above under (1) Historical Variance Analysis of this section, 15

due to refined bookkeeping practice, no SONGS A&G decommissioning credits has been recorded 16

under this section since 2017. As a result, the forecast for SONGS A&G decommissioning credits is 17

zero for 2021 Test Year. 18

Regarding other miscellaneous 3rd-party non-energy billings and credits, 19

we believe a forecast based upon a historical three-year average of such costs/credits is a reasonable 20

representation of future costs. As such, we forecast SCE’s 2021 Test Year Forecast for the 3rd-Party 21

Non-Energy Billing and Decommissioning Credits activity to be a net of $(1.3) million, as shown in 22

Table II-7 above, keeping it flat with the historical three-year average. 23

26


The historical three-year average of the costs/credits, without the SONGS A&G 2

decommissioning credits due to a refinement in bookkeeping practice in 2017 as mentioned above, is the 3

basis for the forecast of the 3rd-Party Non-Energy Billing and Decommissioning Credits activity for the 4

2021 Test Year. 5

5. Franchise Fees 6

Figure II-818 Franchise Fees Expenses


Franchise fee expenses mainly represent payments to municipal and other government 7

authorities. This testimony describes the calculation of SCE’s Franchise Factor, which is applied to 8

SCE’s revenues to determine franchise fee expenses in the 2021 Test Year. 9


Franchise fee expenses represent payments to municipal and other governmental 11

authorities allowing SCE use of streets and rights-of-way for the purposes of construction, operation and 12

18 Refer to WP SCE-06 Vol. 02 Book A, pp. 45-50, Franchise Fees.

2014 2015 2016 2017 2018 2019 2020 2021Labor

Non-Labor $0 $0 ($0) ($0)Other $54,607 $53,578 $49,370 $52,092 $53,631 $68,186 $74,573 $81,436

Total Expenses $54,607 $53,578 $49,370 $52,092 $53,631 $68,186 $74,573 $81,436


Recorded Forecast

($10,000)

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

2014 2015 2016 2017 2018 2019 2020 2021


27

maintenance of our facilities and equipment. A franchise is an agreement between a municipal 1

government and SCE to allow placement and maintenance of utility facilities in the public right of way. 2

SCE’s service territory is subject to three types of franchise agreements used by 3

municipalities and counties. Depending on the franchise agreement’s origination date, an agreement is 4

classified as a Constitutional franchise agreement, a Broughton Act franchise agreement, or a 1937 Act 5

franchise agreement. Table II-8 below summarizes the types, terms, and conditions of the three 6

franchises. 7

Table II-8 Franchise Type and Conditions

New or renewed agreements are negotiated under terms of the 1937 Act. 8

The 1937 Act and Constitutional franchise agreements are indeterminate and do not expire, whereas a 9

Broughton Act franchise agreement is determinate and does expire. When a Broughton Act franchise 10

agreement expires, it converts to a 1937 Act franchise agreement, usually resulting in higher franchise 11

fees. After conversion, the 1937 Act allows for continued payment under the Broughton Act calculated 12

amount, which is based on two percent of the value of the franchise, or one percent of gross annual 13

electricity sales, whichever yields the higher amount. 14



Figure II-8 above identifies recorded franchise fees for years 2014 through 17

2018. A Franchise Factor is defined as the total annual franchise fee expense expressed as a percentage 18

of the total annual gross sales of electric energy. Franchise fees generally speaking have a direct relation 19

to total retail sales as franchise agreements are tied to percentages of revenue for that same calendar 20

year. If sales/revenues increase, we expect comparable levels of franchise fees to also increase. 21

28

Factors such as new negotiated agreements, i.e., converting from a Broughton Act to the 1937 Act 1

typically leads to higher payment to that city as the 1937 Act is tied to a fixed percentage of revenue. 2

Table II-9 below summarizes changes to franchise arrangements in the 3

historical periods during this GRC cycle. 4

Table II-9 Changes to Franchise Calculations

As shown in Figure II-8 above, recorded costs for franchise fees over 5

2014-2018 fluctuated year over year. However, as shown in Table II-10 below, the fluctuations were 6

generally consistent with the corresponding increase and decrease in gross retail sales of electric energy, 7

and the Franchise Factor had been relatively flat, except for 2018. 8

Table II-10 Franchise Fee Factors Recorded 2014-2018

The higher than normal Franchise Factor in 2018 was due to a one-time 9

unbilled revenue estimate methodology change implemented during the first quarter of 2018. 10

This change led to a recording in the first quarter of 2018 a $286 million unbilled revenue accrual that 11

29

was related to December 31, 2017. As a result, the franchise fee expense impact corresponding to the 1

$286 million unbilled revenue estimate adjustment was recorded in 2018 instead of 2017, which led to a 2

higher than normal Franchise Factor in 2018. 3

Shown in Table II-11 below are what the recast 2017 and 2018 franchise 4

fee expenses and Franchise Factors, respectively, would have been, had we push the $286 million 5

unbilled revenue accrual back to December 31, 2017. These recast amounts produced a very consistent 6

Franchise Factors over 2016-2018. 7

Table II-11 Franchise Fee Factors

Recast recorded 2014-2018 / Forecast 2019-2021

(2) Forecast 8

As shown in Table II-11 above, the recast Franchise Factor fluctuates 9

slightly from year to year. These fees are paid out to municipalities based on sales of electricity or the 10

value of the franchise in their jurisdiction. Higher or lower sales and modifications to utility facilities 11

within a jurisdiction fluctuate from year to year. These changes, which are caused by economic drivers 12

such as the change in the customer base, account for variation in the franchise payments even absent 13

new or renegotiated agreements. Additionally, SCE predicts there will be renegotiated franchise 14

30

agreements in the future, however, we do not know when these will occur or the financial impact of 1

these changes. 2

The Franchise Factor applied in the Test Year 2021 forecast is based on a 3

three-year average of 2016-2018 franchise fee expenses divided by a three-year average of 2016-2018 4

gross retail sales of electric energy. 5


The basis for the forecast is the historical three-year average of 2016-2018 7

franchise fee expenses divided by a three-year average of 2016-2018 gross retail sales of electric energy. 8

The use of an average to forecast the franchise fee factor is consistent with Commission guidance, to use 9

an averaging methodology when historical costs fluctuate for three or more years. 10

31

III. 1

INSURANCE 2

SCE maintains property insurance coverage to limit large, unexpected losses to its productive 3

assets, such as transmission and distribution facilities and equipment, power plants, office buildings and 4

general facilities caused by perils such as fire, earthquake, flood, accidental mechanical breakdown, and 5

terrorism. SCE purchases blanket crime insurance for losses due to theft, robbery, and computer and 6

wire fraud. SCE also purchases non-wildfire general liability, wildfire liability, fiduciary liability, 7

directors and officers (D&O) liability, workers’ compensation, nuclear liability insurance, and cyber 8

liability insurance coverage to limit the losses arising from third-party liability claims and lawsuits.19 9

Below, Table III-12 identifies the insurance limits and deductibles that SCE maintains, as well as the 10

policy expiration dates. Premiums for insurance coverage are influenced by SCE’s overall loss history, 11

the commercial availability of desired coverage, and the current and anticipated market conditions of the 12

insurance industry. Following the 2017 and 2018 California wildfires, SCE’s insurance premiums have 13

increased dramatically at the 2018 and 2019 wildfire insurance renewals. More details regarding the 14

significant increase in SCE’s wildfire insurance premiums are discussed in Appendix A, containing a 15

copy of selected portions of the Direct Testimony in SCE’s Wildfire Expense Memorandum Account 16

(WEMA) Application.20 17

19 Claims and claims reserves expenses, including those for workers’ compensation are discussed in SCE-06,

Vol. 2, Chapter IV.

20 A.19-07-020.

32

Table III-12 Summary of Insurance Limits and Deductibles

Edison International (EIX) procures most of SCE’s insurance coverage on behalf of EIX and its 1

subsidiaries. The premiums are then allocated among EIX and its subsidiaries. Fiduciary liability and 2

blanket crime insurance premiums are allocated based on the number of employees. D&O liability 3

insurance premiums, non-wildfire general liability insurance premiums, and cyber liability insurance 4

premiums are allocated using the multi-factor allocation formula. Wildfire liability insurance premiums 5

are allocated 100% to SCE. Workers’ compensation insurance in Nevada is allocated based on payroll in 6

Nevada. Non-nuclear property insurance, nuclear property and liability insurance, and workers’ 7

compensation insurance in California only cover SCE assets or SCE employees and are allocated 100% 8

to SCE. 9

A. Overview 10

For Test Year 2021, SCE forecasts $680 million in A&G expense for property and liability 11

insurance. This request includes $624 million for wildfire liability insurance, $36 million for non-12

wildfire liability insurance and $20 million for property insurance. See Appendix A containing selected 13

33

portions of Direct Testimony from SCE’s recent WEMA Application21 filing for a discussion of the 1

impact of recent wildfires on wildfire insurance expense and the discussion of the Risk Mitigation 2

Balancing Account (RMBA) in SCE-07, Vol. 1, Chapter V associated with wildfire liability insurance 3

expense. 4

As discussed in greater detail in this chapter, SCE’s recorded expense is not an appropriate basis 5

on which to forecast Test Year 2021 expenses. Rather, SCE’s 2021 forecast is based on expected 6

insurance market conditions. SCE’s primary insurance broker, Marsh USA Inc. (Marsh), has forecasted 7

Test Year 2021 premiums reflecting expected insurance market trends as well as SCE’s specific loss 8

history. This testimony addresses the insurance expense SCE has incurred from 2014 through 2018 for 9

both property and liability insurance, and the forecasted insurance expense for 2019 through 2021, as 10

shown in Table III-13 below. (Note: prior to 2018, SCE’s wildfire and non-wildfire general liability 11

insurance were combined and recorded in liability insurance (non-wildfire).) 12

Table III-13 Property and Liability Insurance Expense

2014 – 2018 Recorded/2019 – 2021 Forecast

1. Regulatory Background/Policies 13

SCE is legally required to maintain the following types of insurance: 14

1. Workers’ compensation insurance for employees outside California 15

2. Automobile liability insurance for vehicles outside California 16

3. Nuclear property and liability insurance for the San Onofre Nuclear Generating 17

Station (SONGS) and the Palo Verde Nuclear Generating Station (Palo Verde) 18

4. Fidelity bond coverage for fiduciaries of certain employee benefit plans 19

The State of California permits SCE to self-insure for workers’ compensation and 20

automobile liability exposures in California. However, SCE has approximately 20 employees working in 21

21 A. 19-07-020.

34

Nevada at the Eldorado Substation, and one employee in Washington, DC, all of whom are covered by 1

SCE’s workers’ compensation insurance. SCE also has approximately 15 vehicles located in Nevada 2

which are covered by automobile liability insurance. 3

Although SCE maintains nuclear property and liability insurance for San Onofre Nuclear 4

Generating Station (SONGS), that insurance is not treated as part of this General Rate Case proceeding. 5

Nuclear property and liability insurance for Palo Verde are generally obtained by the plant operator, 6

Arizona Public Service Company (APS), on behalf of itself and the other co-owners. SCE’s allocated 7

share of the insurance cost is included in this General Rate Case. Accidental outage insurance for Palo 8

Verde is purchased separately by the co-owners who maintain that coverage (including SCE). 9

The Employee Retirement Income Security Act of 1974 (ERISA) requires the fiduciaries 10

of certain employee benefit plans to be covered by a fidelity bond. SCE’s crime insurance coverage 11

satisfies this ERISA requirement. 12

Assembly Bill 1054 (AB 1054), recently passed by the California Legislature, calls for a 13

wildfire fund to address investor-owned utility wildfire losses exceeding $1 billion, with each utility 14

being responsible for the first $1 billion of losses through its own insurance program. SCE purchases 15

approximately $1 billion of wildfire liability insurance coverage (net of co-insurance and self-insured 16

retention), consistent with AB 1054. 17

B. 2018 Decision 18

1. Comparison of 2018 Authorized to 2018 Recorded 19

D.19-05-020, Ordering Paragraph 22, directed SCE to compare 2018 authorized to 20

recorded O&M expenses.22 As shown in Figure III-9 below, for 2018 SCE requested $106.5 million 21

(constant 2018$) for Property and Liability insurance expense, and the Commission authorized that 22

amount. In 2018, SCE recorded $278.2 million in Property & Liability insurance expense, 23

approximately $171.7 million, or 161%, higher than authorized. The difference was primarily due to 24

higher wildfire insurance premiums following the 2017-2018 California wildfires and the uncertainty 25

inherent in forecasting insurance market conditions several years in advance. For further detail on the 26

impacts of the 2017-2018 California wildfires on insurance premiums, see Appendix A containing 27

selected portions of testimony from SCE’s WEMA Application, A.19-07-020. 28

22 D.19-05-021, Ordering Paragraph 22, pp. 441-442.

35

Figure III-923 2018 Property and Liability Insurance Authorized to Recorded

(Constant 2018 $000)

C. O&M Forecast 1

1. Property Insurance Expense 2

a) Activity Description 3

(1) Non-Nuclear Property Insurance 4

Property insurance protects SCE property against potential physical loss or 5

damage caused by natural disasters such as fire, earthquake, flood, or accidental mechanical breakdown, 6

and acts of terrorism. SCE’s insurance limit is $750 million per occurrence, with a sub-limit of $300 7

million for California earthquake exposure. Insurance is purchased to protect SCE from catastrophic 8

events that, while unlikely, could have devastating consequences. For example, while the probability 9

23 Refer to WP SCE-07 Vol. 1, Authorized to Recorded, and SCE’s 2018 GRC Decision 19-05-020, under 10.

Administrative & General sections 10.9 to 10.9.2.

36

that SCE would suffer severe earthquake damage in any given year is low, should an earthquake occur, 1

the resulting property damage could be significant. 2

SCE’s property insurance is similar to the insurance most homeowners 3

purchase for their homes. Most homeowners insure their residences to protect against fire and other 4

perils but are unlikely to ever lose their homes to one of these perils. 5

(2) Blanket Crime Insurance 6

SCE purchases blanket crime insurance coverage to protect its assets from 7

losses due to crimes such as theft, robbery, and computer and wire fraud (whether committed by an 8

employee or non-employee). Title I of ERISA requires certain benefit plans to be bonded. SCE’s crime 9

insurance fulfills this ERISA requirement. The Commission has found that blanket crime insurance 10

coverage is prudent because it covers the remote possibility of severe losses from such crimes as wire 11

transfer fraud.24 The need for blanket crime insurance has become even more important due to the 12

increased use of computers and technology. 13

SCE’s blanket crime insurance coverage has a limit of $50 million per 14

occurrence, with a $1 million deductible. Although SCE has a system of internal controls to reduce the 15

potential for large losses associated with criminal acts, it is not possible to prevent all losses arising out 16

of criminal activity. To date, SCE has not been subject to significant losses, and thus its annual 17

premiums are reasonable in light of the large potential losses it could suffer. 18

(3) Nuclear Property Insurance 19

Property insurance coverage for SCE’s nuclear assets at SONGS and Palo 20

Verde is purchased from Nuclear Electric Insurance Limited (NEIL).25 NEIL is a mutual insurance 21

company owned by nuclear facility owner/operators. Property insurance expenses related to SONGS are 22

generally recovered through the decommissioning trust, but a small portion of the expense 23

(approximately $10,000 per year) is attributable to the SONGS switchyard,26 which is not being 24

decommissioned. That portion of the expense is not recoverable through the decommissioning trust and 25

is included in the General Rate Case filing. In addition, property insurance for Palo Verde is generally 26

procured by APS as the operator of the site, and SCE is billed for its share of the expense by APS. 27

24 See generally In re So. Cal Edison Co., D.91-12-076, (mimeo), pp. 47-48, 42 CPUC 2d 645, 680-681 (1991).

25 APS purchases insurance for Palo Verde on behalf of the participants.

26 Refer to WP SCE-06, Vol. 2 Book A, pp. 87-88, Insurance FCCs Detail Recorded/Adjusted & Forecast.

37

However, accidental outage for Palo Verde is purchased separately by SCE and other co-owners of Palo 1

Verde. 2

Should losses at any nuclear facility covered by NEIL exceed the 3

accumulated funds for these insurance programs, SCE could be assessed retrospective premium 4

adjustments of up to approximately $52 million per year.27 5

b) Historical Variance Analysis 6

Property Insurance expense decreased slightly from $16.724 million in 2014 to 7

$16.104 million in 2018, as shown below Figure III-10.28 Over this time period, the market cost of 8

insurance per dollar insured decreased, while SCE’s insurable property values increased from 9

approximately $19.9 billion in 2014 to $25.1 billion in 2018, a 26 percent increase. 10

The insurable value of SCE’s assets grows over time due to two factors: (1) the 11

utility’s ongoing capital expenditure program results in additional physical assets that need to be 12

insured, and (2) for any given physical asset, the replacement value tends to increase over time with 13

inflation. 14

SCE’s forecasted property insurance expense of $20 million for Test Year 2021 is 15

based on an assessment of overall insurance market conditions, SCE’s loss history, and SCE’s insurable 16

property values. The assessment of the overall insurance market condition and projected trends is based 17

on Marsh’s assessment of the market.29 18

27 Refer to WP SCE-06, Vol. 2 Book A, p. 89, EIX 2Q 2019 10-Q (July 28, 2019) p. 64.

28 Refer to WP SCE-06, Vol. 2 Book A, pp. 90-95, Property Insurance.

29 Refer to WP SCE-06, Vol. 2 Book A, p. 96, Marsh Premium forecast letter.

38

Figure III-1030 Property Insurance Expense

Recorded and Adjusted 2014-2018/ Forecast 2016-2018 (Constant 2018 $000)

2. Liability Insurance Expense 1

SCE maintains several types of liability insurance, which are separately discussed below. 2

SCE’s wildfire and non-wildfire general liability insurance provide coverage to limit exposure due to 3

unpredictable losses that may occur as a result of lawsuits alleging third-party bodily injury, personal 4

injury, or property damage. In addition, SCE purchases supplemental wildfire liability insurance to 5

further protect itself from third-party lawsuits alleging property damage caused by SCE facilities. 6

SCE also has fiduciary liability insurance to protect itself in connection with the administration of 7

employee benefit plans. SCE purchases D&O liability insurance to protect its directors and officers in 8

the event of lawsuits alleging errors in judgment in managing the Company. SCE purchases workers’ 9

compensation insurance to protect it from exposure to costs incurred by employees who are injured on 10

the job. SCE also continues to purchase nuclear liability insurance for Palo Verde, and a former repair 11

facility located in Westminster. 12

30 Refer to WP SCE-06, Vol. 2 Book A, pp. 97-102, Liability Insurance-Wildfire.

39

a) Activity Description 1

(1) Wildfire Liability Insurance 2

SCE purchases approximately $1 billion of wildfire insurance coverage, 3

and historical experience supports that SCE needs, at a minimum, $1 billion of such coverage. SCE may 4

obtain this coverage through traditional insurance or through alternative risk transfer instruments such as 5

catastrophe bonds.31 Indeed, after exhausting nearly $2 billion in total insurance coverage for 2017 and 6

2018 (i.e., $1 billion in each year), SCE recognized an additional $1.825 billion after-tax net32 charge 7

related to existing and expected claims arising from the wildfire and mudslide events in accordance with 8

the requirement of the Generally Accepted Accounting Principles in the United States (U.S. GAAP), 9

representing the low-end of SCE’s potential exposure to these claims. SCE believes that maintaining at 10

least $1 billion in insurance coverage is beneficial to customers for the following two reasons. First, it 11

protects customers from third-party claims related to wildfires pursued under the inverse condemnation 12

doctrine, even for events where SCE is in no way at fault but nevertheless SCE—and derivatively, its 13

customers—will be held responsible for resulting damages. Second, as recognized in Governor 14

Newsom’s June 21, 2019 official report on catastrophic wildfires, stabilizing the financial health of 15

California’s utilities is essential to enable them “to provide safe, affordable and reliable energy, ensure 16

fair compensation for wildfire victims, and protect ratepayers from massive rate spikes.”33 17

In addition, Assembly Bill 1054, recently passed by the California 18

Legislature and signed by Governor Newsom on July 12, 2019, calls for a wildfire fund to address 19

investor-owned utility wildfire losses exceeding $1 billion, with each utility insuring the first $1 billion 20

of losses through its own insurance program. Not purchasing adequate levels of insurance imperils a 21

utility’s financial health, which is directly contrary to customers’ interests. Financially unhealthy utilities 22

face higher financing costs that must be recovered from customers, will be impeded from implementing 23

31 Catastrophe bonds are a capital markets instrument used to provide protection against perils such as

earthquakes and wildfires.

32 SCE’s 2018 year-end balance sheet and income statement include estimated gross losses (established at the lower end of the reasonably estimated range of expected losses) of $4.7 billion for the 2017/2018 wildfire/mudslide events in SCE’s service territory. See Edison International 2018 Annual Report at p. 197. https://www.edison.com/content/dam/eix/documents/investors/corporate-governance/eix-sce-2018-annual-report.pdf, as of August 20, 2019.

33 See June 21, 2019 Governor Newsom’s Strike Force Progress Report on Catastrophic Wildfires, Climate Change and Our Energy Future at p. 7. https://www.gov.ca.gov/wp-content/uploads/2019/06/Strike-Force-Progress-Report.pdf, as of August 20, 2019.

40

the State’s ambitious clean energy agenda, and under certain circumstances may even be unable to 1

furnish the critical services that society depends on them to provide. 2

Starting in 2007 after the Witch Fire associated with San Diego Gas & 3

Electric Company (SDG&E) facilities and accelerating rapidly over the last few years after the 4

devastating Northern and Southern California wildfires of 2017-2018, some of which were associated 5

with utility infrastructure, two fundamental changes affected the market for California utility wildfire 6

liability insurance. First, the availability of that insurance “tightened” as fewer insurance carriers were 7

willing to offer those products to California utilities. Second, and not unrelatedly, the cost of the 8

insurance increased dramatically on a per-coverage-dollar basis. In addition, the cost of liability 9

insurance for California utilities has also been affected by two very large non-wildfire losses: the San 10

Bruno gas explosion and the Aliso Canyon gas leak. 11

There are several reasons for those changes in insurance costs. First, the 12

frequency and severity of California’s wildfires, and the risks and consequences associated with them, 13

have considerably increased, starting with the 2017 Northern California Wine Country fires. Multiple 14

factors contribute to wildfires across SCE’s service area and throughout California. These include the 15

buildup of dry vegetation in areas severely impacted by years of historic drought, the failure of multiple 16

responsible parties to clear this buildup of hazardous wildfire fuel, increasing temperatures, lower 17

humidity and strong Santa Ana winds. Such factors can trigger wildfires and strain or damage utility 18

facilities, no matter how well designed, constructed and maintained. Wildfire risk is increasing at the 19

same time that more and more residential and commercial development is occurring in some of the 20

highest-risk areas — with about 28 percent of SCE’s service area in high fire risk areas (HFRA).34 21

SCE’s primary focus for 2019 is to put the full weight of our Company’s talent and resources into 22

helping the State prevent wildfires and limit their impact. Despite those efforts, it would not be 23

reasonable to assume that all future wildfires, including catastrophic ones, will be avoided. 24

Second, through the application of a legal doctrine largely unique to 25

California, courts have held investor-owned utilities strictly liable for wildfire damages where utility 26

34 As of the time of the filing of this application, SCE has finalized an initiative to “remove” the majority of

areas in its service territory that it previously treated as HFRA, but which are not formally included in the CPUC’s Fire Threat District (HFTD) fire maps. SCE will be filing a Petition for Modification of D.17-12-024 in the very near future to seek a formal amendment of the Commission’s HFTD fire maps to include those limited additional non-HFTD HFRA areas that SCE did not “remove” from its internal HFRA designation. See also July 5, 2019 Advice Letter 4030-E.

41

infrastructure is a substantial cause of the wildfire, even if the utility is not at fault. This is based on a 1

legal theory called “inverse condemnation,” whereby courts have concluded that the utility has taken (or 2

“condemned”) the damaged property and must pay for the damages, much like a municipality would pay 3

a property owner if it condemned property to build a road or other public improvement. 4

The confluence of increased frequency and consequences of wildfires with 5

increased risk exposure due to the inverse condemnation doctrine has led some insurance carriers to exit 6

the California market entirely, and those that remain to demand higher premiums for the same level of 7

coverage. Because of the combined effect of these two factors (decreasing supply and increasing 8

perceived risk), the economic principles of supply-and-demand have led to wildfire insurance that is 9

materially more expensive than it was even in the recent past. 10

The significant increase in wildfire liability insurance cost is reflected in 11

SCE’s forecast of premiums for 2021. Of the $660 million forecast for total liability insurance expense 12

for Test Year 2021, $624 million is attributable to wildfire insurance. Because of extreme volatility and 13

uncertainty of wildfire liability insurance costs, SCE is proposing a two-way balancing account (the 14

Risk Management Balancing Account, or RMBA) to capture the difference between SCE’s actual and 15

authorized wildfire liability insurance expense. See Exhibit SCE-07, Vol 1, Chapter V for more detail on 16

RMBA. 17

If SCE determines that it is uneconomic to purchase liability insurance for 18

some portion of its wildfire exposure (i.e., if the cost of insurance is excessive relative to the risk 19

exposure), and if this is supported by actuarial analysis, SCE reserves the option to self-insure that risk. 20

SCE would apply the avoided cost of the insurance as a claims reserve for that self-insured risk and 21

record the avoided cost as an expense in RMBA, to be trued up later based on actual claims paid. 22

By self-insuring in this way, SCE can help to reduce the demand side of the supply-and-demand 23

balance, thereby easing some of the pricing pressure in the insurance market. 24

(2) Non-Wildfire General Liability Insurance 25

Non-wildfire general liability insurance protects the Company from losses 26

that result from lawsuits or negotiated settlements with third parties alleging bodily injury, personal 27

injury, or property damage for which the Company may be found liable. Prior to SCE’s insurance 28

renewal in 2018, a portion of SCE’s insurance covered only wildfire, some covered only non-wildfire, 29

and some covered both within a single policy limit. Starting with the 2018 renewal, SCE no longer has 30

any insurance where wildfire and non-wildfire are both covered within a single policy limit. Thus, SCE 31

42

has procured separate insurance layers for wildfire and non-wildfire coverage. This ensures that 1

dedicated layers of insurance are available for wildfire claims, while non-wildfire coverage is purchased 2

separately at a much lower cost. SCE’s non-wildfire general liability insurance limit is currently $535 3

million. 4

(3) Fiduciary Liability insurance 5

Fiduciary liability insurance protects SCE against lawsuits that may arise 6

over its administration of the employee benefit plans governed by ERISA. This insurance, which has an 7

aggregate limit of $70 million, provides coverage for fiduciaries of the benefit plans.35 8

(4) D&O Liability Insurance 9

D&O liability insurance protects directors, officers, trustees, and senior 10

officials of the Company against lawsuits alleging errors in judgment while managing the Company. 11

The proliferation of D&O suits and the high cost of defending them have made the purchase of this 12

coverage necessary and prudent.36 13

Because directors and officers can be held personally liable in lawsuits, 14

SCE could not attract qualified directors, officers, and trustees if adequate protection for these 15

individuals were not provided. Consequently, the purchase of this coverage is essential to the normal 16

operations of virtually any large institution such as SCE. SCE’s D&O liability insurance has an 17

aggregate limit of $360 million. The premiums and liability limits are prudent in view of the possibility 18

of lawsuits and SCE’s need to attract qualified directors and officers, as discussed above. 19

In SCE’s 1988 Test Year GRC decision, the Commission found that D&O 20

insurance represented a normal and prudent business expense reasonable for ratemaking purposes. In the 21

1995 GRC decision, the Commission ordered that only half of SCE’s D&O insurance expense be paid 22

by customers.37 Pursuant to that direction, SCE’s D&O insurance expense is now shared on an equal 23

basis between customers and shareholders, which has been taken into account in this testimony and 24

SCE’s 2021 forecast. Therefore, the Test Year forecast includes only the 50 percent customer share of 25

D&O insurance costs. 26

35 Refer to WP SCE-06, Vol. 2 Book A, pp. 103-108, Liability Insurance- Non-Wildfire.

36 Id.

37 D.96-01-11, (mimeo), pp. 140-141, 64 CPUC 2d 241, 319 (1996).

43

(5) Workers’ Compensation 1

Workers’ compensation insurance provides four types of benefits (medical 2

care, death, disability, and rehabilitation) for employee job-related injuries or diseases. Each state 3

requires that benefits be paid to injured employees with the amount and term set by the state based upon 4

the extent and type of injury. To serve as proof these benefits will and can be paid by employers, 5

insurance or state-approved self-insurance must be arranged. Requirements for self-insurance are set by 6

each state and require the employer to provide financial security in an amount determined by the state. 7

SCE self-insures its workers’ compensation exposure for its employees in 8

California, as discussed in Exhibit SCE-06, Vol. 2, Chapter IV. However, SCE also purchases excess 9

workers’ compensation insurance to cover large claims for SCE’s California employees.38 The policy for 10

SCE’s non-nuclear workers has a deductible of $1 million and statutory limits. 11

SCE also employs workers in Nevada operating the Eldorado Substation. 12

SCE purchases workers’ compensation insurance to cover this exposure. The Nevada workers’ 13

compensation policy has a zero deductible and statutory limits. Workers’ compensation insurance is 14

necessary and prudent because of the high cost of benefits and the potential financial exposure from a 15

single incident with multiple injuries. 16

(6) Cyber Liability Insurance 17

In recent years, a number of companies have reported that personal 18

information relating to customers or employees has been compromised resulting in notification and 19

monitoring expenses. SCE’s cyber liability insurance covers the liability that could result from such a 20

compromise, as well as coverage for the extra expenses (such as restoring affected servers) associated 21

with a cyber-attack on SCE’s systems. SCE purchases $100 million of cyber liability insurance with a 22

$5 million deductible. 23

(7) Nuclear Liability Insurance 24

Nuclear liability insurance covers losses involving radiological injuries 25

and damages to third parties involving SCE’s facilities at SONGS or Palo Verde, or at a former SCE 26

repair facility located in Westminster. Nuclear liability insurance expenses related to SONGS are 27

generally recovered through the decommissioning trust, but a small portion of the expense 28

38 The insurance is structured as a reimbursement agreement whereby SCE pays all claims and then submits

eligible claims to the insurer for reimbursement.

44

(approximately $45,000 per year)39 is attributable to the Westminster facility, which is not recoverable 1

through the decommissioning trust. That portion of the expense is included in this General Rate Case 2

filing. Liability insurance for Palo Verde is generally procured by APS as the operator of the site, and 3

SCE is billed for its share of the expense by APS. 4

(8) Miscellaneous Liability Insurance and Surety Bonds 5

SCE incurs expense for a variety of small insurance policies and surety 6

bonds. For example, SCE has an aviation liability insurance policy, which covers bodily injury and 7

property damage to third parties caused by SCE aircraft. 8

b) Historical Variance Analysis 9

Wildfire and non-wildfire general liability insurance were combined before 2018. 10

Beginning in 2018, SCE separated its wildfire and non-wildfire general liability insurance. Figure III-11 11

shows recorded wildfire liability insurance expense in 2018 and forecasted wildfire liability insurance 12

expense for 2019 to 2021. 13

39 Refer to WP SCE-06, Vol. 2 Book A, pp. 87-88, Insurance FCCs Detail Recorded/Adjusted & Forecast.

45

Figure III-1140 Wildfire Liability Insurance Expense

Recorded and Adjusted 2018/ Forecast 2019-2021 (Constant 2018 $000)

Figure III-12 shows total liability insurance expense from 2014 to 2017, and total 1

liability insurance expense excluding wildfire from 2018 to 2021. 2

40 Refer to WP SCE-06, Vol. 2 Book A, pp. 97-102, Liability Insurance – Wildfire.

2014 2015 2016 2017 2018 2019 2020 2021Labor

Non-Labor ($0) ($0)Other $0 $236,939 $410,585 $566,812 $623,804

Total Expenses $0 $236,939 $410,585 $566,812 $623,804


Recorded Forecast

($100,000)

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

2014 2015 2016 2017 2018 2019 2020 2021


46

Figure III-12 Non-Wildfire Liability Insurance Expense

Recorded and Adjusted 2014-2018/ Forecast 2019-2021 (2018 $000)

Total liability insurance expense (the sum of Figure III-14 and Figure III-15) 1

increased from $71.5 million in 2014 to $262.1 million in 2018.41 This increase was driven almost 2

entirely by the large increase in wildfire liability insurance expense. 3

As with property insurance premiums, Marsh has forecasted Test Year 2021 4

premiums for liability insurance. Test Year 2021 liability insurance expense is expected to be $660 5

million,42 a 152 percent increase over the 2018 recorded amount of $262.1 million. Insurance premiums 6

have long been accorded cost recovery in rates as a necessary cost of doing business. The financial risk 7

posed by wildfire liability underscores the need for SCE to maintain its insurance program. 8

D. Proposal to Accelerate Recovery of Previously Authorized Wildfire Liability Insurance 9

SCE proposes to recover, over 2021 to 2023, $95 million in unrecovered expense for wildfire 10

insurance premiums that were already authorized in prior GRCs. 11

41 Refer to WP SCE-06, Vol. 2 Book A, pp.103-108, Liability Insurance – Non-Wildfire.

42 Refer to WP SCE-06, Vol. 2 Book A, pp.103-108, Liability Insurance – Non-Wildfire.

47

As background, in the 2018 GRC decision, the Commission approved $293.0 million for the 1

2018-2020 period in insurance covering a combination of general liability, supplemental wildfire and 2

other43 insurance. Specifically, the Commission approved $92.427 million for total liability insurance 3

expense in the 2018 test year, comprised of $71.340 million of general liability (which provided 4

coverage for wildfire liability) and $14.749 million of supplemental wildfire insurance. Consistent with 5

that decision, for the 2018-2020 period, SCE is applying its pensions and benefits capitalization rate 6

(45.5%) to both pieces, attributing 80%44 of the general liability and 100% of the supplemental wildfire 7

insurance to wildfire-related liability coverage. At the end of 2020, SCE forecasts that the unrecovered 8

balance of the capitalized wildfire-related insurance amounts will be $95 million.45 9

The Commission had authorized SCE to capitalize a portion of these premiums and recover them 10

over more than twenty years because, consistent with SCE’s prior practice,46 wildfire coverage had 11

generally been included in combined liability insurance. However, due to the frequency and severity of 12

wildfires, two changes occurred. First, the costs of the wildfire insurance premiums increased 13

dramatically. Second, the market for wildfire insurance in 2018 mandated wildfire-specific policies and 14

premiums (not combined ones). Given these market changes, SCE evaluated the appropriate accounting 15

treatment for standalone wildfire insurance. The Federal Energy Regulatory Commission (FERC) 16

requires expensing, not capitalizing, stand-alone wildfire insurance premiums.47 Therefore, SCE 17

proposes to accelerate recovery of the $95 million of unrecovered wildfire premiums authorized in prior 18

GRCs in its 2021-23 revenue requirement.48 19

SCE’s proposal to accelerate cost recovery is appropriate because the Commission has already 20

found that the underlying costs SCE had forecast for these premiums was reasonable and recoverable in 21

43 Director & Officer, Fiduciary, Cyber, etc.

44 This 80/20 ratio is based on verbal input from SCE’s brokers, which was informed by informal discussions with insurance carriers.

45 This includes the wildfire portion of the 2015 GRC-authorized insurance premiums as well. See WP SCE-06, Vol 2 Book A, pp. 153-154, WF CPUC Reg Asset 2017-2020.

46 See Chapter III.C.2(a)(2), above.

47 Federal Energy Regulatory Commission Order On Compliance Filing, issued August 3, 2012, to San Diego Gas & Electric Company. Docket No. ER11-4318-001.

48 The capital revenue requirement (depreciation, return and taxes) on the $95 million of capitalized wildfire insurance results in $39 million of revenue requirement in Test year 2021.

48

rates. The proposed acceleration of the recovery period is consistent with FERC’s accounting guidance 1

in the Uniform System of Accounts. 2

49

IV. 1

LEGAL 2

The Legal business planning element provides counsel and representation in civil courts, 3

regulatory hearing rooms, and numerous other forums. In doing so, this business planning element helps 4

mitigate SCE’s costs and risks in safely delivering reliable, affordable, and clean energy to our 5

customers. Legal also plays an important role in helping ensure that SCE fully complies with laws, 6

regulations, and Commission and judicial decisions. 7

This chapter presents our Test Year (TY) 2021 forecasts of administrative and general expenses 8

for the Legal work area. The work activity areas consist of the following: (1) Law; (2) Claims; and 9

(3) Workers’ Compensation.49 10

Section A justifies our Law forecast of $42.911 million of TY 2021 expenses. This represents a 11

$250,000 increase due to escalation of labor relative to 2018 recorded (in 2018 dollars). 12

Section B justifies our Claims forecast of $32.601 million of TY 2021 expenses. This represents 13

a decrease of $5.791 million over the 2018 recorded (in 2018 dollars). The change is primarily driven by 14

the averaging methodology in claims reserves50 and write-off expenses that takes into account the 15

unpredictable nature of these activities. 16

Section C justifies our Workers’ Compensation forecast of $13.170 million of TY 2021 17

expenses. This represents a decrease of $3.493 million over the 2018 recorded (in 2018 dollars). 18

This decrease is the result of a multi-year averaging method used to forecast Workers’ Compensation 19

Reserve. 20

A. Overview 21

Legal’s primary work activities are summarized below. A more detailed breakdown and 22

explanation is included in our workpapers.51 23

The Law Department advises SCE’s management on compliance with applicable laws and 24

regulations, such as regulatory, environmental, and labor requirements. This Department represents SCE 25

before courts and regulatory agencies. It also supports the boards of directors and helps ensure 26

49 Disability Management activities are discussed in Exhibit SCE-06, Volume 3, Part 1.

50 As discussed below, reserves include disputes outside the Claims area such as employment, commercial, environmental, and other matters.

51 Refer to WP SCE-06, Vol. 2 Book A, pp. 155-162, Law Department Attorney Section and Staff Responsibilities.

50

compliance with California’s General Corporation Law and reporting requirements under applicable 1

securities laws. This support is provided through the Corporate Governance team. 2

The Claims Department investigates, processes, and resolves claims against SCE, as well as 3

claims that SCE asserts against third parties. Claims made against SCE include those for bodily injury, 4

damage to electrical appliances and other equipment, food spoilage, accidents involving SCE vehicles, 5

and real property damage. Claims that SCE makes against third parties involve, among other things, 6

damage to SCE facilities or equipment caused by others, accidents involving SCE vehicles caused by 7

third parties, and enforcement of indemnification obligations for third party damage claims against SCE. 8

The Workers’ Compensation and Disability Management52 Department administers workers’ 9

compensation benefits and disseminates information to SCE employees regarding such benefits. 10

This Department also handles and resolves contested workers’ compensation claims, and determines 11

eligibility for workers’ compensation benefits. 12

1. O&M Request 13

Table IV-14 summarizes the recorded costs for years 2014-2018 and the requests for Test 14

Year 2021 for Legal’s work activities. 15

Table IV-14 Summary of Costs for Legal Activities

Recorded and Adjusted 2014-2018/Forecast 2021 (Constant 2018 $000)

2. Risk Factors, Safety, Reliability and Connection with RAMP 16

The following GRC activity addresses one risk associated with Employee, Contractor & 17

Public Safety represented in SCE’s RAMP filing as shown in Table IV-15. More detailed descriptions of 18

the activity can be found in the associated O&M section.53 19

52 Only Workers’ Compensation activities are discussed in this volume. Disability Management activities are

discussed in Exhibit SCE-06, Vol. 3, Part 1.

53 See the Workers’ Compensation section below.

GRC Activity 2014 2015 2016 2017 20182021

ForecastLaw 50,008$ 45,326$ 35,790$ 39,150$ 42,661$ 42,911$ Claims 38,789$ 28,972$ 21,385$ 35,551$ 38,392$ 32,601$ Workers' Compensation 17,054$ 12,833$ 9,617$ 14,106$ 16,663$ 13,170$ Total Legal 105,851$ 87,131$ 66,792$ 88,807$ 97,716$ 88,682$

51

Table IV-15 GRC Activities Included in SCE’s 2018 RAMP Filing

3. Compliance Requirements 1

In the 2018 GRC Decision, the Commission urged the parties to meet and confer on 2

means to accurately determine the portion of In-House Counsel costs and other expenses which are 3

incurred in connection with findings of utility imprudence. TURN, Cal Advocates, and SCE held an 4

initial meet and confer on July 3, 2019. The participants in the meet and confer agreed in advance that 5

the substance of the meet and confer would be subject to Commission Rule of Practice and Procedure 6

12.6. The parties engaged in a further meet and confer on July 26, 2019. 7


The 2018 authorized amount for Legal is approximately 12 percent lower than the 2018 9

recorded costs.54 This variance was driven primarily by higher recorded spend in Law outside counsel, 10

Claims injuries and other damages, Claims write-offs and Workers’ Compensation reserves. 11

Legal’s 2018 forecast request is consistent with our 2018 recorded, as shown in Figure IV-13. 12

54 Refer to WP SCE-07, Vol. 1 – Authorized to Recorded.

GRC Activity RAMP Control / Mitigation Name RAMP ID Risk Addressed

Workers' Compensation Safety Controls C1Employee, Contractor &

Public Safety

52

Figure IV-13 Legal Expenses for 2018 – Authorized versus Recorded

(Constant 2018 $ Millions)

B. Law 1

Table IV-16 summarizes the 2014-2018 recorded O&M expenses in Law work activities and 2

Law’s Test Year 2021 forecasts. 3

Table IV-16 Summary of Costs for Law (Including Corporate Governance)


1. Overview of Activities 4

Law work activities are led by a Senior Vice President and General Counsel,55 and 5

supported by four Assistant General Counsels responsible for various practice areas (including 6

55 The General Counsel leads the entire Legal Operating Unit.

$2.8 $7.8 $1.2

$100.7

$85.8

$97.7

0

20

40

60

80

100

120

2018 Request 2018 Authorized Law Claims Workers' Compensation 2018 Recorded

Law Claims Workers' Compensation

GRC Activity 2014 2015 2016 2017 20182021

ForecastLaw - In-house Legal Resources & Corporate Governance Support 32,027$ 29,814$ 26,666$ 24,333$ 24,766$ 25,016$ Law - Outside Counsel 15,153$ 12,251$ 5,843$ 11,851$ 14,917$ 14,917$ Law - Corporate Governance Miscellaneous 2,828$ 3,260$ 3,281$ 2,966$ 2,979$ 2,978$ Total Law 50,008$ 45,326$ 35,790$ 39,150$ 42,661$ 42,911$

53

regulatory, litigation, labor, and transactions, among others).56 In-house attorneys are generally assigned 1

to one of four general practice groups. Each of these general practice groups functions under the 2

supervision of an Assistant General Counsel. This structure helps our in-house attorneys develop 3

expertise in substantive practice areas that are of particular importance to SCE. In-house attorneys, 4

however, are also encouraged to work on projects in different practice areas to broaden their 5

understanding of other legal issues affecting SCE and our customers. For example, some of the attorneys 6

whose normal assignments involve litigation or transactions are occasionally assigned to regulatory 7

projects. 8

SCE’s Law Department also has a staff of paralegals, administrative and operational 9

personnel who support the different practice areas, as well as other components of the Legal work area. 10


The 2018 authorized amount for Law is $2.8 million lower than the 2018 recorded 12

costs.57 This was driven by reductions to our in-house and outside counsel forecasts in the Test Year 13

2018 GRC decision. These reductions were made on three principal grounds. First, both SCE’s outside 14

counsel and in-house forecasts were reduced on the ground that certain Legal costs were purportedly 15

incurred in instances where SCE had acted or operated imprudently. Second, SCE’s in-house Law 16

forecast was subject to an additional reduction to reflect the Commission’s conclusion that SCE, in a 17

number of instances across its Test Year 2018 GRC showing, had renewed previously denied arguments 18

without providing a sufficient showing that a different outcome was now warranted. Third, SCE was not 19

permitted to recover equity compensation for Board members in the Corporate Governance account. 20

Please refer to Table IV-17. 21

56 Refer to WP SCE-06, Vol. 2 Book A, pp. 155-162, Law Department Attorney Section and Staff

Responsibilities.


54

Table IV-17 2018 Law Authorized vs 2018 Recorded


3. Law Sub-Work Activities 1

a) In-House Legal Resources and Corporate Governance Support 58 2

(1) Activity Description 3

SCE records the salaries and related expenses of the Law Department’s 4

attorneys and staff (including Corporate Governance support staff) to this sub-work activity. 5

(2) Need for Activity 6

Using in-house counsel is advantageous for several reasons. First, our in-7

house attorneys have developed an extensive knowledge of SCE’s policies, programs, operations, 8

regulatory oversight and compliance obligations; our attorneys also maintain an effective and supportive 9

working relationship with other SCE organizations. This knowledge base allows the attorneys to provide 10

assistance on a wide range of assignments required for SCE’s service activities. Our in-house regulatory 11

attorneys also have considerable knowledge and expertise in practicing before regulatory agencies, and 12

our civil litigators have developed significant experience with the types of legal issues that SCE is called 13

upon to litigate throughout the civil courts across our service territory, as well as the procedures and 14

rules that apply in those proceedings. 15

Moreover, the Company’s business representatives have greater direct 16

access to the Law Department’s attorneys than would typically be the case with outside counsel. 17

This promotes timely and efficient legal advice, and aids the Law Department in potentially avoiding or 18

more expeditiously resolving expensive and time-consuming litigation. Furthermore, SCE’s in-house 19

58 Refer to WP SCE-06 Vol. 2 Book A, pp. 163-168, Law – In-house Legal Resources and Corporate

Governance Support.

GRC Activity Request Authorized RecordedLaw - In-house Legal Resources & Corporate Governance Support 27.6$ 23.4$ 24.8$ Law - Outside Counsel 16.1$ 13.2$ 14.9$ Law - Corporate Governance Miscellaneous 4.3$ 3.3$ 3.0$ Total Law 47.9$ 39.9$ 42.7$

55

attorneys are, in most matters, a more cost-effective legal resource as compared to the cost of outside 1

counsel. 2

Figure IV-14 In-House Legal Resources (Including Corporate Governance Support)

Recorded And Adjusted 2014-2018/Forecast 2021 (Constant 2018 $000)


As shown in in Figure IV-14, labor and non-labor expenses decreased 4

from 2014 to 2016 as a result of the Operational and Service Excellence initiative. The initiative led to 5

staff reductions and operational changes. These reductions and changes included enhancing our process 6

efficiency efforts and developing guidelines that improved the prioritization of work and clarified 7

service level expectations with internal Company clients. One of the process efficiency initiatives 8

includes moving to a “paperless office” environment by streamlining mail, records, files, and 9

calendaring for litigation. The process has increased efficiencies and contributed to the reduced staffing 10

needs. Costs remained essentially flat from 2017 to 2018. 11

(4) Forecast 12

The Law Department’s Test Year 2021 forecast for in-house legal services 13

is $25.016 million. This forecast is based on 2018 recorded expenses with a modest increase of 14

$250,000 to account for labor escalation. The use of 2018 as the base year to forecast labor and non-15

2014 2015 2016 2017 2018 2019 2020 2021Labor $28,466 $26,601 $24,272 $22,276 $22,737 $23,132 $23,132 $22,988

Non-Labor $3,562 $3,213 $2,388 $2,056 $2,028 $1,844 $1,844 $2,028Other $0 $0 $6 $0 $0 $0 $0 $0

Total Expenses $32,027 $29,814 $26,666 $24,333 $24,766 $24,976 $24,977 $25,016

Recorded Forecast

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2014 2015 2016 2017 2018 2019 2020 2021


56

labor is reasonable. After we implemented the Operational and Service Excellence initiative in 2016, 1

costs remained relatively stable in 2017 and 2018. We expect this activity to continue at the same level 2

in 2021. When one examines labor and non-labor combined, the change in recorded costs from 2016 to 3

2017 is very close to 10%. Costs then varied by much less than 10% from 2017 to 2018. Accordingly, 4

the overall costs appear to be relatively stable over the last three years of recorded expense. 5

b) Outside Counsel 59 6


This activity includes fees and expenses charged by outside law firms, 8

court reporters, and consultants in connection with defending and/or resolving labor, commercial, 9

environmental, regulatory proceedings and injuries and damages claims. 10

(2) Oversight and Monitoring of Outside Counsel 11

SCE retains outside counsel on an as-needed basis to handle matters 12

requiring specialized expertise that is not available in-house, to staff matters when the resource demands 13

exceed the in-house level of resources, and to represent SCE in high-exposure or sensitive matters where 14

a second or more independent opinion is important. The Law Department has established the following 15

practices and protocols to monitor and control outside counsel costs. 16

First, retaining outside counsel on new matters generally requires the 17

approval of an Assistant General Counsel or the General Counsel. However, in certain lower-exposure 18

matters or matters involving substantive issues for which counsel has previously been approved, the 19

Director of a practice area section has the authority to retain outside counsel as needed. Importantly, 20

retaining a firm that SCE has not previously used requires the express approval of the General Counsel. 21

Second, once a law firm has been retained, the Law Department has 22

developed a careful, detailed process to control outside counsel billings. This process is outlined in the 23

Law Department’s Outside Counsel Guide (the “Guide”) and provided to each firm that SCE retains. 24

The Guide identifies SCE’s prescribed billing procedures and related principles that outside counsel are 25

expected to follow in performing legal services for the Company. 26

Third, SCE, with limited exceptions, negotiates discounted fees from firms 27

that provide legal services. 28

59 Refer to WP SCE-06, Vol. 2 Book A, pp. 169-174, Law – Outside Counsel.

57

Fourth, SCE continues to retain Diverse Business Enterprise firms (DBE 1

firms) and other, generally smaller firms to perform legal work or provide legal support resources 2

whenever it is feasible. Such firms generally have lower billing rates than larger firms. In 2018, SCE 3

spent more than one-fifth of its entire outside counsel spend on DBE firms. 4

Fifth, the Law Department has an Outside Counsel Committee comprised 5

of in-house attorneys and paralegals who review the department’s policies as they relate to outside 6

counsel, periodically update the outside counsel guides, track and compare any rate increase requests, 7

and serve as an interface between outside counsel and Law Department management. 8

Sixth, SCE strongly encourages and increasingly utilizes alternative 9

billing methods by outside counsel, including fee caps either by matter or phase, fixed fee arrangements, 10

incentive billing, modified contingency agreements, and other alternative billing arrangements. 11

The above policies and practices allow SCE to procure outside counsel at 12

a discount from standard rates. 13

58

(3) Scope and Cost Forecast 1

Figure IV-15 Law - Outside Counsel60



As shown in Figure IV-15, the decrease from 2014 to 2016 is attributed to 3

reduced litigation activities related to property damage and commercial disputes, and an offset of $3.2 4

million of insurance recovery recorded in 2016. The increase in 2017 and 2018 recorded costs is due to 5

increased legal activities related to claims of injuries by third parties, and increased property damage 6

litigation. 7

(5) Forecast 8

For test year 2021, SCE forecasts $14.917 million for outside counsel 9

expenses. The forecast is based on 2018 adjusted recorded expenses and is consistent with D.89-12-057. 10

In that decision, the Commission stated that if costs have shown a trend in a certain direction over three 11

or more years, the last recorded year is an appropriate base forecast for future costs. Costs in this 12

60 SONGS, Wildfire-related and other outside costs are excluded from our historical numbers and forecast.

Please refer to WP SCE-07, Vol. 1 for a listing of these adjustments.

2014 2015 2016 2017 2018 2019 2020 2021Labor $0 $0 $0 $0 $0 $0 $0 $0

Non-Labor $15,153 $12,251 $5,843 $11,851 $14,917 $15,450 $15,913 $14,917Other $0 $0 $0 $0 $0 $0 $0 $0

Total Expenses $15,153 $12,251 $5,843 $11,851 $14,917 $15,450 $15,913 $14,917

Recorded Forecast

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2014 2015 2016 2017 2018 2019 2020 2021


59

account showed a clear upward trend over the three-year period from 2016 to 2018. The costs recorded 1

in 2018 reasonably represent the types of expenditures SCE anticipates for 2021 and beyond. Thus, the 2

2018 recorded costs serve as an appropriate basis for our current GRC forecast. 3

c) Corporate Governance Miscellaneous Expenses 61 4


Corporate Governance miscellaneous expenses include the following: 6

(1) non-equity compensation paid to non-employee members of SCE’s board of directors; (2) director 7

expenses associated with Board meetings; (3) Stock Exchange fees; (4) Financial Industry Regulatory 8

Authority (FINRA) fees; (5) costs associated with the Annual Meeting, including proxy solicitation, 9

electronic access, printing and mailing fees; (6) SEC filing fees and related costs of SEC filings; and 10

(7) costs related to Secretary of State filings. Annual expenses recorded in this activity are represented in 11

Figure IV-16. 12

The labor component of this account represents time spent by SCE 13

employees in providing assistance with the various activities described above. All other expenses, 14

including directors’ fees, are classified as non-labor. 15

(2) Need for Activity 16

Companies incorporated in California, such as SCE and EIX (SCE’s 17

parent company) are governed by the California Corporations Code.62 This Code mandates that the 18

business and affairs of the corporation be managed by or under the direction of a board of directors.63 19

61 Refer to WP SCE-06, Vol. 2 Book A, pp. 175-180, Law- Corporate Governance Miscellaneous.

62 Cal. Corp. Code § 300.

63 EIX and SCE have separate boards, but for simplicity we will be referring to them jointly as “the Board.”

60


Figure IV-16 Corporate Governance - Miscellaneous



From 2014 to 2018, costs in this account remained relatively flat. 3

(5) Forecast 4

The Test Year 2021 forecast for Corporate Governance and Miscellaneous 5

is $2.978 million. This forecast is based on 2018 recorded costs. It is consistent with Commission 6

guidance that if recorded expenses have been relatively stable for three or more years, the last year 7

recorded expense serves as an appropriate base forecast. 8

d) Director Compensation 9

The Board and its committees have a significant role in overseeing SCE’s mission 10

to safely provide customers reliable, affordable and clean electricity.64 Their key responsibilities include 11

64 Under Cal. Corp. Code § 300, the business of California Corporations such as EIX and SCE must be managed

by a Board of Directors.

2014 2015 2016 2017 2018 2019 2020 2021Labor $14 $39 $9 $10 $7 $6 $6 $6

Non-Labor $2,814 $3,219 $3,272 $2,956 $2,971 $4,105 $4,205 $2,971Other $0 $2 $0 $0 $0 $0 $0 $0

Total Expenses $2,828 $3,260 $3,281 $2,966 $2,979 $4,111 $4,211 $2,978

Recorded Forecast

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2014 2015 2016 2017 2018 2019 2020 2021


61

approving annual company goals and overseeing SCE’s responses, strategies, and work activities to 1

address: 2

Major capital projects, such as those necessary to maintain the safety and 3

reliability of SCE’s transmission and distribution system; 4

Other safety and reliability issues, including grid safety and resiliency, 5

wildfire mitigation, worker and public safety, SCE's safety culture, safe 6

decommissioning of San Onofre Nuclear Generating Station, safety and 7

security of SCE's grid assets including cyber-security, safety metrics and 8

benchmarking, and response plans in the event of earthquakes or other natural 9

disasters; 10

SCE's enterprise risk management process, including the monitoring and 11

mitigation of strategic and emerging risks; 12

Operational efficiencies and reduction of costs for customers; 13

Renewable energy, energy efficiency and other environmental issues; and 14

Employee and supplier diversity and other critical social issues.65 15

Due to the essential role performed by the Board, it is critical that SCE be able 16

to attract and retain qualified directors.66 Since compensation below the 17

market median would create recruitment and retention difficulties, the 18

compensation for the Board’s non-employee directors is targeted to be 19

approximately at the market median for companies in the Philadelphia Utility 20

Index.67 21

In a report for the August 2019 meeting of the Compensation and Executive 22

Personnel Committee of the Board, Pay Governance LLC reviewed non-23

employee director compensation at Philadelphia Utility Index companies and 24

65 See Edison International and Southern California Edison Company 2019 Joint Proxy Statement (the “Joint

Proxy Statement”), pp. 14-17 and 19-21. The Joint Proxy Statement is available at http://www.edison.com/home/investors/sec-filings-financials/proxy-statements.html (as of August 20, 2019).

66 See the Joint Proxy Statement, pp. 4-10, for the qualifications and experience of SCE’s directors.

67 The Philadelphia Utility Index contains 20 companies. In accordance with the recommendations provided by the current and previous independent compensation consultants for the Board’s Compensation and Executive Personnel Committee, the Philadelphia Utility Index has been the basis for the peer group used for benchmarking non-employee director compensation since 2005.

62

found that the total annual cash and equity compensation paid to the median 1

non-employee Board director ($275,000) was exactly at the Philadelphia 2

Utility Index market median ($275,000), and approximately $6,000 below the 3

S&P 500 median ($281,000).68 EIX is one of approximately 28 companies 4

included in the S&P 500 that is classified as a utility. 5

Pay Governance LLC also found that all 20 Philadelphia Utility Index companies 6

provide annual equity compensation to non-employee directors. The $152,500 in annual equity 7

compensation for each non-employee Board director is approximately at the Philadelphia Utility Index 8

market median and below the S&P 500 market median.69 The market data therefore shows that not only 9

is the total compensation provided to SCE directors reasonable, but the portion that consists of equity 10

compensation is also reasonable. 11

The compensation provided to directors, including equity compensation, 12

represents a normal cost of business that is reasonable in amount and that serves SCE’s overall mission 13

of providing adequate service to its customers. Recovery for the cost of all compensation provided to 14

directors, including equity compensation, would be appropriate. However, the Commission has in recent 15

rate cases not viewed with favor SCE’s requests for rate recovery of equity compensation to non-16

employee directors. As a result, SCE has excluded equity compensation from the 2014-2018 recorded 17

costs shown above, and from the Test Year 2021 forecast. Equity compensation comprises 18

approximately half of non-employee director compensation. 19

Since we have excluded equity compensation from our cost-recovery request, the 20

recovery we are requesting is plainly appropriate. 21

C. Claims 22


Claims Department personnel have responsibilities in the following areas: (1) the 24

managers are responsible for providing oversight of the Claims Department’s operations; (2) the 25

collections claims representatives are responsible for pursuing recovery for damage to SCE facilities or 26

equipment caused by third-parties; (3) the liability claims representatives handle the claims made against 27

68 Pay Governance LLC is the independent compensation consultant for the Board’s Compensation and

Executive Personnel Committee. See August 2019 report by Pay Governance LLC entitled Outside Director Competitive Compensation Assessment, available for inspection at SCE’s headquarters.

69 Id.

63

SCE involving personal injury and property damage; (4) investigators perform field investigations and 1

provide support for complex matters involving personal injuries and property damage in litigated cases, 2

and interface with SED and Cal/OSHA through site inspections and data requests in response to their 3

investigations; and (5) analysts and administrative staff provide clerical support for Claims Department 4

operations, and also handle subpoenas. 5

2. Need for Activity 6

Each year, claims are initiated against SCE and by SCE, arising out of the Company’s 7

provision of electric service and other operations. Approximately 13,000 files were opened per year 8

during the last five years (2014-2018). Claims against SCE administered by the Claims Department 9

during this time period included, among other things, bodily injury, damage to electric appliances and 10

equipment, accidents involving SCE vehicles, and property damage. Claims filed by SCE against others 11

ordinarily involve damage to SCE facilities or equipment caused by others, accidents involving SCE 12

vehicles that were caused by others, and enforcement of indemnification obligations for third-party 13

damage claims against SCE. 14

These activities have a direct bearing on the cost of providing electric service. 15

For example, SCE filed numerous claims against contractors or subcontractors for construction “dig-in” 16

cases where the contractor or subcontractor caused damage to our underground facilities. On average, 17

SCE recovers monetary damages in approximately 70 percent of these claims. In addition, Claims 18

personnel dispute claims against the Company that are not meritorious, either because the Company is 19

not liable for the Claim or the amount claimed is not justified. Had SCE not filed its own claims or 20

defended claims made against the Company, SCE’s cost of providing service would have increased. 21

3. Comparison of Authorized 2018 to Recorded 70 22

The 2018 authorized amount for Claims is $7.8 million lower than the 2018 recorded 23

costs. The variance was driven primarily by higher recorded expenses in Claims injuries and other 24

damages and Claims write-offs as shown in Table IV-18. The significant fluctuation in these accounts is 25

driven by the unpredictable nature of injuries, fatalities, and damages claims. Consistent with the 26

previous two GRC rate cases, we used an averaging methodology to forecast these activities. 27


64

Table IV-18 2018 Claims Authorized vs 2018 Recorded


4. Claims Sub-Work Activities 1

For Test Year 2021, SCE’s Claims Department forecasts expenses of $32.601million, 2

consisting of $3.195 million for administrative and general expenses, $15.126 million for Claims 3

injuries and other damages, and $14.281 million for Claims write-offs. Please refer to Table IV-19. 4

Table IV-19 Claims (Including Claims Reserves)


a) Claims Administration & Property Insurance Expenses 71 5


Labor and non-labor expenses we incur in processing both liability claims 7

against SCE and collection claims by SCE against others are recorded in Administrative and General 8

expenses. We record in Property Insurance accounts: (a) payments made to outside entities such as third-9

party investigators, expert witnesses, and stenographers, and (b) the associated travel and related 10

reimbursable expenses incurred to process and collect claims made by or against others. Such costs vary 11

due to a number of factors. These factors include the need for travel, the location of incidents, and the 12

number and severity of claims brought against SCE or initiated by SCE. 13

71 Refer to WP SCE-06, Vol. 2 Book A, pp. 181-186, Claims – Administration.

GRC Activity Request Authorized RecordedClaims - Administration 3.3$ 3.3$ 3.2$ Claims - Injuries & Other Damages 22.4$ 15.7$ 19.5$ Claims - Write-offs 11.6$ 11.6$ 15.7$ Total Claims 37.3$ 30.6$ 38.4$

GRC Activity 2014 2015 2016 2017 20182021

ForecastClaims - Administration 3,485$ 3,278$ 3,191$ 2,942$ 3,162$ 3,195$ Claims - Injuries & Other Damages 23,972$ 12,678$ 4,355$ 15,106$ 19,517$ 15,126$ Claims - Write-offs 11,331$ 13,016$ 13,839$ 17,503$ 15,713$ 14,281$ Total Claims 38,789$ 28,972$ 21,385$ 35,551$ 38,392$ 32,601$

65

Claims personnel respond to claims against SCE (referred to as liability 1

claims) and pursue recovery for damages caused to SCE facilities by other parties (referred to as 2

collections claims). 3


Figure IV-17 Claims - Administration


As indicated in Figure IV-17, labor expenses remained relatively stable. 5

The slight fluctuations in this area are mainly due to timing of staffing changes. 6

(3) Forecast 7

The Claims Department’s test year 2021 forecast for administration 8

expenses is $3.195 million. The labor and non-labor forecasts were based on 2018 recorded expenses. 9

The labor forecast of $2.991 million and non-labor forecast of $204,000 are based on 2018 recorded 10

expenses, adjusted by applying the labor escalation rate. Using the 2018 level of expense to forecast our 11

labor and non-labor needs is consistent with D.89-12-057. That Commission decision stated that if 12

recorded expenses have been relatively stable for three or more years, or if recorded expenses have 13

shown a trend in a certain direction over three or more years, the last year recorded expense is an 14

appropriate base forecast. Here, costs have remained relatively stable. 15

2014 2015 2016 2017 2018 2019 2020 2021Labor $3,300 $3,119 $3,057 $2,808 $2,958 $3,010 $3,010 $2,991

Non-Labor $185 $158 $133 $134 $204 $154 $154 $204Other $0 $0 $0 $0 $0 $0 $0 $0

Total Expenses $3,485 $3,278 $3,191 $2,942 $3,162 $3,164 $3,164 $3,195

Recorded Forecast

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2014 2015 2016 2017 2018 2019 2020 2021


66

b) Claims - Injuries & Other Damages 72 1


Reserves arising from claims against the Company (other than those 3

arising from Workers’ Compensation), such as personal injury, property damage, commercial, labor, and 4

other general liability claims are recorded in this activity. This includes actual cash outlays and reserve 5

expenses, which represent the Company’s estimate of potential exposure on known events. Each quarter, 6

the Department assesses the Company’s litigation reserve balance, and records adjustments as needed. 7


Figure IV-18 Claims Injuries & Other Damages



As shown in Figure IV-18, recorded expenses between 2014 and 2018 10

fluctuated year-to-year due to an unpredictable pattern of injuries, fatalities, and damages claims 11

(e.g., fires, falling wires, abnormal voltage, and other causes). This type of fluctuation in this area is not 12

unusual for SCE. 13

72 Refer to WP SCE-06, Vol. 2 Book A, pp. 187-192, Claims – Injuries and Other Damages.

2014 2015 2016 2017 2018 2019 2020 2021Labor $0 $0 $130 $693 $361 $0 $0 $0

Non-Labor $23,972 $12,678 $4,226 $14,414 $19,156 $20,475 $21,162 $15,126Other $0 $0 $0 $0 $0 $0 $0 $0

Total Expenses $23,972 $12,678 $4,355 $15,106 $19,517 $20,475 $21,162 $15,126

Recorded Forecast

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2014 2015 2016 2017 2018 2019 2020 2021


67

(4) Forecast 1

For Test Year 2021, SCE forecasts $15.126 million for Claims Injuries & 2

Other Damages, which was calculated based on a five-year average of recorded costs from 2014-2018. 3

This approach is consistent with D.89-12-057, which stated that for those accounts which have 4

significant fluctuations, and which are influenced by external factors, an average of recorded expenses 5

over a period of time is a reasonable base estimate. 6

c) Claims Write-Offs 73 7


This section discusses expenses for unpaid claims for damaged facilities. 9

Write-offs can occur from unpaid claims involving damage to our facilities. Such damage is primarily 10

caused by cars hitting our poles, or other third parties damaging our underground facilities while 11

digging. When these events occur, SCE repairs the damaged facilities. SCE also bills the responsible 12

party, if known, so that our customers do not pay for these costs. Although we make all reasonable 13

efforts to try to collect from the responsible party, not all such endeavors will result in a collection. 14

When such invoices are deemed uncollectible, the invoice is written off and the amount is recorded to 15

this account. 16

If payment is ultimately received for a previously written-off invoice, a 17

credit is reflected in this account. Technically, this write-off activity is accomplished on a monthly basis 18

by multiplying the outstanding claims receivable balance by the five-year historical ratio of write-offs. 19

The result is compared to the previous month’s balance in the Provision for Uncollectible Damage 20

Claims account, and a debit or credit is made to this account to adjust to the new balance. The labor and 21

non-labor expenses associated with claims write-offs are shown in Figure IV-19. 22

73 Refer to WP SCE-06, Vol. 2 Book A, pp. 193-198, Claims – Write-Offs.

68


Figure IV-19 Claims Write-Offs



Claims write-off costs varied throughout the historical period, due to 3

fluctuating levels of claims receivable balances and collection percentages. As discussed above in the 4

activity section, each month the outstanding claims receivable balance is multiplied by the five-year 5

historical ratio of write-offs. The result is compared to the previous month’s balance in the Provision for 6

Uncollectible Damage Claims account, and a debit or credit is made to this account to adjust to the new 7

balance. 8

(4) Forecast 9

For Test Year 2021, we forecast the expenses in this activity will be $14.3 10

million. This forecast is based on a five-year average of recorded costs. In D.89-12-057, the 11

Commission stated that when accounts have significant fluctuations in recorded costs from year to year, 12

or are influenced by external forces beyond the control of the utility, an average of recorded expenses 13

over a period of time is a reasonable base estimate. This approach is appropriate due to the fluctuating 14

levels of claims receivable balances and collections. 15

2014 2015 2016 2017 2018 2019 2020 2021Labor $0 $0 $0 $0 $0 $0 $0 $0

Non-Labor $11,331 $13,016 $13,839 $17,503 $15,713 $14,000 $15,000 $14,281Other $0 $0 $0 $0 $0 $0 $0 $0

Total Expenses $11,331 $13,016 $13,839 $17,503 $15,713 $14,000 $15,000 $14,281

Recorded Forecast

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2014 2015 2016 2017 2018 2019 2020 2021


69

D. Workers’ Compensation 1


Workers’ Compensation activities include administering workers’ compensation benefits, 3

providing information to SCE employees regarding such benefits, and determining workers’ 4

compensation benefit eligibility. 5

Workers’ Compensation Claims Advisors determine whether SCE has an obligation to 6

provide workers’ compensation benefits. If SCE does have such an obligation, then our advisors 7

administer benefits to eligible employees pursuant to statutory and regulatory requirements. 8

The statutory benefits that employees receive through Workers’ Compensation include medical care, 9

income replacement, return to work, supplemental job displacement, compensation for permanent 10

impairment, and in the event of an employee’s death, benefits to the employee’s dependents. 11

2. Need for Activity 12

The California Legislature has established the level of workers’ compensation benefits 13

SCE provides to employees. The California Constitution requires that employers provide a workers’ 14

compensation program to compensate employees, or their dependents, in the event employees suffer 15

work-related injuries, illnesses, or death.74 Employers’ workers’ compensation programs may be insured 16

or self-insured. SCE self-insures and self-administers its workers’ compensation obligations. 17

California’s Department of Industrial Relations’ Self-Insurance Plans unit regulates SCE’s workers’ 18

compensation benefits program. 19

3. Comparison of Authorized 2018 to Recorded 75 20

The 2018 authorized amount for Workers’ Compensation is $1.2 million lower than the 21

2018 recorded costs. The variance was driven by a higher recorded than forecast expense in workers’ 22

compensation reserves. The fluctuation in reserve expenses was due to an increase in new serious injury 23

and illness claims. Please refer to Table IV-20. 24

74 California Constitution, Art. XIV, § 4. See also Cal. Labor Code § 3702.2 and Cal. Code Regs. tit. 8,

§§ 15300, 15301 for the regulations pertaining to self-insured reserves.


70

Table IV-20 2018 Workers’ Compensation Authorized vs 2018 Recorded


4. Workers’ Compensation Sub-Work Activities 1

For Test Year 2021, SCE forecasts expenses of $13.2 million, consisting of $5.2 million 2

for Workers’ Compensation administrative expenses and $8 million for workers’ compensation reserves. 3

Please see Table IV-21. 4

Table IV-21 Workers’ Compensation (Including Workers’ Compensation Reserves)


a) Workers’ Compensation Administration 76 5

This account includes labor expenses that reflect the compensation of the 6

Workers’ Compensation group’s employees, as well as related non-labor expenses associated with their 7

job responsibilities. The recorded non-labor expenses include costs for consultants and supplemental 8

personnel, utilization review, medical bill audits, employee development, office supplies and equipment, 9

conference fees, taxes, fees, and licenses. 10


The Workers’ Compensation group administers SCE’s workers’ 12

compensation program by performing the following activities: 13

76 Refer to WP SCE-06, Vol. 2 Book A, pp. 199-204, Worker’s Compensation – Administration.

GRC Activity Request Authorized RecordedWorkers' Compensation - Administration 7.3$ 7.3$ 5.2$ Workers' Compensation - Injuries & Damages 8.2$ 8.2$ 11.5$ Total Workers' Compensation 15.5$ 15.4$ 16.7$

GRC Activity 2014 2015 2016 2017 20182021

ForecastWorkers' Compensation - Administration 7,269$ 7,661$ 6,005$ 5,299$ 5,160$ 5,196$ Workers' Compensation - Injuries & Damages 9,785$ 5,172$ 3,612$ 8,807$ 11,503$ 7,974$ Total Workers' Compensation 17,054$ 12,833$ 9,617$ 14,106$ 16,663$ 13,170$

71

Investigation of cases: Work-related injuries, illnesses, or death claims 1

reported to SCE are thoroughly investigated to determine whether the individual filing the claim is 2

entitled to benefits. 3

Delivery of benefits: Workers’ Compensation claims advisors determine 4

which benefits are payable, ascertain when benefits are due, coordinate benefits with the Company’s 5

return-to-work and non-occupational disability plans, develop and implement short- and long-term 6

claims strategies, coordinate litigation, and close claims when all statutory regulations are met. Support 7

staff is responsible for efficiently processing payments, benefit notices, and all other non-technical tasks. 8

Medical case management: Personnel from a medical case management 9

firm handle the clinical and administrative tasks involved with planning and authorizing medical care for 10

work-related injuries and illnesses. 11

Early Intervention: Activities include monitoring medical release on 12

restricted duties and lost-time cases, to facilitate SCE employees’ transition to return-to-work following 13

a work-related injury or illness. 14

Hearing representation: Claims advisors make periodic appearances before 15

the California’s Workers’ Compensation Appeals Board to represent SCE in contested medical liens. 16

These advisors also represent SCE in contested matters or settlement activities where the SCE employee 17

represents himself or herself. 18

(2) RAMP Integration 19

SCE implemented the Injury Assistance Program (IAP) in August 2014. 20

The IAP is an injury assistance hotline to provide access to trained medical professionals (nurses and/or 21

physicians). These medical professionals can assess non-emergency medical situations over the 22

telephone and provide care advice. The IAP hotline guides the employee through self-care options 23

(when appropriate) or directs the employee to the nearest available clinic within the SCE Medical 24

Provider Network and expedites paperwork for quicker appointments. This program is voluntary and can 25

help prevent minor injuries from potentially becoming more serious. 26

There are no changes in costs as shown in Table IV-22 or scope for the 27

IAP as SCE estimated in its 2018 RAMP report and as SCE now forecasts in this GRC. 28

72

(a) Reconciliation Between RAMP and GRC 1

Table IV-22 IAP Costs

(Nominal 2018 $000)


Figure IV-20 Workers’ Compensation – Administration



As indicated in Figure IV-20, labor and non-labor went up by less than 4

10% from 2014 to 2015. The costs then trended downward each year from 2015 to 2018. The trend was 5

primarily driven by reductions in personnel resulting from attrition. Also, for non-labor, the annual Self-6

Insurance Plans assessment fee was lower in 2018 compared to prior years. 7

RAMP RiskRAMP

IDRAMP Control / Mitigation Name

Filing Name 2019 2020 2021

RAMP 75$ 75$ 75$ GRC 75$ 75$ 75$ Variance -$ -$ -$

Employee, Contractor & Public Safety C1 Safety Controls

2014 2015 2016 2017 2018 2019 2020 2021Labor $4,310 $4,248 $3,570 $3,183 $3,273 $2,836 $2,846 $3,309

Non-Labor $2,959 $3,413 $2,435 $2,117 $1,887 $2,300 $2,600 $1,887Other $0 $0 $0 $0 $0 $0 $0 $0

Total Expenses $7,269 $7,661 $6,005 $5,299 $5,160 $5,136 $5,446 $5,196

Recorded Forecast

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

2014 2015 2016 2017 2018 2019 2020 2021


73

(5) Forecast 1

The Workers’ Compensation group’s test year 2021 forecast for operating 2

expenses is $5.196 million. The labor forecast of $3.309 million and non-labor forecast of $1.887 3

million are based on 2018 recorded expenses, adjusted by applying the labor escalation rate. 4

SCE’s forecast is consistent with the Commission guidance found in 5

D.89 12-057. In that decision, the Commission stated when accounts have shown a consistent trend over 6

three or more years, or have proven to be relatively stable, the last recorded year serves as an appropriate 7

base forecast. Here, the recorded expenses have trended downward for three years. Accordingly, using 8

the last recorded year as the base estimate is warranted. 9

b) Workers’ Compensation Injuries and Damages 77 10


The workers’ compensation injuries and damages reserves are established 12

based on various factors related to existing workers’ compensation claims. Factors considered in 13

determining workers’ compensation reserves include, but are not limited to: date of injury, ages of the 14

injured employees, severity of injuries, medical reports, and applicable rules and regulations that set the 15

rate and limitations of workers’ compensation benefits. 16

Workers’ compensation reserves are also adjusted to incorporate the 17

current “Incurred but not Reported” (IBNR) rate provided by actuaries from Milliman Inc., one of the 18

largest property-casualty consulting actuarial firms in California. The term “IBNR loss liability” refers 19

to SCE’s liability for losses that occurred on or before the end of a period, but for which SCE had no 20

knowledge until after that period. The IBNR rate is calculated based on SCE’s historical loss trend, 21

incorporating information from similar companies and any regulatory provisions that would have an 22

impact on the ultimate loss calculation (typically provided by an actuarial company). 23

Currently, SCE adjusts its workers’ compensation reserves on a monthly 24

basis to account for payments and additional reserves for new and existing claims. 25

77 Refer to WP SCE-06, Vol. 2 Book A, pp. 205-210, Worker’s Compensation – Injuries and Damages.

74

(2) Scope and Forecast 1

Figure IV-21 Workers’ Compensation Injuries and Damages



As shown in Figure IV-21, recorded expenses fluctuated from year to year 3

due to the unpredictable nature and severity of workers’ compensation claims in any given year. 4

The decrease in 2015 is due to a decline in settlement activities, a lowered 5

number of new claims, and a reduction in the total inventory of open claims. The decrease in 2016 was 6

driven by a reduction in workers’ compensation reserves. The increases in 2017 and 2018 resulted from 7

new serious injury and illness claims and an increase in settlements. 8

(4) Forecast 9

For workers’ compensation injuries and damages reserves, SCE’s test year 10

2021 forecast is $7.974 million. This is a three-year average of 2016-2018 recorded costs. In 11

D.89-12-057, the Commission stated that for expenses that fluctuate from year-to-year, an average is an 12

appropriate forecasting methodology. Here, the expenses have fluctuated. Moreover, in SCE’s 2018 13

GRC the Commission adopted the use of a three-year methodology for this area. 14

2014 2015 2016 2017 2018 2019 2020 2021Labor $0 $0 $0 $0 $0 $0 $0 $0

Non-Labor $9,785 $5,172 $3,612 $8,807 $11,503 $7,600 $9,700 $7,974Other $0 $0 $0 $0 $0 $0 $0 $0

Total Expenses $9,785 $5,172 $3,612 $8,807 $11,503 $7,600 $9,700 $7,974

Recorded Forecast

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2014 2015 2016 2017 2018 2019 2020 2021


75

V. 1

BUSINESS AND FINANCIAL PLANNING 2

This chapter presents Test Year 2021 O&M and capital forecasts for the Business and Financial 3

Planning Business Planning Element (BPE). The work activities within this BPE consist of: (1) Business 4

Planning, (2) Corporate Services, (3) Modeling, Analysis and Forecasting, and (4) Digital and Process 5

Transformation. These work activities support the overall coordination, prioritization and planning of 6

SCE work and improvement efforts, including the development of digital technology solutions. 7

Section A provides an overview of Business and Financial Planning BPE work activities. 8

Section B compares the 2018 authorized to recorded expenses. 9

Section C discusses Business and Financial Planning BPE Test Year 2021 forecast of $65.5 10

million, a $6.1 million increase relative to 2018 recorded costs. This increase is primarily driven by 11

Digital and Process Transformation work activities. 12

Section D discusses the Capital Expenditures forecast supporting the Digital and Process 13

Transformation work activities. The Capital forecast expense is $7.0 million, which is an $3.7 increase 14

from 2018 recorded (in constant 2018 dollars). Digital and Process Transformation was formed in late 15

2018 in response to the increasing demand for process redesign leveraging the deployment of digital 16

solutions. 17

A. Overview 18

The Business and Financial Planning BPE supports SCE’s efforts to develop, coordinate, and 19

implement policies and practices to address federal and state regulatory and cost recovery requirements 20

and related goals as well as development and management of business and financial operating plans and 21

goals. In recent years, these efforts have expanded to leveraging technological advances in support of 22

SCE’s goal to deliver safe, reliable, affordable, and clean power to our customers. As discussed in 23

greater detail below, the Business and Financial Planning work activities reinforce SCE’s commitment 24

to: 25

Effectively execute strategic and financial planning activities; 26

Prudently furnish corporate services such as financing, risk management, tax, and trust 27

investments; 28

Accurately forecast and plan long-term system resource needs; and 29

Continuously improve our operations, including through application of digital tools and data 30

analytics. 31

76


Business and Financial Planning leads SCE’s adherence to and fulfillment of financial 2

compliance and reporting requirements established by a multitude of state and federal governing bodies, 3

including: 4

U.S. Securities and Exchange Commission (SEC) 5

California Public Utilities Commission 6

Federal Energy Regulatory Commission (FERC) 7

U.S. Internal Revenue Service (IRS) 8

California Franchise Tax Board (FTB) 9

Business and Financial Planning includes interpreting the legislation, regulations, 10

policies, and guidance issued by these bodies, including U.S. Generally Accepted Accounting Principles 11

(GAAP) and Senate Bills 100 and 350, to support SCE’s compliance efforts. These efforts have grown 12

over time as the volume and complexity of laws and regulations and related oversight have increased. 13

2. Compliance Requirements 14

In the 2015 GRC Decision, the Commission authorized the establishment of a Tax 15

Accounting Memorandum Account (TAMA). The Corporate Services activity supports ongoing 16

adherence to the TAMA requirements and addresses all related requests. 17

B. 2018 Decision 18


The 2018 GRC request for Business and Financial Planning activities was $66.2 million. 20

Of that amount, the Commission authorized $58.0 million and SCE recorded $59.5 million during 21

2018.78 22


77

Figure V-22 2018 Business and Financial Planning Authorized versus 2018 Recorded

(2018 Constant $ Millions)

The 2018 GRC Decision adopted an $8.0 million (in Constant 2018 dollars) 1

reduction to SCE’s request for Financial Services 923-930 accounts resulting in an authorized amount of 2

$36.1 million. The activities associated with the reduction to Financial Services 923-930 are performed 3

within Business Planning. SCE prudently managed expenses in Business Planning in 2018 and incurred 4

recorded expenses $8.0 million (18%) less than SCE’s request but exceeding the adopted amounts by 5

$230,000 (0.6%). 6

Recorded spend for Corporate Services activities was $302,000 (1.8%) above 7

2018 authorized amounts. The primary driver of the variance related to higher banking fees associated 8

with our credit facility agreements and SCE’s credit rating downgrade in September 2018 from A2 to 9

A3.79 10

Recorded spend for Modeling, Analysis and Forecasting in 2018 was $73,000 11

(1.8%) above 2018 authorized amount. The variance arose from structural changes for Modeling, 12

Analysis and Forecasting that took place following the submission of SCE's application in the 2018 13

GRC (see “Scope and Forecast Analysis” below). 14

Recorded spend for Digital and Process Transformation in 2018 was $922,000 15

(132%) above 2018 authorized amounts. The variance primarily arose from startup costs related to the 16

79 See WP SCE-06 Vol. 2 Book B, pp. 1-17, Credit Facility Fee Increase and Credit Rating Downgrades.

78

new Business Transformation and Digital Accelerator functions in 2018 and scaling costs associated 1

with the Continuous Improvement team. 2

C. O&M Forecast 3

Figure V-23 Business and Financial Planning


2014 2015 2016 2017 2018 2019 2020 2021

Labor $39,144 $35,747 $29,555 $33,629 $34,623 $38,511 $38,840 $40,398Non-Labor $28,303 $60,656 $33,131 $22,969 $24,992 $26,711 $26,095 $25,314

Other ($192) ($132) ($127) ($99) ($127) ($159) ($162) ($165)Total Expenses $67,255 $96,272 $62,559 $56,499 $59,488 $65,063 $64,773 $65,547


Recorded Forecast

($20,000)

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

2014 2015 2016 2017 2018 2019 2020 2021


79

1. Business Planning 1

Figure V-24 Business Planning



Business Planning encompasses functions to perform integrated planning for the 3

enterprise, and includes strategic planning, business planning, and financial planning.81 4

(1) Strategic Planning 5

SCE endeavors to deliver superior value to customers and foster a safe and 6

clean energy future. Strategic Planning focuses on setting the direction for the organization and aligning 7

its activities with the company’s highest priorities: (1) mitigating top safety risks to the public and our 8

workers, (2) supporting the State’s de-carbonization goals by deploying technology and customer 9

programs that enable the utilization of carbon-free resources, and (3) achieving operational and service 10

excellence in a cost-efficient manner. Strategic Planning enhances our core capabilities by assessing key 11

external trends that impact those priorities, aligning with state and federal policies, navigating the 12

80 Refer to WP SCE-06 Vol. 2 Book B, pp. 18-23, O&M Detail for Business Planning

81 Business Planning activities occur at the corporate level and within all organizational units. However, costs for business planning activities within Transmission & Distribution (T&D) are not included in the forecasts in this chapter as those costs are embedded within forecasts for T&D projects.

2014 2015 2016 2017 2018 2019 2020 2021Labor $26,671 $23,723 $18,320 $22,073 $22,576 $23,593 $23,660 $23,767

Non-Labor $14,036 $40,568 $20,629 $11,607 $13,744 $12,029 $11,644 $11,662Other

Total Expenses $40,707 $64,291 $38,949 $33,681 $36,319 $35,623 $35,304 $35,429


Recorded Forecast

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2014 2015 2016 2017 2018 2019 2020 2021


80

changing climate and landscape within our industry, and continuously improving our operational 1

practices enterprise-wide. Strategic Planning also develops and implements actionable and measurable 2

initiatives to meet regulatory objectives and improve performance company-wide. 3

(2) Business Planning & Performance Management 4

SCE continues to build on and operationalize an integrated risk-informed 5

planning framework. This framework identifies and evaluates risks, assesses mitigation measures, and 6

prioritizes work activities. Consistent with this effort, Business Planning activities focus on development 7

of short-term and long-term plans, taking into consideration emerging risks and corporate strategy, and 8

translating company objectives into specific, actionable targets. Business Planning activities also include 9

developing and applying uniform risk-informed prioritization of resources and funding by linking 10

activities to the business outcomes and other decision making across the enterprise. 11

Performance Management activities include identifying areas of under or 12

over performance, conducting root cause analyses, and monitoring industry trends. This function also 13

develops SCE and organizational goals, measures progress on performances, and identifies corrective 14

actions informed by data-driven analytics, if necessary. 15

(3) Financial Planning 16

The Financial Planning function develops the planning process for O&M 17

and capital spending, analyzes actual spending against budgets, and prepares an outlook for the 18

remainder of the year. This information is captured and reported to senior leadership monthly at both the 19

corporate and organizational unit level. This function also includes the development and analysis of 20

financial forecasts which include forecasts of rate base, revenue requirement, average rates, cash from 21

operations, and financings, and reporting these forecasts to senior leadership on a monthly basis. 22

Financial Planning also oversees SCE’s capital allocation process. 23

Key projects and programs are reviewed with senior leadership before funds are spent. Financial 24

Planning leads this process to prudently distribute capital resources addressing the safety, reliability and 25

affordability of electric service and minimizing the risks inherent in our business. The capital budgeting 26

and planning process is continuous and requires input and development at all levels of the company, 27

including organizational unit management, SCE senior management, and the Board of Directors. 28

Financial Planning retains outside consultants to support corporate and 29

organization unit strategic efforts. Consultants are utilized for specific tasks when it is more cost-30

81

effective than developing and maintaining such expertise on a permanent basis in-house. In addition, 1

SCE’s parent company, EIX, provides tax and treasury services. 2


The Business Planning activity serves as the company’s integrated planning 4

function addressing a wide range of required compliance activities, including financial results and 5

analyses related to SEC filings, FERC reporting, and CPUC reporting, including submissions associated 6

with the Risk Assessment Mitigation Phase (RAMP) and the GRC. This function informs and drives 7

decision making to balance resources for competing priorities, to help achieve operational and service 8

excellence for customers and advance California’s energy policies, and to address affordability while 9

mitigating safety, reliability, financial, and compliance risks. Business Planning’s functions also include 10

analysis of recorded data to establish budgets and develop O&M and capital forecasts. 11


Business Planning consists of SCE’s integrated planning functions, including 13

developing strategy, prioritizing work to achieve the strategy, developing 5-year O&M and capital 14

forecasts to execute the work, and developing corporate financial forecasts. As described in SCE’s 2018 15

GRC testimony, SCE undertook an operational excellence effort to improve our integrated planning 16

capabilities and these improvements to our planning processes were “expected to take several cycles to 17

complete.”82 The evolution began in 2015 with the centralization and standardization of planning and 18

budgeting functions and continued to mature from 2017-2018 through the formation of centralized 19

strategy and business planning teams. These improvements are needed to address the progressively 20

complex company and state requirements and priorities, including the increasingly interdependent 21

activities across the company. 22


Total (labor and non-labor) costs for Business Planning have decreased 24

from $40.707 million in 2014 to $36.319 million in 2018, a decrease of 10.8%. 25

Labor expenses decreased by $2.948 million in 2015 and further decreased 26

by $5.403 million in 2016. Both decreases were the result of Operational Excellence efforts to centralize 27

and improve Financial Planning activities. The Operational Excellence efforts included the development 28

of 5-year operating plans and related process improvements which prioritized financial workloads, 29

82 See WP SCE-06 Vol. 2 Book B, pp.24-25, GRC Excerpt - Improvement of Budget and Forecast Process.

82

created synergies in the execution of work, and incorporated best practices into multiple components of 1

the Business Planning function. As a result of the centralization and process improvements of Financial 2

Planning activities in 2015 and 2016, Business Planning staffing levels fell below sustainable levels due 3

to vacancies resulting from the pre-centralization employee base lacking the skills needed for the new 4

organization. During this period, the critical work was performed by non-labor contract labor (see 5

below). By 2017, Business Planning reached sustainable levels, and, in addition, the Business Planning 6

function was supplemented by the creation of two new activities to fulfill the integrated planning 7

approach: (1) Strategic Planning and (2) Business Planning & Performance Management. 8

Non-labor expenses in 2015 and 2016 included (1) outside consultant 9

costs in 2015 to support Operational Excellence initiatives across the company and (2) temporary 10

contract labor to address significant vacancies in critical positions in Business Planning during 2015 and 11

2016. In 2018, contract labor and outside consultants were leveraged to supplement staff and build out 12

the next phase of the integrated planning solution, including refinement of the new Strategic Planning 13

and Business Planning & Performance Management functions. Expenses for these additional external 14

resources in 2018 resulted in a $2.136 million increase in non-labor expenses as compared to 2017. 15

(2) Forecast 16

As displayed in Figure V-24, the Business Planning Test Year 2021 17

forecast is $35.429 million. This amount is 2% below 2018 levels, 2% below the 3-year average (from 18

2016-2018), and 17% below the 5-year average (from 2014-2018). 19

This forecast incorporates the full-year impact of labor costs consistent 20

with the optimized structure of the Business Planning function implemented by the end of 2018. 21

Although SCE shall continue to utilize outside consultants to support 22

Business Planning’s identification of efficiency opportunities across the company, the Test Year 2021 23

non-labor forecast reflects lower levels of outside consultant spend as compared to those incurred by the 24

large-scale initiatives conducted in 2015 and 2016. Since the Strategic Planning and Business Planning 25

& Performance structure has been implemented, Test Year 2021 non-labor costs are also forecast below 26

2018 levels as the need for external resources to support the integrated planning buildout has decreased. 27


SCE’s forecast utilizes the last recorded year as the base estimate, consistent with 29

D.89-12-057 which states for those accounts which have shown a trend in a certain direction over three 30

or more years or are relatively stable. The Test Year 2021 forecast is then adjusted downward by 31

83

$890,000 to account for the reduced need for consulting. Although the replacement of contract labor 1

with permanent staff shifted costs from non-labor to labor, the forecast reflects an overall reduction from 2

2018 recorded costs. 3

The Business Planning forecast is based on the resources required for the key 4

functions of strategic planning, business planning and performance management, and financial planning 5

for SCE. Implementation of the integrated planning process began in 2015 as an alternative to the 6

historically decentralized approach involving planning activities within each organizational unit and 7

limited integration across organizational units. The current integrated approach improved the efficiency 8

and effectiveness of the planning activities. 9

Based on the integrated planning approach, this forecast represents a decrease 10

from the 2014-2015 levels as a result of efficiencies gained through centralization and standardization of 11

operational planning, even though the volume and complexity of integrated and impactful strategic 12

planning, business planning and performance management, and financial planning activities have 13

increased. These activities improve the effectiveness of addressing business objectives to mitigate risks 14

efficiently. 15

84

2. Corporate Services 1

Figure V-25 Corporate Services



Corporate Services includes enterprise-wide financial services including 3

financing, risk management, tax, and trust investments. 4

(1) Financing 5

The Financing function raises capital to fund capital expenditures and 6

operations and manages SCE’s capital structure as authorized through cost-of-capital proceedings. 7

This group also provides liability management services and manages the liability structure of SCE’s debt 8

and preferred equity portfolio. 9

(2) Risk Management 10

(a) Enterprise Risk Management 11

The Enterprise Risk Management (ERM) function provides an 12

enterprise-wide framework and assistance to identify, evaluate, and manage risks and to report them to 13

83 Refer to WP SCE-06 Vol. 2 Book B, pp. 26-31, O&M Detail for Corporate Services.

85

senior leadership for reviewing, monitoring and prioritizing enterprise risks. ERM provides risk 1

assessment, analysis and reporting covering the broad spectrum of risks facing SCE. Through timely risk 2

identification and assessment and responsive mitigation plans and activities, SCE is better able to deliver 3

on its commitment to provide safe and reliable power and meet its regulatory requirements. 4

(b) Risk Management 5

The Risk Management function manages credit and liquidity risk 6

and performs the “middle office” activities for Energy Procurement. Middle office activities include 7

transaction confirmation, valuation, risk control and limit monitoring, collateral management and risk 8

reporting. Risk Management manages counterparty credit risk and determines collateral requirements for 9

energy and corporate procurement by developing and implementing credit policy, procedures and 10

controls; performing counterparty credit reviews; negotiating credit terms in agreements; and managing 11

unsecured credit limits and collateral. Risk Management also maintains and operates specific controls 12

for power procurement transactional and contracting activities. The Risk Management function mitigates 13

the financial exposure created from power procurement activities and monitors and tracks compliance 14

with internal policies and regulatory requirements. 15

(3) Tax 16

The Tax function is responsible for all income, property and transactional 17

tax-related activities, including: (a) complying with applicable federal and state tax statutes and 18

regulations, court decisions and other official tax guidance; (b) complying with applicable general 19

accounting standards for recording and disclosing income tax-related information for financial reporting; 20

(c) preparing SCE’s federal and state income tax returns and defending the filing position under audit; 21

(d) complying with all sales and use tax filing requirements and defending filing positions under audits; 22

(e) complying with property tax assessment and filing requirements and defending assessment 23

valuations; (f) analyzing impact of tax law changes (such as 2017’s Tax Cuts and Jobs Act) and new tax 24

guidance to minimize tax costs; and (g) participating in regulatory proceedings, including quantifying 25

tax-related cost of service, maintaining the TAMA and responding to CPUC and FERC requests 26

concerning tax matters.84 27

84 This group also performs tax-related functions on behalf of EIX and its regulated subsidiaries. Costs

associated with this work are subject to the affiliation credit mechanism discussed in SCE-07 Vol. 1, Part 1 Results of Operations. This mechanism helps ensure that customers are only charted for costs related to the regulated utility.

86

(4) Trust Investment 1

SCE’s employee benefit programs85 include a pension plan, post-2

retirement health benefit plan, and 401(k) plan. The Trust Investment function provides administrative, 3

technical and managerial support to SCE’s Trust Investment Committee which is charged with 4

overseeing the prudent management of the investment trusts associated with these benefit plans. Trust 5

Investment also provides corresponding support to SCE’s Nuclear Decommissioning Trust Committee 6

charged with overseeing the prudent management of the Nuclear Decommissioning Trusts and the 7

monitoring of service providers. (Costs for decommissioning activities are not recovered in the GRC.) 8


Corporate Services coordinates the identification, management and reporting of 10

key corporate risks and directly manages certain financial risks; performs critical financial functions; 11

and ensures compliance with regulatory requirements and state and federal laws. These financial 12

services benefit customers by managing costs and minimizing losses by risk management activities, 13

oversight of the management of investment trusts, and activities to comply with regulations and laws. In 14

addition, customers benefit from its financing function which raises capital on reasonable terms to fund 15

the company’s capital expenditures and operations supporting the delivery of safe and reliable electric 16

service to customers. 17

The Enterprise Risk function works with specific organizational areas to monitor 18

and manage the major corporate risks. Various functions in Corporate Services manage key financial 19

risks including credit, interest rate, and liquidity risk. These include managing and overseeing SCE’s 20

large benefits and nuclear decommissioning trusts and complying with financial and reporting 21

requirements established by various state and federal regulatory governing bodies. In addition, all 22

significant tax-related compliance activities are included within Corporate Services, such as complying 23

with federal and state regulations, filing SCE’s income tax returns, and analyzing tax policy to maximize 24

value for customers. 25


Corporate Services consists of financing, risk management, tax, and trust 27

investment. Excluding certain non-recurring non-labor expenses incurred in 2015, Corporate Services’ 28

85 See SCE-06 Vol. 3, Ch. 3 for details on SCE’s employee benefit programs.

87

recorded costs decreased from 2014-2016 levels and stabilized in 2017-2018. The Test Year 2021 1

forecast is consistent with 2018 expenses. 2


(a) Labor 4

Labor costs decreased approximately 17% from 2014 to 2018. 5

From 2015-2016, the decline in labor costs of 11% was primarily driven by staff reductions as part of 6

the Tax department’s Operational Excellence initiative. From 2016-2018, labor expenses remained 7

stable. The lower level of spend from 2016-2018 reflects SCE’s ongoing commitment to identifying and 8

capturing operational efficiencies within the Corporate Services activity. 9

(b) Non-Labor 10

Non-labor expenses associated with the Corporate Services activity 11

increased sharply from 2014 to 2015, decreased from 2015 to 2017, and stabilized from 2017 to 2018. 12

In 2015 and 2016, the higher level of non-labor expenses is mostly attributable to a non-recurring 13

expense associated with contingent payments to an outside consultant for SCE’s 2008-2011 sales tax 14

audit. This audit was unique in nature and began in 2015 and carried into 2016, causing the expenses to 15

be higher for both years. Excluding these costs, non-labor expenses from 2015-2018 remained stable. 16

(2) Forecast 17

(a) Labor 18

As displayed in Figure V-25, the Corporate Services Test Year 19

2021 forecast for labor expenses is $7.820 million. The labor forecast is 1% below 2018 spend, 2% 20

below the 3-year average (from 2016-2018), and 8% below the 5-year average (from 2014-2018). 21

The requested amount is required to support the critical Corporate Services activities, including risk 22

management and compliance with state and federal laws and regulations. 23

(b) Non-Labor 24

The Corporate Services Test Year 2021 forecast for non-labor 25

expenses is $10.387 million. The non-labor forecast is 16% below the 5-year average (from 2014-2018). 26

Banking charges associated with our credit facility agreements increased $1.2 million primarily driven 27

by higher fees due to credit rating downgrades in September 2018 and March 2019.86 Excluding this 28

86 See WP SCE-06 Vol. 2 Book B, pp. 1-17, Credit Facility Fee Increase and Credit Rating Downgrades.

88

increase to banking fee expenses, the non-labor forecast is 4% below 2018 levels, 11% below the 3-year 1

average (2016-2018) and 25% below the 5-year average (2014-2018). 2


SCE’s labor and non-labor forecasts are consistent with D.89-12-057, in which 4

the Commission stated that for those accounts which have shown a trend in a certain direction over three 5

or more years or are relatively stable, the last recorded year is an appropriate base estimate. 6

In the case of non-labor expenses, the credit rating downgrades resulted in 7

unavoidable additional expenses and an adjustment was made to reflect the increased cost of credit 8

facilities. 9

SCE has worked to keep overall Corporate Services spend at efficient levels and 10

has reduced costs whenever possible, as demonstrated over the 2014-2018 timeframe. Alternatives to the 11

current approach include increased reliance on outside services for certain responsibilities of Corporate 12

Services; however, this alternative has historically resulted in higher overall costs. 13

89

3. Modeling, Analysis and Forecasting 1

Figure V-26 Modeling, Analysis and Forecasting



Modeling, Analysis and Forecasting supports advancement of California’s de-3

carbonization goals and energy policies and plays a key role in maintaining long-term reliability and 4

affordability to our customers. Modeling, Analysis and Forecasting performs three primary functions. 5

The first is a long-term forecasting function creating detailed sales, demand, and market price forecasts 6

that provide the foundation for system planning functions, prioritization of work activities and, 7

ultimately, projection of future financial performance. The second primary function is system resource 8

planning. This function has evolved from the traditional resource planning function focused on large 9

central station power plants into one focused on identifying and meeting system resource needs with a 10

much broader portfolio of resources including Distributed Electrical Resources (DERs), central station 11

power plants, and transmission and distribution capacity. The third primary function is developing and 12

maintaining various existing and emerging planning frameworks and methodologies. These include 13

87 Refer to WP SCE-06 Vol. 2 Book B, pp. 32-37, O&M Detail for Modeling, Analysis and Forecasting.

90

broad frameworks such as the process for making tradeoffs among system resources based upon 1

generating attributes like how fast the resource can raise power, cost, and potential for actual 2

construction, as well as discrete methodologies such as Resource Planning Avoided Cost, Locational 3

Net Benefits Analysis (LNBA), support of GRC Phase 2 activities, and Marginal Energy Costs. 4

The centralization and merger of these functions generates an integrated and 5

consistent forecast for our operations and serves as the foundation for system planning, business 6

planning and financial planning activities, including sales, usage, demand, Demand Side Management 7

(DSM) and DER growth and potential, and resource procurement (as reported in the Energy Resource 8

Recovery Account (ERRA) proceeding). Additionally, the centralized forecast function includes 9

granular DER forecasting (i.e. at the distribution substation level), and subsequent reconciliation of these 10

granular forecasts with system level forecasts. 11

The centralized forecast function also merges SCE’s price and market forecasting 12

function with its simulation of electric system operation, as both utilize a single simulation software 13

platform. This combined forecast and system simulation function is leveraged in supporting scenario 14

development and analysis as led by the centralized strategic planning function. Functions of sub-groups 15

within Modeling, Analysis and Forecasting are discussed below: 16

(1) Long-Term Energy Forecasting 17

The Long-Term Energy Forecasting function develops the Long-Term 18

Demand & Sales forecast including development of the statistically adjusted end-use Long-Term model, 19

development of EE, DR and other DER forecasts at system and circuit-level, support of regulatory 20

forecasting engagement, and development of new tools and forecasting methodologies (e.g., to 21

disaggregate forecasts to circuit-level). 22

(2) Integrated Resource Planning (IRP) 23

The IRP function develops, implements, and executes IRP processes 24

including managing tradeoffs between various system resources, designing portfolios of DER solutions 25

as alternatives to traditional wires-based solutions, identifying opportunities for integrated area study 26

analysis (e.g., evaluation of long-term (10+ years) system needs for a geographical region), coordinating 27

locational net benefits analysis, and analyzing and developing long-term scenarios for Distribution 28

Resource Planning. 29

91

(3) Fundamental Modeling 1

The Fundamental Modeling function leads electric system modeling and 2

functional assessment, maintenance, simulation and analysis including developing long-term price 3

forecasts and providing long-term hourly ancillary service price forecasts. 4

(4) Planning and Environmental Analytics 5

The Planning and Environmental Analytics function supports analysis and 6

price forecasting for the sub-groups described above. Activities include preparing the fuel and purchased 7

power budget, updating Demand Response/Electric Efficiency (DR/EE) frameworks, evaluating cost-8

effectiveness of customer-oriented programs, supporting DER Demand Side Management (DSM) 9

forecasting with analyses and models, and performing operational simulations of the electric system for 10

planning activities. 11

b) Need for Activity Including Risk Avoided 12

Modeling, Analysis and Forecasting is essential to support electric system 13

reliability and compliance with laws and regulations. Most recently, state law and policy require the 14

electric utilities to acquire additional renewable generation and reduce greenhouse gas emissions. 15

Senate Bill 350 (signed into law in October 2015) requires, among other things, that SCE increase 16

renewable generation to 50% of its load by 2030 and submit a biannual Integrated Resource Plan such 17

that the state can monitor performance against goals. Senate Bill 100 (signed into law in September 18

2018) increases the 2030 renewable target to 60% of load and adds the state goal of having all delivered 19

electricity be greenhouse gas free by 2045. The Modeling, Analysis and Forecasting function was 20

formed to plan for meeting these ambitious goals without negatively impacting SCE’s delivery of safe 21

and reliable electric service. 22



The responsibilities for the Modeling, Analysis and Forecasting function 25

have increased significantly over the last several years. Modeling, Analysis and Forecasting was formed 26

by combining several existing groups (which had resided in Regulatory Affairs and Energy Procurement 27

& Management) as well as adding new staff to meet new state planning requirements (such as the 28

aforementioned Senate Bills 350 and 100). By 2017, the new organization was fully formed and became 29

stable. In 2014, 2015, and 2017, there were non-recurring consulting efforts that drove increased non-30

labor expenses. 31

92

(a) Labor 1

Labor costs decreased from 2014 to 2015 driven by reductions 2

associated with the elimination of generation planning and strategy activities as the former Project 3

Development Division88 was eliminated. From 2014 through 2016, the Integrated Resource Planning 4

function was decentralized, and scope was more limited, primarily focused on supporting the Long-5

Term Procurement Plan with the goal of selecting the least-cost reliable resources. This goal was 6

achieved utilizing a single system modeling tool called PLEXOS. When SB 350 came into effect, 7

modeling became more complicated. Rather than identifying and selecting only the least-cost resources, 8

SB 350 introduced complexity to meet the state’s evolving greenhouse gas (GHG) targets at the same 9

time. Thus, SCE required additional system modeling capabilities and expertise to be able to model and 10

optimize the tradeoffs between cost and GHG impacts during the necessary capacity expansion. 11

In addition, further capabilities were required to analyze and compare results from another modeling 12

tool, called RESOLVE, being utilized by the CPUC Energy Division. These capabilities and expertise 13

were acquired in late 2016. Thus, labor costs remained low in 2016 but increased in 2017 when the full-14

year impact of these resources was realized. Since 2017, the organization has been in a steady state, and 15

since the Commission has completed one full Integrated Resource Plan cycle, is forecast to remain that 16

way through and beyond the Test Year. 17

(b) Non-Labor 18

In general, annual non-labor expenses remained proportionate to 19

the labor expenses from 2015-2018, after considering higher than normal expenses in 2014, 2015, and 20

2017 driven by non-recurring items in those years. In 2014, consultants were used to perform feasibility 21

studies associated with potential new generation. As previously discussed, the generation planning and 22

strategy activity was later eliminated. In March 2015, SCE was directed by the Commission89 to analyze 23

and calculate a Renewable Integration Cost Adder (RICA). SCE leveraged the expertise and resources 24

of a consultant to perform the requisite RICA analysis, increasing total non-labor expenses. In 2016, 25

88 The generation Project Development Division was established in the Test Year 2006 General Rate Case

(D.06-05-016) to provide a backstop in case market forces failed to provide adequate generation resources. The group developed SCE’s five peaker generators, rooftop solar PV program, and fuel cells while also investigating the feasibility of generation powered by hydrogen. The Division relied heavily on consultants to perform feasibility studies for potential new generation analytics.

89 See “Administrative Law Judge’s Ruling Directing Southern California Edison Company to Perform Production Cost Simulations for the Interim variable Integration Cost Adder” dated March 27, 2015.

93

there was a refund of interconnection costs associated with SCE’s rooftop solar PV program, causing 1

non-labor to be lower than other years. In 2017, SCE retained consultants to develop its then-titled 2

Electric-Led Clean Energy pathway at a one-time cost of $365,000. This was renamed the Clean Power 3

and Electrification Pathway (CPEP) and currently forms the basis for SCE’s energy policy direction.90 4

(2) Forecast 5

As shown in Figure V-26, Modeling, Analysis and Forecasting, SCE’s 6

Test Year 2021 forecast is $4.062 million. Labor and non-labor costs for Modeling, Analysis and 7

Forecasting settled into a steady-state and are forecast to remain relatively flat (in constant dollars) into 8

the future absent major changes to laws, regulations, or compliance activities such as occurred when 9

SB 350 came into effect in late 2015. Recorded costs prior to 2017 are not indicative of the level of 10

activities undertaken in 2017 and beyond. A steady-state for labor expenses was achieved in 2017. 11

For non-labor, steady-state was achieved in 2018 after excluding non-recurring items, including the 12

initial purchase of electric system modeling software. As the level of activities during Test Year 2021 13

align with 2017 and 2018 levels, 2018 recorded costs are used as the basis for the forecast. 14


Since SCE has now been through one full Commission-directed Integrated 16

Resource Plan biannual cycle driven by SB 350 and SB 100 requirements, the last recorded year of costs 17

provides a reasonable basis for the Test Year 2021 forecast. As this activity has significantly changed 18

over the past five years due to the elimination of the generation planning activity and the introduction of 19

SB 350 and SB 100, the application of a 3-year or 5-year average would not be appropriate. 20

90 See “Integrated Resource Plan of Southern California Edison Company” submitted to the Commission on

August 1, 2018.

94

4. Digital and Process Transformation 1

Figure V-27 Digital & Process Transformation



With a major shift towards clean energy and SCE’s commitment to confront 3

climate change through our Clean Power and Electrification Pathway,92 SCE is investing in technologies 4

and capabilities to transform the way we operate as a business. Our goal is to fully utilize data and 5

technology to improve decision making, manage risk proactively, and enhance customer offerings. 6

In pursuit of this goal, SCE initiated Digital and Process Transformation to build upon its Operational 7

Excellence effort and the X-Change program.93 Initiated in 2015, the X-Change program sought to 8

provide visibility of and support for grassroot continuous improvement ideas from employees about 9

ways to improve our business operations. The program was created to trust, empower, and aid 10

employees who want to take the initiative to solve problems, explore innovative ideas, and implement 11

improvements. Employees vetted and tested their ideas during a 6-12-month timespan via a series of 12

91 Refer to WP SCE-06 Vol. 2 Book B, pp. 38-43, O&M Digital and Process Transformation.

92 See Exhibit SCE-01, Policy Testimony.

93 Refer to WP SCE-06 Vol. 2 Book B, pp. 44-72, Digital Accelerator Benchmarking.

95

three workshops where employees were guided by a core team utilizing basic Lean Six Sigma94 and 1

project management techniques. X-Change encourages innovation, helps develop employees in problem 2

solving techniques, and motivates high performers. To date, approximately 480 employees have 3

participated in an X-Change project with 40% of these ideas having been implemented. 4

Digital and Process Transformation is spearheaded by three teams: Business 5

Transformation, Continuous Improvement, and Digital Accelerator. The Continuous Improvement team 6

focuses on developing employee/organizational skills and capabilities while the Business 7

Transformation and Digital Accelerator teams focus on transforming the most critical processes through 8

streamlining and enabling digital operations and improving analytics. These teams assist organizations 9

in responding to digital trends and using digital technologies to address to the needs of customers and 10

SCE employees and organizations. They work to integrate those digital tools into employees’ work 11

activities with the aim of transformative impact on the business. 12

Digital business transformation is more than just deploying technology. 13

Other considerations such as business strategy, performance and talent management, organizational 14

structure and leadership are equally important. These initiatives will provide new ways of working by 15

deploying digital solutions throughout our business processes to modernize operations. 16

(1) Continuous Improvement 17

The success of the X-Change program led to SCE’s formation of the 18

Continuous Improvement team in 2017. The Continuous Improvement team developed an SCE-19

customized Lean Six Sigma-based curriculum and certification program and focuses on training and 20

certifying our workforce on that program. The program is pragmatic and rigorous, focusing on building 21

the capability of the organization to improve performance to better meet operational needs using 22

Kaizen.95 Certified employees are expected to remain active after training, facilitating efforts with co-23

94 Lean is the systematic identification and removal of waste in processes and Six Sigma is a data-driven

systematic methodology to reduce variation to meet customer needs. More information can be found at https://goleansixsigma.com/what-is-lean-six-sigma/, https://asq.org/quality-resources/six-sigma (as of August 20, 2019).

95 Kaizen is a term that means continuous improvement, but a kaizen effort has come to represent a simple, iterative, agile approach to process improvement that employs quick, tightly scoped, group efforts that prioritize fast, high-impact improvements over long, slow projects. It is used within SCE’s Lean Six Sigma-based approach to continuous improvement following the DMAIC methodology. https://www.isixsigma.com/methodology/kaizen/kaizen-six-sigma-ensures-continuous-improvement/ (as of August 20, 2019).

96

workers within their work area to improve processes at a minimum of once every 6 months. In 2018, the 1

first year of the Kaizen facilitator training program, the Continuous Improvement team trained 67 2

employees, certified 19, and conducted 92 Kaizen events with 482 unique participants. By April 2019, 3

those numbers grew to 89 trained employees, 27 certified employees, and 124 Kaizens events with 596 4

unique participants. 5

(2) Digital Accelerator 6

Central to a continuous improvement culture is a strong digital capability 7

focused on business results/impact. From a technology perspective, it is imperative to know where 8

digital tools are best deployed within a process and to be able to deliver those tools quickly. Therefore, 9

at the end of 2018 SCE created a new team in the IT organization called the Digital Accelerator that 10

focuses on deploying digital tools such as robotic process automation,96 mobile solutions97 and advanced 11

analytics98 using Agile99 delivery methods focused on user/customer centric design principals. Among 12

its many responsibilities, the Digital Accelerator team reviews software architecture, provides 13

engineering best practices, and guides teams on technology strategy. 14

96 Robotic Process Automation (RPA) software is used to create a list of actions that automate the tasks that a

user performs in a software application’s front-end graphical user interface (GUI). Once created, this RPA code can then be run (either triggered manually by the user or automatically triggered) to repeat those tasks directly in the application’s GUI, instead of a user having to do it.

97 Mobile application is a computer program or software application designed to run on a mobile device such as a phone/tablet or watch. These applications stand in contrast to desktop applications which are designed to run on desktop computers, and web applications which run in a web browser, rather than directly on the mobile device. These apps can greatly increase productivity through their ease of use, their availability on a device that can easily carried around as well as leveraging capabilities from the device like GPS, location-based services, camera and voice recognition.

98 Advanced Analytics is the use of sophisticated techniques and software tools to examine data or content (beyond the capabilities of traditional business intelligence tools) to discover deeper insights, make predictions, or generate recommendations. Advanced analytic techniques include those such as data/text mining, machine learning, artificial intelligence, pattern matching, forecasting, visualization, semantic analysis, sentiment analysis, network and cluster analysis, multivariate statistics, graph analysis, simulation, complex event processing, and neural networks.

99 “Agile” methodology is a framework for solution development that anchors on integrated teamwork (business and IT working together), accountability, and an interactive process for frequent validation of the solution toward a well-defined goal. The Agile method can dramatically reduce delivery times by delivering parts of an overall solution in increments and foster the ability to “fail fast” and stop initiatives or parts of a solution that are not succeeding. The types of solutions in advanced analytics, automation, and mobile, lend themselves to the agile methodology.

97

(3) Business Transformation 1

Recognizing that the effort would be very challenging and require vast 2

cross-functional coordination to address large end to end process improvement opportunities, SCE 3

created a new Business Transformation team to specifically focus on cross functional digital process 4

transformations in late 2018. The Business Transformation team brings together the Lean Six Sigma 5

approach with the Design Thinking100 and Agile digital delivery model to create a digital lean process 6

transformation capability executed by a team of personnel trained in these methodologies. The team 7

supervises overall program direction and progress across all processes, including project management 8

activities such as value tracking. The Business Transformation team also supports analysis required for 9

processes such as value-at-stake and baselining. 10

The Business Transformation, Digital Accelerator and Continuous 11

Improvement teams collaborate to accelerate ‘digital and process transformation’ by focusing on 12

transforming core, complex, cross-functional, end-to-end processes facilitated by digital technologies. 13

SCE has identified 25 core cross-functional transformation opportunities and hundreds of digital uses 14

case opportunities to focus on over the next several years and has initiated 4 core cross-functional 15

process transformation efforts and 25 digital uses cases in 2019.101 16

Table V-23 below provides examples of opportunities and benefits arising 17

from Digital and Process Transformation activities: 18

100 “Design Thinking” is a user-centered solution focused approach to understand user needs and design products

and solutions to address those needs. Design Thinking encompasses processes such as context analysis, problem finding and framing, ideation and solution generating, creative thinking, sketching and drawing, modelling and prototyping, testing and evaluating. The benefits of this method include avoiding wrong assumptions, the ability to identify technical constraints early on in development phase, and the ability to “fail fast” and eliminate low value ideas.

101 Refer to WP SCE-06 Vol. 2 Book B, pp. 73-78, Digital Accelerator Project Details.

98

Table V-23 Examples of Digital Technology and Process Transformation Activities

Category Opportunity Solution Benefits

X-Change

OMNI switches are underutilized to reduce Customer Minutes of Interruption

Piloted the installation of OMNI switches on Mainline Primary Riser Poles. Connected with Distribution Apparatus to get revisions in Distribution Design Standards (DDS), and Distribution Overhead Construction Standards (DOH) as they pertain to all Primary Riser Poles.

Positive results from installations to date; ex: Antelope Valley Hospital and Medical Facilities. Situation: Car hit pole and put the hospital out of power. OMNI switch PS0317 was installed and during the next experience outage, the customer impact was minimized. Decreased CMI times, improved switching capabilities on circuits, and increased employee safety.

Kaizen

The process to identify customers for potential Public Safety Power Shutoff (PSPS) events increases cycle time and makes it difficult to notify customers affected by an event in a timely manner.

Created a circuit list by account manager PSPS report and implemented best practices to update customers only on “new” circuits and the end of the event – Reducing lead time by 99.4%

Lead-time went from almost a full day to minutes, providing greater advanced notice for customers

Mobile Application

Crews in the field were spending over 20min on average on the phone updating the Distribution Operations Center (DOC) with outage status information. The DOC then had to manually key this information into the Outage Manage System (OMS), delaying the process and potentially introducing keying errors.

Created a mobile application for the field crews to use to update the status of their outage and estimated restoration time throughout the outage. This app sends the data directly to OMS eliminating the need for the crew to call the DOC and no longer requiring personnel in the DOC to manually key the information into OMS.

With over 1,000 outages worked using the mobile application, the average time interacting with the app was below 5 min, resulting in over 75% reduction in time spent by the field updating outage status and eliminating the manual keying of updates by the DOC. In addition, initial data shows those outages worked using the app resulted in higher customer satisfaction scores.

99

Table V-23 (Continued) Examples of Digital Technology and Process Transformation Activities

b) Need for Activity Including Risk Avoided 1

The Digital and Process Transformation activities support SCE’s efforts to 2

eliminate waste and improve operations by leveraging digital technologies. At present, Digital and 3

Process Transformation, in collaboration with the respective OUs, is helping modernize customer 4

service and mitigate safety and reliability risks in the following specific areas:102 5

1. Customer Service – Meter to Cash: Digital tools and process redesign seeking 6

to improve the community choice aggregators’ (CCA) servicing activity for 7

both CCAs and our shared customers. As the number of CCA customers is 8

approaching ~1.7 million, the current business processes and supporting 9

infrastructure are not scalable and do not meet the growing needs of the 10

business, the CCAs, or our shared customers. 11

102 Refer to WP SCE-06 Vol. 2 Book B, pp. 79-105, Potential Use Cases.

Robotic Process Automation

The customer service organization identified a number of manual repetitive processes that were requiring a large number of people to operate.

Utilizing a robotic process automation (RPA) software tool, over 50 automations were created and implemented to eliminate these existing manual processes.

These automations were created by a team of 7 people, resulting in savings and avoided costs of $2.39M* in 2017 and $3.35M by year end 2018 in the Customer Service Organization.

Advanced Analytics

SCE wanted a way to automatically detect energized down conductors (EDC) to quickly eliminate public safety threats and fix primary issues on the grid more quickly.

Developed a predictive algorithm using voltage data from our smart meters combined with other data to predict an energized down conductor in the field. The algorithm is run and monitored in our Reliability Operations Center (ROC).

In the first quarter of 2019, there were 13 predicted EDCs, 7 confirmed wire downs, 6 were primary issues. There was a 10 min average time from prediction to isolation (down from 103 min prior to having the algorithm). All 13 predictions resulted in direct field interventions based on the predictive algorithm running in the ROC.

* Please also see SCE-03, Vol 1, section II.C.1.

100

2. Supply Chain – Source to Pay: Digital transformation of supply management 1

processes pursuing more data driven decisions with our business partners to 2

improve procurement efficiency and other ways to reduce costs. 3

3. Corporate Safety and T&D – Field Safety: Using predictive analytics to 4

develop models providing field leadership with a management tool focused on 5

risk mitigation to help prevent injuries in the field. 6

4. T&D – Inspections and Notifications: An inspection, notification and close 7

out process utilizing advanced analytics for more data informed decision 8

making to improve public and employee safety, reduce system risk, enhance 9

grid resiliency and reliability, and improves frontline performance overall. 10

As illustrated by the examples above, the Business Transformation, Continuous 11

Improvement, and Digital Accelerator teams meet the growing demands of our customers by utilizing 12

digital solutions to find ways to improve system reliability, customer service and risk mitigation. 13


Table V-24 reflects O&M recorded 2014-2018 and forecast from 2019-2023 for 15

Digital and Process Transformation work activities. 16

Table V-24 Digital & Process Transformation



(a) Labor/Non-Labor 18

The Continuous Improvement team evolved from the Operational 19

Excellence program. Historic costs from 2015 and 2016 are related to the program management costs for 20

Operational Excellence initiatives. Starting in 2016 and continuing through 2018, the Continuous 21

Improvement team began to phase-in and the Operational Excellence team phased out as those activities 22

largely ended. The Business Transformation and Digital Accelerator teams were initiated at the end 23

TOTAL AMOUNT IN CONSTANT

2014 2015 2016 2017 2018 2019 2020 2021

Labor $37 $582 $810 $766 $917 $4,128 $4,128 $5,548Non-Labor $0 $145 $36 $50 $703 $1,532 $1,634 $2,465

OtherTotal Expenses $37 $727 $845 $816 $1,621 $5,660 $5,761 $8,013

101

2018, resulting in a partial year of historical data during the ramp up stages of the Digital and Process 1

Transformation activities. 2

(2) Forecast 3

(a) Labor 4

For Test Year 2021, SCE forecasts labor costs for Digital and 5

Process Transformation activities based on an allocation of staff resources between O&M and Capital.103 6

The O&M portion is $5.548104 million which includes labor expenses of $0.625 million for Continuous 7

Improvement, $1.939 million for Business Transformation and $2.985 million for Digital Accelerator. 8

As comparable historical data was not available as certain portions of the program remained in 9

development during 2018, SCE utilized an itemized forecast methodology based on the forecast level of 10

staffing necessary to support the volume of initiatives that will be undertaken in 2021. 11

Although we expect high demand for these capabilities 12

continuously, the labor forecast includes comparatively moderate increases of six percent and five 13

percent for 2022 and 2023, respectively, as our expectation is that increased staff capabilities will lead to 14

operational efficiency gains and higher output. The number of initiatives is forecast to increase to 15

approximately 40 initiatives in 2021, 45 initiatives in 2022 and 50 initiatives in 2023. These numbers 16

may vary depending on the mix between mobile, automation and advanced analytics initiatives as well 17

as the relative complexity of these initiatives. Consequently, these 2022-2023 increases have been 18

normalized and adjusted into the Test-Year 2021 forecast for ratemaking purposes.105 19

(b) Non-Labor 20

Like labor costs, non-labor costs for Digital and Process 21

Transformation activities are split between Capital and O&M. For Test Year 2021, SCE forecasts O&M 22

non-labor expenses of $2.465 million, which includes contract labor costs, employee expenses, training 23

fees, and third-party software development costs. As with the labor cost forecast, the non-labor forecast 24

is based on the volume of initiatives that will be undertaken in 2021. 25

103 The allocations are based upon the activities performed by each group in accordance with SCE’s financial

accounting policies.

104 Reflects normalization amount.

105 Calculation of normalization amount is as follows: [2021 amount of 7,424 + 2022 amount of 8,011 + 2023 amount of 8,606] /3= the updated 2021 normalized amount of $8,013. Dollars are in constant and in ‘000.

102


The Digital and Process Transformation forecast is based on the labor resources 2

required to support the functions described above.106 Non-labor employee expenses, supplies and 3

training costs are a function of the employee headcount. The third-party software development costs and 4

software, hardware and implementation costs are derived utilizing industry benchmarks, as well as 5

historical costs107 from similar technology work components implemented by SCE. 6

D. Capital Expenditures- Digital Accelerator 7

1. Costs and WBS Indicator of Project or Program and Capital Forecast 8

As shown below in Table V-25, SCE forecasts capital expenditures of $33.090 million 9

over the 2019-2023 period for the Digital Accelerator activity, which includes labor, hardware, software 10

licenses, and third-party software development costs. 11

The Capital expenditure for Digital Accelerator has a WBS indicator of CIT-00-DM-12

DM-000230. This is the corresponding capital request to the Digital Accelerator O&M forecast in 13

section C. 14

106 Refer to WP SCE-06 Vol. 2 Book B, pp. 106-107, Digital Accelerator GRC Summary.

107 Refer to WP SCE-06 Vol. 2 Book B, pp. 108-110, Software Tools.

103

Figure V-28108 Capital Chart- Digital Accelerator- Historical & 2019-2023 Forecast


Table V-25 Capital Table- Digital Accelerator- Historical & 2019-2023 Forecast


2. Project or Program Description 1

Digital Accelerator capital investment will fund the development and implementation of 2

digital solutions that meet the SCE capital thresholds. See Section C4a of this Chapter for the 3

description of implementation work. 4

3. Need for Capital Project or Program Including Risk Avoided 5

Digital Accelerator capital investment is needed for the planning, development and 6

implementation of digital solutions. The establishment of the Digital Accelerator and the new ways of 7

108 Refer to WP SCE-06 Vol. 2 Book B, pp. 113-115, Digital & Process Transformation Capital

104

working in delivering these digital solutions109 is anticipated to result in greater user adoption of 1

technology solutions and a higher level of customer satisfaction. It may also result in cost savings, safety 2

improvements, and reliability improvements.110 Refer to the O&M activity for Digital & Process 3

Transformation in Section 4.b for more information. 4

4. Historical Expenditures 5

In 2018, the Digital Accelerator activity recorded $3.336 million in capital expenditures. 6

This is not comparable or indicative of SCE’s expected level expenditures in 2019-2023, since the 2018 7

recorded amount represents only a partial year during the ramp up stages of the program. 8

5. Basis for Capital Expenditures Forecast 9

For 2019-2023, we forecast labor-related capital costs of $9.760 million for Digital & 10

Process Transformation. This projection is based on the resources needed to execute solutions in 11

automation, mobility, and advanced analytics based on the demand111 for initiatives and goals to execute 12

initiatives planned for each year. Despite the expectation of continued high demand for these 13

capabilities, we are forecasting only moderate increases year over year averaging approximately 14

$331,000, enabled by increased capabilities of our staff and operational efficiency gains allowing the 15

team to deliver more output. 16

Solution planning, development, and implementation work for Digital & Process 17

Transformation will include targeted digital solutions (excluded from the capital software project 18

portfolio) to meet specific capability needs for the business as well as multiple technology solutions 19

packaged together in support of an end to end process transformations. As a result, we anticipate 20

significant capital investment towards the development of these solutions to meet business demand. 21

The non-labor costs of $23.330 million from 2019-2023 include contract labor costs for 22

software development, software tool purchases and accompanying prepaid maintenance, tool 23

implementation costs, and hardware costs. These costs were derived from industry benchmarks and 24

historical costs from similar technology work components implemented by SCE, as applicable. 25

109 Please refer to WP SCE-06 Vol. 2 Book B, pp. 73-78, Digital Accelerator Project Details.

110 Please refer to WP SCE-06 Vol. 2 Book B, pp. 111-12, Example Benefit Metrics.

111 Please refer to WP SCE-06 Vol. 2 Book B, pp. 79-105, Potential Use Cases.

105

VI. 1

SUPPLY CHAIN MANAGEMENT 2

SCE’s Supply Chain Management (SCM) organization manages Supplier Diversity, Mailing 3

Services, Graphics Production, Procurement, and Warehousing. SCM provides the people to manage 4

and execute these activities and incurs expenses to provide the services. While most of the O&M 5

expenses associated with SCM, such as those relating to Procurement and Warehousing, are allocated to 6

SCE’s Operating Units via Internal Marketing Mechanism (IMM), several SCM departments are 7

supported through O&M and are the subject of this testimony; specifically, Supplier Diversity and 8

Development (SDD), Mailing Services, and Graphics Production. This chapter presents SCM’s request 9

for O&M expenses in Test Year 2021 by summarizing the activities of the department and analyzing 10

historical recorded and forecast costs. SCM’s authorized vs recorded O&M activity for the 2018 base 11

year is $8.3 million authorized and $7.4 million recorded. SCM’s O&M historical recorded costs for 12

2014 -2018 were $38.7 million. SCM’s 2021 Test Year O&M forecast expense is $6.9 million, which is 13

a decrease of $500,000 from 2018 recorded (in constant 2018 dollars). 14

SCM’s capital request for the 2021 test year is $375,000 which is a $10,000 increase over the 15

$365,000 authorized for the 2018 base year. 16

A. Overview 17

For nearly 40 years SCE has administered a supplier diversity program designed to advocate and 18

advance opportunities for diverse business enterprises (DBEs). The program consists of three primary 19

components: (1) Supplier Inclusion; (2) Supplier Development; and (3) Supplier Outreach. SDD 20

manages the Company’s efforts to procure materials and services from; provide developmental training 21

to; and conduct outreach to DBEs in compliance with the California Public Utilities Commission’s 22

(CPUC) General Order 156 (GO 156) and other applicable laws and regulations. In alignment with 23

SCE’s Diversity, People and Culture corporate goals and objectives, SCE strives to achieve greater than 24

40 percent procurement spend with DBE firms. In addition, SCE has a combination of federal contracts, 25

grants and awards that require compliance with the Federal Acquisition Regulation (FAR)112 specific to 26

small business subcontracting and reporting. 27

112 Federal Acquisition Regulation (FAR) link: https://www.acquisition.gov/browse/index/far (as of July 22,

2019).

106

SCE’s Warehousing, Mailing Services, and Graphics Production Services are activities of SCM. 1

Warehousing is responsible for supporting the supply of materials and delivery to the point of use; 2

Mailing Services provides interoffice mail and package delivery to SCE facilities; Graphics Production 3

supports SCE’s document handling requirements including printing, copying, and graphic design 4

services. These activities support the SCE Corporate Goal of Operational and Service Excellence to 5

achieve Reliability Performance and Customer Cost Efficiency metrics. This chapter requests capital 6

funding to support Warehousing and O&M funding to support Supplier Diversity, Mailing Services and 7

Graphics Production. 8


SCE’s supplier diversity program is administered in accordance with the CPUC’s 10

General Order 156 (GO 156) which sets forth guidelines for DBE supplier inclusion, development, and 11

outreach activities. GO 156 defines diverse businesses as women, minority, disabled veteran (WMDV), 12

and lesbian, gay, bisexual and transgender (LGBT) owned business enterprises. The WMDVLGBTBE 13

spend goal established in GO 156 is 21.5 percent. Other requirements of GO 156 include maintaining a 14

Tier 2 DBE subcontracting program; implementing processes or systems to validate, track, and report 15

DBE spend; goal planning; and submitting a Supplier Diversity Annual Report/Plan.113 Additionally, the 16

CPUC requires SCE to fund and utilize the Supplier Clearinghouse, which certifies diverse businesses 17

that utilities can use to procure goods and services. SCE has achieved greater than 40 percent 18

procurement spend with DBE firms for six consecutive years (2013-2018) as shown in Figure VI-29 19

below. 20

2. Compliance Requirement 21

As indicated in Section 5.4 of Decision No. 19-05-020 (SCE’s 2018 GRC Decision), SCE 22

and the Small Business Utility Advocates (SBUA) entered a stipulation (Exhibit SCE-SBUA-2) that sets 23

forth a number of requirements that the Commission adopted in its May 2019 decision. Because the 24

DBEs that do business with SCE may classify as small businesses, the following requirements from the 25

stipulation impact SCE’s Supplier Diversity and Development Department: 26

113 Refer to WP SCE-06 Vol. 2 Book B, pp. 116-150, SCE’s Supplier Diversity 2018 Annual Report/2019

Annual Plan, which was submitted to the Commission in March 2019.

107

SCE commits to sponsor or attend at least four events per year and to promote 1

outreach to small businesses. SCE will provide notice to SBUA of these events at 2

least 30 days in advance so that SBUA can share with its constituents. 3

SCE will commit to offer a variety of payment options to help small business 4

maintain positive cash flow to sustain their operations: (i) SCE to provide options of 5

varying periods and discount values, and (ii) SCE to offer potential electronic 6

disbursement options such as Automated Clearing House (ACH) and credit card. 7

SCE will post the above information on its dedicated Supplier page and include a link 8

to the page on its new Small Business Webpage at SCE.com (which will be created 9

during the 2018 GRC period). 10

SCE will evaluate potential modifications of insurance requirements for small 11

business suppliers, subject to the project requirements, the capabilities of the supplier, 12

and the risk inherent to the work. 13

Under the stipulation, SCE also agreed to address compliance with the SCE-SBUA 2018 14

GRC settlement agreement in its 2021 GRC. Regarding the first bullet, in 2018, SDD sponsored or 15

attended multiple supplier outreach events that promoted outreach to small businesses and provided the 16

SBUA 30-plus days notification of six events,114 thus complying with the requirements in bullet point 17

one above. SDD is on schedule to comply with this requirement in 2019 and plans to comply in 2020. 18

For compliance regarding bullets two and three above, please see SCE-06, Vol. 02, 19

Ch. II, Financial Oversight and Transactional Processing, and SCE-03, Vol. 06, Ch. II, Customer Care 20

Services, respectively. 21

Regarding bullet four above, SCE evaluated its insurance requirements and determined 22

that its contracts contemplate insurance requirements based on the scope of services being provided by a 23

supplier, irrespective of the size of the supplier or value of the contract. When SCE negotiates with a 24

supplier, the suppliers (be they large or small businesses) often propose changes to SCE’s insurance 25

114 The six events were: (1) National Asian American Coalition – 15th Annual Economic Development

Conference;( 2) Regional Hispanic Chamber of Commerce – Business Development Conference; (3) CPUC / Joint Utilities Small & Diverse Business Expo; (4) Veteran in Business – National Conference; (5) Cal Asian Chamber of Commerce – Procurement Conference; and (6) Orange County Black Chamber of Commerce – Business Development and Supplier Diversity Forum.

108

requirements, which is when it makes sense to modify the requirements. As a result, SCE often modifies 1

the insurance requirement, irrespective of the size of the supplier. 2

Additionally, on June 19, 2017, SCE entered into the Three-Year Leadership Agreement 3

Between Southern California Edison Company and the Greenlining Institute which states SCE will 4

continue to set a corporate baseline procurement spending goal of greater than 40 percent with WMDV 5

and LGBT owned businesses and will continue to maintain its Minority Business Enterprise (MBE) 6

spend at greater than 24 percent.115 SCE’s corporate procurement spend goal has been set at greater than 7

40 percent since 2017, and as seen in Figure VI-29 below, SCE has achieved MBE spend greater that 24 8

percent in 2017 and 2018,116 thus complying with this agreement. 9

Figure VI-29 Diverse Business Enterprise (DBE) Spend 2013 -2018

B. 2018 Decision 10


SCM was authorized $3.618 million in O&M for SDD and $4.652 million in O&M for 12

Mailing Services and Graphics Production in 2018. Recorded 2018 O&M expenditures for SDD were 13

$3.240 million. The lower recorded expenditures were primarily due to SDD having vacant positions 14

115 Refer to WP SCE-06 Vol. 2 Book B, pp.151-153, SCE’s agreement with the Greenlining Institute.

116 SCE also achieved an MBE spend greater than 24 percent for 2013-2016 as well.

109

throughout the year. Recorded 2018 O&M expenditures for Mailing Services and Graphics Production 1

were $4.170 million. This amount is lower than authorized due to reductions in Mailing Services labor 2

costs from reduced delivery frequencies and lower Graphics Production costs due to increased use of 3

electronic forms rather than printed forms. 4

Figure VI-30 2018 Supply Chain Management Authorized versus 2018 Recorded117

(2018 Constant $000)


110

C. O&M Forecast 1

Figure VI-31 Supply Chain Management


1. Work Description 2

SDD plans, manages and executes various internal and external activities to drive diverse 3

supplier inclusion, development, and outreach (as described below) in alignment with GO 156 and other 4

applicable laws and regulations. SDD maintains a staff of nine and utilizes external contractors to 5

manage its supplier diversity program functions and requirements. 6

As indicated earlier, SCE’s supplier diversity program consists of three primary 7

components: (1) Supplier Inclusion, (2) Supplier Development, and (3) Supplier Outreach. Each of these 8

components is discussed in more detail below. 9

Supplier Inclusion: SDD collaborates with representatives across SCE’s procurement 10

and operating units to forecast procurement spend, establish spend goals, develop and 11

execute sourcing plans, and monitor performance to maximize DBE firms’ access to 12

and inclusion in procurement opportunities. The external contractor program 13

expenses for the Supplier Inclusion function includes the required funding of the 14

Supplier Clearinghouse fees (the CPUC’s approved DBE certifying agency), 15

111

administration of a third-party Tier 2 DBE spend verification project, production of 1

the GO 156 Supplier Diversity Annual report, and other administrative costs. 2

Supplier Development (Capacity Building and Technical Assistance): SCE’s supplier 3

development initiative, EDGE (Entrepreneurial Development, Growth, and 4

Education), offers a variety of structured learning opportunities aimed at helping 5

small and diverse firms build capacity, develop technical capabilities, and become 6

more competitive in the marketplace. It is structured into three development tracks: 7

business education workshops, a mentorship program, and educational scholarships. 8

In 2018, SDD sponsored the execution of 70 EDGE workshops in partnership with 9

diverse business organizations. More than 1,500 attendees representing 1,200-plus 10

companies received training on a wide variety of topics, such as contract readiness, 11

human resources, marketing, negotiations, and more. In addition, six diverse firms 12

completed our EDGE Mentorship Program, an 18-month progressive learning 13

program that provides developmental opportunities through business education 14

coaching and mentoring from internal SCE stakeholders. SCE provided multiple 15

scholarship opportunities to help diverse entrepreneurs strengthen their business 16

acumen, models, and processes. SCE will continue to evolve the scholarship track as 17

the company focuses on opportunities in clean energy, efficient electrification, and 18

building the grid of the future increase. The external contractor program expenses for 19

Supplier Development include mentorship business coach fees, workshop facilitator 20

fees, catering and venue costs, and sponsorship funding for scholarships. 21

Supplier Outreach: SDD partners and provides sponsorship support to more than 50 22

diverse business organizations that share SCE’s objective to promote the growth and 23

development of DBEs. In 2018, SCE sponsored and/or attended over 120 DBE 24

outreach events coordinated by diverse business organizations at the local, state, and 25

national levels. We were a major sponsor at several supplier diversity conferences 26

and outreach events that provided diverse firms with skills development, networking, 27

and matchmaking opportunities. SDD and other internal stakeholders delivered 28

presentations, facilitated workshops, participated on panels and in business 29

matchmaking, and more. Internal expenses include employee expenses (i.e., airfare, 30

lodging, meals, etc.) associated with event participation. The external contractor 31

112

program expenses for Supplier Outreach include membership and sponsorship 1

funding for diverse business organizations and costs associated with executing 2

outreach events (i.e., booth displays, exhibit management fees, materials, etc.). 3

The Mailing Services Department performs inter-office mail delivery and internal light 4

freight (up to 100 pounds of weight) pickup and delivery at SCE’s major office facilities. Each day, 5

Mailing Services collects, sorts, and distributes approximately 4,000 pieces of internal and external 6

business correspondence (equivalent to an annual volume of over one million parcels), provides 7

overnight and same-day courier services, and acts as a central corporate source for addressing 8

information. Mailing Services also acts as the intermediary between SCE and the United States Postal 9

Service (USPS) and United Parcel Service. Mailing Services helps conserve USPS postage expense by 10

pre-sorting by zip code. As a result of this pre-sorting and the volume of external mail (primarily SCE’s 11

monthly customer bills), SCE receives a postal discount of approximately 15% percent on letter-sized 12

items. 13

The Graphics Production Department coordinates SCE’s printing, duplication, binding, 14

framing, and graphics jobs with established vendors. In-house graphics designers provide expertise to 15

SCE’s operating units to produce assorted collateral materials, corporate stationary, stamps, media, etc. 16

a) Need for Activity 17

SCE’s supplier diversity program is governed by the CPUC’s GO 156, which sets 18

forth the guidelines for DBE supplier inclusion, development, and outreach programs. The many 19

program requirements outlined in GO 156 include maintaining a Tier 2 DBE subcontracting program, 20

having processes and systems to validate and report DBE spend performance, and submitting an Annual 21

Supplier Diversity Report/Plan. Additionally, the CPUC requires SCE to fund and utilize the Supplier 22

Clearinghouse, which certifies diverse businesses that utilities can use to procure goods and services. 23

Other requirements include timely response to ad hoc data requests from the CPUC. SCE faces 24

significant compliance risk if the company fails to comply with GO 156 requirements and other federal 25

requirements, such as FAR. 26

As recognized by the Commission, the Legislature has declared that by 27

“encouraging expansion of the number of potential suppliers, competition grows and economic 28

efficiencies result to the benefit of ratepayers.”118 SCE’s commitment to supplier diversity stems not 29

118 D. 11-05-019, p. 4.

113

only from compliance with GO 156, but also from our fundamental belief that supplier diversity is a 1

sound business strategy. SCE is proud that it has achieved greater than 40 percent procurement spend 2

with DBE firms for the past six years, thus providing value to our customers. 3

Mailing Services activities directly support SCE’s Accounts Receivable functions. 4

Failure to perform this function impacts timeliness of Accounts Receivable functions with implications 5

for corporate cash flow as well as the timely application of customer payments. 6

b) Comparison of Authorized 2018 to Recorded 7

Recorded 2018 O&M expenditures for SDD were $3.240 million. The amount 8

authorized by the Commission for SDD in the 2018 GRC was $3.618 million, resulting in a variance of 9

$378,000.119 The variance is primarily from a decrease in labor costs due to various staffing vacancies in 10

2018. 11

Recorded 2018 O&M expenditures for Mailing Services and Graphics Production 12

were $4.170 million. The amount authorized by the Commission for Mailing Services and Graphics 13

Production was $4.652 million resulting in a variance of $482,000.120 This variance is primarily due to 14

reduced mail delivery frequency resulting in reduced labor and contractor costs. 15



SDD’s O&M recorded costs were relatively flat from 2014 – 2018 (10% 18

or less year over year variance) with an approximate 13% decrease from 2014 to 2018 recorded costs. 19

The reduction was primarily due to attrition and various staffing changes as further described below. 20

The 2014-2016 recorded costs for Mailing Services and Graphics 21

Production were relatively flat. In 2017, Mailing Services and Graphics Production O&M was $1.174 22

million below the previous year due to vacancies, reduced contractor expenses in Mailing Services, a 23

refund of a payment made to an affiliate, and the transfer of the Process Stewardship and Integrated 24

Support Services organization to Corporate Real Estate. In 2018, Mailing Services and Graphics 25

Production was above the previous year by $464,000. This increase was due to the filling of vacancies 26

and corporate travel service charges. 27

119 In Section 9.7 of D. 19-05-020, the Commission approved $3.618 million for SDD. SDD’s 2018 recorded was

$3.240 million.

120 In Section 9.6 of D. 19-05-020, the Commission approved $4.652 million for SCM. SCM’s 2018 recorded was $4.170 million. See footnote in Section B.1 of this chapter for details.

114

(a) Labor 1

From 2014 – 2018 SDD’s recorded expenditures for labor have 2

been relatively flat but steadily decreasing each year, with the most significant decreases occurring from 3

2014 to 2015 and from 2016 to 2017 due to attrition and other staffing changes. In 2014, SDD labor 4

increased due to the support of a leadership transition that concluded by 2015, thus resulting in a 5

reduction of $143,000. In 2017, unexpected attrition resulted in staff level fluctuations leading to a 6

decrease in labor expenditures by $170,000. 7

Mailing Services and Graphics Productions recorded labor costs 8

from 2014 to 2015 increased by $445,000 primarily due to the transfer of the Integrated Support 9

Services, Business Operations and Process Stewardship functions into the Supply Chain Management 10

organization. From 2015 to 2016, labor expenditures were relatively flat. From 2016 to 2017, labor costs 11

were down $488,000 due to the transfer of Process Stewardship and Integrated Support Services to 12

Corporate Real Estate and vacancies in Mailing Services. Labor costs remained relatively flat through 13

2018. 14

(b) Non-Labor 15

SDD’s Non-labor expenses for years 2014-2018 have been 16

relatively flat (10% or less year over year variance). In 2015, new requirements were set forth in 17

D.15-06-007 to extend GO 156 to include LGBT business enterprises, which led to a significant increase 18

in our 2016 non-labor expenses for additional sponsorships and outreach efforts in support of LGBT 19

business advocacy organizations. 20

From 2014 to 2015, Mailing Services and Graphics Production 21

non-labor costs were down by $209,000 due primarily to reductions in demand for corporate forms. 22

From 2015 to 2016, non-labor costs remained flat. From 2016 to 2017, non-labor expenditures were 23

down by $629,000 due to a refund of a payment made to an affiliate and reduced usage of contracted 24

courier services by Mailing Services. From 2017 to 2018, non-labor expenses increased by $341,000 as 25

a result of increased contracted courier services by Mailing Services and the allocation of Travel 26

Expense Service charges. 27

115

(2) Forecast 1

As displayed in Figure VI-31 above, SDD’s 2021 test year O&M forecast 2

is $3.422 million,121 and Mailing Services and Graphics Production’s 2021 test year O&M forecast is 3

$3.480 million.122 4

(a) Labor 5

For Test Year 2021, SDD forecasts labor expenses of $1.174 6

million which represents an increase of $194,000 over 2018 record expenses. This increase is due to 7

reinstating staffing levels to account for the unexpected attrition in 2017 as discussed earlier and 8

including an additional position to manage an expanded focus on small business programming and 9

outreach. Small businesses have been referred to as the engine of economic growth. There has been 10

growing interests among legislators, regulators, and community advocates to provide support and 11

utilization of small business enterprises. As a result of the growing interest and SCE’s executed 12

stipulations with SBUA in the 2018 GRC,123 SDD is increasing its efforts to outreach to small 13

businesses. Many of SCE’s DBEs may classify as small businesses, and therefore by focusing on the 14

needs of diverse and non-diverse small businesses, SCE believes that the overall pool of suppliers will 15

grow, thus benefitting our communities and customers. 16

For Test Year 2021, Mailing Services and Graphics Production 17

forecasts labor expenses of $2.501 million, which represents no significant change from 2018 recorded 18

expenses. The forecast captures reductions in labor costs developed in 2017-2018 from reduced delivery 19

schedules. 20

(b) Non-Labor 21

For Test Year 2021, SDD forecasts non-labor expenses of 22

$188,000 for employee expenses, and $2.060 million (for a total of $2.248 million) for external 23

expenses to support SDD programs and projects. This represents no significant change from 2018 24

recorded expenses. 25

For Test Year 2021, Mailing Services and Graphics Production 26

forecasts non-labor expenses of $978,000 for employee expenses, equipment, courier services and 27

121 Refer to WP SCE-06, Vol. 2 Book B, pp. 154-159, Supplier Diversity & Development O&M.

122 Refer to WP SCE-06, Vol. 2 Book B, pp. 160-165, Logistics, Graphics, and Center of Excellence O&M.

123 See Section 5.4 of D. 19-05-020, which is discussed earlier in this testimony.

116

forms. This represents a decrease of $636,000 compared to 2018 recorded levels resulting from a 1

reduction in charges for outside courier services due to reduced delivery frequency, the elimination of 2

company vehicles to align with reduced staffing levels, and lower projected requirements for corporate 3

forms. 4


The basis for SDD’s 2021 O&M forecast of $3.422 million is its 2018 recorded 6

costs ($3.240 million) plus the additional labor costs as discussed above. 7

The basis for the Mailing Services and Graphics Production’s 2021 O&M forecast 8

of $3.480 million is its 2018 recorded costs ($4.170 million) less the costs associated with outside 9

courier services and company vehicles. The reductions are made possible due to operational 10

improvements and by decreasing service frequency. Additionally, this includes a forecast reduction 11

based on reduced historical requirements for forms and printing. 12

SCE’s request represents a continuation of vital services that support the 13

Operating Units in their efforts to achieve SCE’s clean energy, safety, and affordability goals. 14

The forecasted request includes reductions due to efficiency and operational improvements that reflects 15

our commitment to continuous improvement and operational excellence. 16

D. Capital: Supply Chain Management Warehouse and Material Management 17

SCM is responsible for procuring, storing, and delivering materials to support the activities of all 18

of SCE’s Operating Units. This chapter describes SCE’s capital expenditures request for SCE’s material 19

supply warehouses and the equipment associated with the warehouse operations. The expenditures, 20

which may be recurring in nature, include warehouse infrastructure improvements, hardware for 21

technology applications, and materials handling equipment. 22

1. COS-00-SC-FE Warehouse and Material Management 23

We forecast $1.874 million124 in 2019-2023 to support warehouse improvements, 24

technology application hardware, and more sustainable and economical materials handling equipment. 25

124 Refer to WP SCE-06, Vol. 2 Book B, pp. 166-168, Logistics, Graphics, and Center of Excellence Capital.

117

Figure VI-32 Supply Chain Management Recorded & Forecast 2019-2023


2. Project or Program Description 1

SCM operates a network of five warehouses and supports procurement activities at 35 2

Service Centers, 12 major contractor staging sites, and over 800 substations. SCM utilizes technology 3

applications that facilitate procuring, storing, and tracking materials and related accounts payable 4

functions across the entire enterprise. SCM’s facilities are geographically positioned to deliver materials 5

on a timely basis for SCE projects. These facilities must be safely maintained and able to support 6

emergency restoration efforts in a prompt manner. 7

Capital expenditures are needed to replace obsolete and outdated equipment in the 8

warehouses and upgrade the warehouses in response to changing conditions and material storage 9

requirements. These expenditures include racking, packaging equipment, and material handling systems. 10

SCM is continuing to transition to electrically powered forklifts, which require infrastructure changes to 11

support this alternative power option. SCE has already converted a portion of the material handling fleet 12

to electric vehicles and this request is part of a multi-year process to continue this transition, which is the 13

basis for a recurring request. This transition to electric forklifts from gasoline and diesel-powered units 14

will eliminate the emission of air pollutants. 15

SCM uses hand-held bar code readers for material delivery, distribution, and tracking. 16

On a recurring basis, a portion of these units need to be replaced due to equipment failures and 17

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Nominal $1,254 $2,023 $198 $509 ($82) $371 $378 $375 $375 $375

($500)

$500

$1,000

$1,500

$2,000

$2,500

Forecast

118

obsolescence in addition to new units purchased to expand the use of this technology. Previously 1

authorized funds have been used for this purpose. SCM has been informed that the technical support for 2

the software application embedded in these units will discontinue in 2020 and replacement units that are 3

not dependent on this software will be needed to support the work. Upon notification of the 4

discontinuation of support, SCM has ceased purchasing the affected units and is evaluating alternative 5

equipment. SCM proposes to begin phasing out the existing units in favor of newer units and is 6

requesting capital funding to permit continued utilization of this technology that improves productivity 7

and efficiency. SCM will continue to utilize the older units until they fail or the software no longer 8

usable. SCM expects this process to occur over a two- to three-year period. 9

SCM has also invested in sustainable packaging equipment including reusable 10

palletainers. These units replace wooden pallets and cardboard palletainers, both of which contribute to 11

the waste stream. Using the reusable plastic palletainers is expected to continue and grow as an 12

environmentally friendly alternative to wood and cardboard. This recurring request is for continued 13

expansion of this work method and to replace units that have reached the end of their useful life. 14

3. Need for Capital Project or Program Including Risk Avoided 15

The network of warehouses employed by SCE is a critical component of the supply 16

chain. Among other things, they play a critical role in supporting system reliability by housing and 17

organizing materials for infrastructure construction and replacement. Regular and timely replacement of 18

aging machinery, racks and equipment enhances the supply chain for SCE’s operations. Failing to do 19

impedes the flow of needed materials and hamper reliability efforts. 20

SCM maintains and supports the hardware and technology used to receive, issue and 21

track materials across the enterprise. Hand-held bar-code reader technology increased the accuracy of 22

supply chain transactions and reduced the time required to accomplish the transactions in the system. 23

Failing to provide sufficient units for end-users or spares for repair and replacement requires end-users 24

to revert to manual entry. This increases the time required to complete the tasks and introduces a higher 25

degree of imprecision. 26

SCM has piloted a material handling process that uses reusable plastic palletainers to 27

protect and transport construction materials. The palletainers protect the materials, reduce the packaging 28

required, and increase the amount of materials transported per truck by virtue of being stackable. Capital 29

expenditures are needed to replace units that are damaged beyond repair and to expand the application of 30

the program. The reusable units replace cardboard palletainers that only allow for single use and enter 31

119

the waste-stream following use. The cardboard units cost between $100 and $140 per unit (2015 dollars) 1

depending upon size. The reusable plastics units have a useful life of about 5 years and are projected to 2

conserve as many as 60 cardboard palletainers over the life of the unit. While the reusable units cost 3

approximately $200 to $300 per unit (2015 dollars) depending upon size, their multiple use over an 4

extended period makes them the more economical and environmentally friendly alternative. 5

This request represents continuing support for existing programs and work methods. As a 6

result of previous requests, SCE has deployed a highly successful sustainability palletainer program and 7

wishes to continue expanding and maintaining that work approach. As a result of previous requests, SCE 8

has been able to deploy an increasing number of electric vehicles, and this request allows SCE to 9

continue to add electric vehicles while displacing fossil-fuel based equipment. As the mix of materials in 10

the warehouses changes, capital expenditures allow SCE to make adjustments to the racking and storage 11

equipment that help maintain a safe and efficient workplace. Previous capital requests have been utilized 12

to make these changes and this recurring request will allow that work to continue. 13


SCM requested $360,000 for 2018 as shown in Table VI-26. Actual spend in 2018 was 15

$149,000. However, as seen in Table VI-26 below, there is a credit of $82,000 recorded for 2018 due to 16

internal accounting adjustments in the amount of $231,000. In 2015, SCM spent $2.023 million on 17

capital, which exceeded the authorized amount of $569,000 for that year. In doing so, SCM was able to 18

avoid related expenditures in subsequent years resulting in minimal expenditures in 2018. 19

Table VI-26 2018 Supply Chain Management Authorized vs 2018 Recorded125


5. Basis for Capital Expenditure Forecast 20

SCM’s basis for the forecast is the continuation of vital technology applications that 21

enable efficient operations, the utilization of sustainable packaging and warehousing techniques and 22


GRC Activity Request Authorized Recorded

Logistics, Graphics, and Center of Excellence 0.4 0.4 (0.1)

Total 0.4 0.4 (0.1)

120

investment in electric handling equipment as an environmentally responsible alternative to equipment 1

utilizing internal combustion engines. 2

Appendix A

Selected Portions of the Direct Testimony in SCE’s Wildfire Expense Memorandum Account

(WEMA) Application

Selected portions of the direct testimony in SCE’s Wildfire Expense Memorandum Account (WEMA) Application highlighted in the Table

of Contents are included in this appendix.

A-1

Application No.: 19-07-XXX Exhibit No.: SCE-01C Witnesses: D. Heller D. Wong J. Jiang April Li S. Deana

(U 338-E)

Direct Testimony in Support of Southern California Edison Company’s Request for Authorization to Recover Costs Related to 2018-2020 Wildfire Insurance Premiums Recorded in its Wildfire Expense Memorandum Account

Before the

Public Utilities Commission of the State of California

Rosemead, California July 31, 2019

CONFIDENTIAL VERSION THIS DOCUMENT CONTAINS CONFIDENTIAL MATERIALS THAT ARE PROTECTED PURSUANT TO CALIFORNIA PUBLIC UTILITIES COMMISSION DECISIONS AND APPLICATION LAW, PUBLIC DISCLOSURE

A-2

SCE-01C Direct Testimony in Support of Southern California Edison Company’s Request for Authorization to Recover Costs Related to 2018-2020 Wildfire Insurance Premiums Recorded in its Wildfire Expense Memorandum Account

Table Of Contents Section Page Witness

-i-

I. INTRODUCTION .............................................................................................1

A. Summary of Request ..............................................................................1 D. Heller

B. SCE’s Motion for Interim Rate Recovery .............................................3 D. Wong

II. WEMA BACKGROUND ..................................................................................6

III. INSURANCE EXPENSES TRACKED IN WEMA ARE REASONABLE .................................................................................................7 D. Heller

A. Impact of Wildfire Events on Insurance Market ....................................7

B. Overview of SCE’s Insurance Coverage Strategy ...............................12

C. Description of SCE’s Post-April 3, 2018 Insurance Coverage ..............................................................................................15 J. Jiang

1. 2017-2018 Policies...................................................................16

2. 2018-2019 Policies...................................................................16

3. 2018-2019 Policies: Second Part of Policy Year ....................19

4. 2019-2020 Policies...................................................................22

5. SONGS Adjustments ...............................................................24 D. Heller

IV. INSURANCE-RELATED COSTS TRACKED IN WEMA ARE INCREMENTAL TO THE AUTHORIZED AMOUNTS IN THE 2018 GRC ........................................................................................................26 A. Li

A. Insurance Expenses Tracked in WEMA are Incremental ....................26

1. Amortization of Insurance Expenses Based on Policies Bound to Date.............................................................26

2. Overview of Wildfire Insurance Expenses Authorized in SCE’s 2018 GRC Request ................................27

3. Description of Incremental Test ...............................................29

Impact of Wildfire Events on Insurance Market .................

Overview of SCE’s Insurance Coverage Strategy .................

Description of SCE’s Post-April 3, 2018 Insurance Description of SCE’s PCoverage ......................................................

2017-2018 Policies.............................................

2018-2019 Policies.............................................

2018-2019 Policies: Second Part of Policy Year ...............

2019-2020 Policies.............................................

SONGS Adjustments .............................................

Insurance Expenses Tracked in WEMA are Incremental ............

Amortization of Insurance Expenses Based on Policies Bound to Date.........................................

Overview of Wildfire Insurance Expenses Overview of Wildfire Insurance Expenses Authorized in SCE’s 2018 GRC Request ..........................

Description of Incremental Test ...............................

A-3

SCE-01C Direct Testimony in Support of Southern California Edison Company’s Request for Authorization to Recover Costs Related to 2018-2020 Wildfire Insurance Premiums Recorded in its Wildfire Expense Memorandum Account

Table Of Contents (Continued) Section Page Witness

-ii-

B. Insurance-related Financing Costs Tracked in WEMA are Incremental ..........................................................................................30 S. Deana

V. COST RECOVERY OF INSURANCE WEMA REVENUE REQUIREMENT .............................................................................................32 D. Wong

A. SCE’s Interim Rate Recovery Proposal ...............................................32

B. SCE’s Cost Recovery Proposal if Interim Rate Recovery is Denied ..................................................................................................33

APPENDIX A - WEMA Closing Sheets

APPENDIX B - (ELECTRONIC ONLY) - Confidential Policy Binders

APPENDIX C - Confidentiality Declaration and Witness Qualifications

APPENDIX B - (ELECTRONIC ONLY) - Confidential Policy Binders

APPENDIX C - Confidentiality Declaration and Witness Qualificat

A-4

7

III. 1

INSURANCE EXPENSES TRACKED IN WEMA ARE REASONABLE 2

For decades, SCE has maintained insurance covering both wildfire- and non-wildfire-related 3

liabilities at levels believed to be adequate to protect customers from risk exposure resulting from claims 4

from third parties. The Commission reviews and approves the amount and cost of that insurance 5

coverage, typically in General Rate Cases (GRCs). Over the last approximately six years, SCE has 6

purchased supplemental wildfire insurance in addition to its general liability insurance in order to 7

maintain approximately $1 billion (net of any co-insurance) of total wildfire liability insurance coverage. 8

In May of 2019, the Commission approved SCE’s full 2018 GRC forecast cost request which, at the 9

time of filing the GRC on September 1, 2016, was expected to support approximately $1 billion in 10

wildfire-related insurance coverage. 11

As explained in sections A and B below, the insurance expenses tracked in WEMA are 12

reasonable because (1) the overall increase in wildfire liability insurance costs are outside of SCE’s 13

reasonable control,17 and (2) the procurement of approximately $1 billion in wildfire-liability coverage 14

(net of co-insurance) and the decision to purchase replacement wildfire insurance after the Woolsey fire 15

are consistent with SCE’s historical, Commission-approved, insurance coverage strategy.18 Section C 16

provides an overview of SCE’s post-April 3, 2018 wildfire-liability coverage, including a description of 17

SCE’s wildfire insurance “towers” at various points in time and details about the individual policies that 18

were purchased. 19

A. Impact of Wildfire Events on Insurance Market 20

Starting in 2007 after the Witch Fire associated with San Diego Gas & Electric Company 21

(SDG&E) facilities, and accelerating rapidly over the last few years after the devastating Northern and 22

17 See Resolution E-4994, p. 7, which concludes that “[t]he global insurance market is affected by factors

outside of SCE’s control, including the number and severity of recent wildfires and insurers’ perception of risk in the California market. The availability and cost of wildfire insurance is beyond SCE’s control, because SCE cannot dictate the price of premiums or deductibles.”

18 See Resolution E-4994, p. 8, which finds that SCE’s decision to seek replacement coverage following the Thomas fire “was a reasonable procurement strategy under the circumstances.”

A-5

8

Southern California wildfires of 2017-2018, some of which were associated with utility infrastructure, 1

two fundamental changes affected the market for California utility wildfire liability insurance. First, the 2

availability of that insurance “tightened” as fewer insurance carriers were willing to offer those products 3

to California utilities. Second, and not unrelatedly, the cost of the insurance increased dramatically on a 4

per-coverage-dollar basis. In addition, the cost of liability insurance for California utilities has also been 5

affected by two very large non-wildfire losses: the San Bruno gas explosion and the Aliso Canyon gas 6

leak. 7

The reasons for those changes in insurance costs are well documented and beyond reasonable 8

dispute. First, the frequency and severity of California’s wildfires, and the risks and consequences 9

associated with them, have considerably increased, starting with the 2017 Northern California Wine 10

Country fires. Multiple factors contribute to wildfires across SCE’s service area and throughout 11

California. These include the buildup of dry vegetation in areas severely impacted by years of historic 12

drought, the failure of multiple responsible parties to clear this buildup of hazardous wildfire fuel, 13

increasing temperatures, lower humidity and strong Santa Ana winds. Such factors can trigger wildfires 14

and strain or damage utility facilities, no matter how well designed, constructed and maintained. 15

Wildfire risk is increasing at the same time that more and more residential and commercial development 16

is occurring in some of the highest-risk areas — with about 28 percent of SCE’s service area in high fire 17

risk areas (HFRA).19 SCE’s primary focus for 2019 is to put the full weight of our Company’s talent 18

and resources into helping the State prevent wildfires and limit their impact. Despite those efforts, it 19

would not be reasonable to assume that all future wildfires, including catastrophic ones, will be avoided. 20

Second, through the application of a legal doctrine largely unique to California, courts have held 21

investor-owned utilities strictly liable for wildfire damages where utility infrastructure is a substantial 22

cause of the wildfire, even if the utility is not at fault. This is based on a legal theory called “inverse 23 19 As of the time of the filing of this application, SCE has finalized an initiative to “remove” the majority of

areas in its service territory that it previously treated as HFRA but which are not formally included in the CPUC’s Fire Threat District (HFTD) fire maps. SCE will be filing a Petition for Modification of D.17-12-024 in the very near future to seek a formal amendment of the Commission’s HFTD fire maps to include those limited additional non-HFTD HFRA areas that SCE did not “remove” from its internal HFRA designation. See also July 5, 2019 Advice Letter 4030-E.

A-6

9

condemnation,” whereby courts have concluded that the utility has taken (or “condemned”) the damaged 1

property and must pay for the damages, much like a municipality would pay a property owner if it 2

condemned property to build a road or other public improvement. 3

The confluence of increased frequency and consequences of wildfires with increased risk 4

exposure due to the inverse condemnation doctrine has led some insurance carriers to exit the California 5

market entirely, and those that remain to demand higher premiums for the same level of coverage. 6

Because of the combined effect of these two factors (decreasing supply and increasing perceived risk), 7

the economic principles of supply-and-demand have led to wildfire insurance that is materially more 8

expensive than it was even in the recent past. For example, as can be seen in Figure III-2 below, the 9

total cost for comparable levels of wildfire and non-wildfire liability insurance has quadrupled between 10

2016 and 2018. 11

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10

Figure III-2 SCE Historical Wildfire and Non-Wildfire Liability Insurance Policy Limits and Costs20

Despite the undeniable fact that wildfire liability insurance is now more expensive, historical 1

experience supports that SCE needs, at a minimum, $1 billion of insurance coverage. Indeed, after 2

exhausting nearly $2 billion in total insurance coverage for 2017 and 2018 (i.e., $1 billion in each year), 3

SCE recognized an additional $1.825 billion after-tax net21 charge related to existing and expected 4

20 Prior to 2018, certain policies included combined limits for wildfire and non-wildfire coverage. 21 SCE’s 2018 year-end balance sheet and income statement include estimated gross losses (established at the

lower end of the reasonably estimated range of expected losses) of $4.7 billion for the 2017/2018 wildfire/mudslide events in SCE’s service territory. See Edison International 2018 Annual Report at p. 197. https://www.edison.com/content/dam/eix/documents/investors/corporate-governance/eix-sce-2018-annual-report.pdf

$0

$50

$100

$150

$200

$250

$300

$0

$200

$400

$600

$800

$1,000

$1,200

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Cost ($ million)Policy Limit ($ million)

Non-Wildfire Limit Wildfire Limit

A-8

11

claims arising from the wildfire and mudslide events in accordance with the requirement of the 1

Generally Accepted Accounting Principles in the United States (U.S. GAAP), representing the low-end 2

of SCE’s potential exposure to these claims. SCE believes that maintaining at least $1 billion in 3

insurance coverage is beneficial to customers for the following two reasons: First, it protects customers 4

from third-party claims related to wildfires pursued under the inverse condemnation doctrine, even for 5

events where SCE is in no way at fault but nevertheless SCE -- and derivatively, its customers -- will be 6

held responsible for resulting damages. Second, as recognized in Governor Newsom’s June 21, 2019 7

official report on catastrophic wildfires, stabilizing the financial health of California’s utilities is 8

essential to enable them “to provide safe, affordable and reliable energy, ensure fair compensation for 9

wildfire victims, and protect ratepayers from massive rate spikes.”22 10

In addition, Assembly Bill 1054, recently passed by the California Legislature and signed by 11

Governor Newsom on July 12, 2019, calls for a wildfire fund to address investor-owned utility wildfire 12

losses exceeding $1 billion, with each utility insuring the first $1 billion of losses through its own 13

insurance program. Not purchasing adequate levels of insurance imperils a utility’s financial health, 14

which is directly contrary to customers’ interests. Financially unhealthy utilities face higher financing 15

costs that have to be recovered from customers, will be impeded from implementing the State’s 16

ambitious clean energy agenda, and under certain circumstances may even be unable to furnish the 17

critical services that society depends on them to provide. 18

22 See June 21, 2019 Governor Newsom’s Strike Force Progress Report on Catastrophic Wildfires, Climate

Change and Our Energy Future at p. 7. https://www.gov.ca.gov/wp-content/uploads/2019/06/Strike-Force-Progress-Report.pdf

A-9

12

B. Overview of SCE’s Insurance Coverage Strategy 1

SCE uses two insurance brokers—Marsh and Guy Carpenter (GC)23—to access the insurance 2

and reinsurance markets and to obtain competitive pricing.24 These brokers canvass the world-wide 3

insurance and reinsurance markets in the United States, London, Bermuda and continental Europe. The 4

Company buys from various insurers, procuring increasing amounts of coverage and progressively 5

building a “tower” of overall coverage to meet its needs (to the extent that there is sufficient coverage 6

available in the market to do so).25 7

Historically, a portion of SCE’s liability insurance has covered both wildfire liability and non-8

wildfire liability within a combined policy limit. However, since the 2018-2019 policy year, SCE has 9

procured separate insurance towers for wildfire- and non-wildfire-related coverage. This ensures that a 10

dedicated tower of insurance is available for wildfire claims, while non-wildfire coverage is purchased 11

separately at a much lower cost. SCE’s wildfire-specific insurance tower is comprised of both 12

insurance, which provides broad coverage for property damage, loss of use, and bodily injury claims and 13

23 Marsh and Guy Carpenter are both part of Marsh & McLennan Companies, which is a global professional

services firm headquartered in the US, offering clients advice and solutions in the areas of risk, strategy, and human capital with 60,000 employees worldwide and annual revenue of $13 billion. The Marsh Power and Utilities Practice has more than 500 clients in over 50 countries. Their clients account for 76% of the gas and electric utility companies on the Fortune 500 industry list. Marsh’s market relationships span every insurer in every market globally.

24 Using a broker gives SCE access to a variety of insurance providers as well as the ability to leverage the brokers’ expertise and knowledge of the current market to obtain the most competitive pricing.

25 The term “tower” is used in the insurance industry to refer to an overall insurance program that includes different layers of insurance coverage. An illustrative tower is found in Figure III-3.

A-10

13

is generally “lower” in the tower, and reinsurance,26 which typically only covers property damage claims 1

and is generally towards the top of the tower.27 2

SCE’s wildfire-related insurance tower is comprised of different “layers” of insurance. First in 3

the tower is a “Self-Insured Retention” (SIR), or deductible.28 The retention is an expense, recovered 4

through customer rates, which must be incurred for each wildfire event before insurers begin paying for 5

an insured claim. The subsequent “layers” of coverage refer to policies that begin to provide coverage 6

after the layer immediately below has been exhausted. 7

Figure III-3 Illustrative Insurance Tower

$1 Billion Coverage

For example, in the illustrative insurance tower shown in Figure III-3 above, SCE has a $10 8

million SIR and three layers of insurance totaling $1 billion in coverage for a given policy year. The 9

26 Reinsurance is a form of insurance purchased by insurance companies in order to mitigate risk and limit the

amount of loss an insurer can potentially suffer. Because reinsurance can only be purchased by an insurance company, EIX uses its captive insurance subsidiary (Edison Insurance Services, Inc., or “EIS”) to access the reinsurance. EIS is a wholly-owned subsidiary of Edison International, established in 1997 in Hawaii and subject to the captive insurance company laws of Hawaii. It is being used as a pass-through mechanism to access the reinsurance provided by the carriers. The structure of a reinsurance transaction is that EIS insures SCE for wildfire liability, and then a third party carrier reinsures EIS. The third party carrier’s reinsurance of EIS and EIS’s insurance of SCE have the same coverage at the same premium.

27 As noted in Figure III-4, Figure III-5, and Figure III-6 below, one reinsurance company provides broad coverage for property damage, loss of use, and bodily injury.

28 SCE is not seeking to recover the Self-Insured Retention in this Application.

Self-Insured Retention - $10MLayer 1 - $100M

Layer 2 - $250M

Layer 3 - $650M

A-11

14

first layer of insurance, which is typically the costliest because it is low in the tower with a 1

comparatively higher likelihood of paying out money for insured claims, provides the initial layer of 2

coverage and has a limit of $100 million per occurrence. The second layer of insurance provides $250 3

million of coverage in “excess” of a $110 million “attachment point” (i.e., the second layer provides 4

coverage in excess of the $100 million first layer limit and the $10 million SIR). Similarly, the third 5

layer of insurance provides $650 million of coverage in “excess” of a $360 million attachment point 6

(i.e., the third layer provides coverage in excess of the underlying two layers’ combined limit of $350 7

million and the $10 million SIR). Normally, higher layers in an insurance tower are less expensive than 8

lower layers, but this is less true for wildfire insurance than for other lines of insurance because of the 9

tight market and the loss history for wildfire insurance. 10

Consider, for example, a hypothetical wildfire event that results in insured damages of $1.1 11

billion, where SCE’s equipment is determined to have been associated with the ignition. The damages 12

for this wildfire occurrence would be split as follows: 13

• The first $10 million is paid by SCE as a Self-Insured Retention; 14

• The next $100 million is paid by the first layer of insurance; 15

• The next $250 million is paid by the second layer of insurance; 16

• The next $650 million is paid by the third layer of insurance; and 17

• The final $90 million is paid by SCE because its insurance tower has been exhausted. 18

If SCE did not purchase additional wildfire insurance after this wildfire event, then it would be 19

uninsured for subsequent wildfires until the company’s next insurance renewal date. Following the 20

Thomas Fire in 2017 and again following the Woolsey Fire in 2018, SCE recognized that its wildfire 21

insurance could potentially be exhausted, and SCE procured new wildfire insurance to replace it. 22

Given the effects of climate change and the application of inverse condemnation to California 23

IOUs described above, a single wildfire occurrence has the potential to fully exhaust, and potentially 24

exceed, SCE’s wildfire insurance coverage for a given policy year, leaving SCE with little to no 25

remaining coverage for any possible subsequent wildfire events that occur in that same policy year. 26

Thus, SCE generally has sought to acquire replacement wildfire insurance after wildfire events to fill in 27

A-12

15

any insurance gaps for the remainder of the policy year—especially given the “new normal” of year-1

round fire risk. Failure to purchase replacement insurance coverage could force SCE to pay future 2

claims on a “dollar-for-dollar” basis from authorized GRC revenues, or seek recovery from customers 3

through the WEMA, rather than seek reimbursement from its insurers. That result would not be in the 4

best interest of customers. 5

C. Description of SCE’s Post-April 3, 2018 Insurance Coverage 6

With this background on insurance procurement in mind, SCE sets forth its wildfire insurance 7

coverage towers for the period spanning April 3, 2018, the effective date of WEMA, through June 30, 8

2020.29 SCE’s wildfire liability insurance policies generally provide coverage for an annual “policy 9

year” beginning in June or July of each year.30 As such, the following sections provide a narrative 10

description of the insurance coverage towers for each policy year (i.e., 2018-2019 and 2019-2020), and 11

an accompanying chart that includes specific information on the policies within those towers. Because 12

the Woolsey Fire, which began on November 8, 2018, had the potential to exhaust most of SCE’s 2018-13

2019 policy year wildfire insurance coverage and leave SCE and its customers with little coverage for 14

any wildfire events that might occur in the remainder of the 2018-2019 policy year (i.e., prior to the 15

typical 2019-2020 policy year renewal date), SCE acquired replacement wildfire insurance to “rebuild” 16

its tower. A narrative description and accompanying chart of the insurance coverage tower for this 17

second part of the 2018-2019 policy year are also provided below. 18

Additionally, as described in further detail in Chapter IV, because a portion of the 2017-2018 19

policy premiums were expensed after April 3, 2018, SCE also provides below a short narrative 20

description of the 2017-2018 coverage. However, because the 2017-2018 policies’ contribution to the 21

$719 million total is relatively small (< 2%), this Section focuses primarily on the 2018-2019 and 2019-22

2020 insurance coverage towers. 23

29 As noted in Chapter 1, as of the date of this Application, SCE has not yet obtained wildfire coverage for July

1, 2020 – December 31, 2020. 30 Historically, SCE’s insurance policies had annual policy periods beginning June 1, and SCE’s reinsurance

policies had annual policy periods beginning June 30. SCE has aligned those policy periods such that all of SCE’s existing 2019-2020 policies (insurance and reinsurance) provide coverage through June 30, 2020.

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16

1. 2017-2018 Policies 1

As alluded to in Chapter III.A, above, SCE’s 2017-18 tower included insurance that 2

provided both wildfire and non-wildfire coverage, as well as “supplemental wildfire” reinsurance, which 3

only provided wildfire-specific coverage. Collectively, and consistent with the limits described in 4

SCE’s 2018 GRC, SCE purchased approximately $1 billion in wildfire insurance coverage and $685 5

million in non-wildfire insurance coverage for the 2017-2018 policy year.31 The cost of this coverage 6

was approximately $73.6 million,32 pricing that reflects the insurance market as it existed prior to the 7

2017 and 2018 wildfire seasons. 8

The costs of those policies were expensed over the 2017-2018 policy period, including 9

approximately $10 million in wildfire-related premiums that were expensed after April 3, 2018.33 SCE 10

has included the $10 million of insurance expense incurred after April 3, 2018 in the “incremental test” 11

described in Chapter IV. 12

2. 2018-2019 Policies 13

For the 2018-2019 policy year, SCE sought to obtain approximately $1 billion in total 14

wildfire liability insurance coverage at the most favorable terms available. In late 2017 after the 15

Thomas Fire, SCE had determined that it was prudent and believed it was in the best interests of SCE 16

and its customers to acquire additional, replacement wildfire insurance for 2018. Accordingly, SCE 17

negotiated and purchased one $300 million reinsurance policy34 covering the period from December 31, 18

31 These limits include $195 million that covered both wildfire and non-wildfire events. In subsequent policy

renewals, SCE has procured completely separate insurance towers for wildfire and non-wildfire coverage. 32 Excludes premium for the policy approved in Resolution E-4994. 33 Because many of SCE’s 2017-18 insurance policies were with carriers that provided both wildfire and non-

wildfire general liability coverage, the invoices received often did not specify what portion of the premium was associated with each type of coverage. To approximate the cost of the 2017-2018 “wildfire” coverage amortized after the April 3, 2018 effective date of WEMA, SCE multiplied the total wildfire and non-wildfire-related general liability insurance expense by 80% and added in the full cost of the “supplemental wildfire” reinsurance. That 80% figure is based on verbal input from SCE’s brokers, which was informed by informal discussions with insurance carriers.

34 Although reinsurance, this policy provided coverage for property damage, loss of use, and bodily injury.

A-14

17

2017 to December 31, 2018.35 At the June 2018 annual insurance renewal, SCE purchased an additional 1

$490 million in insurance coverage and $210 million in reinsurance coverage, effective for the entire 2

2018-2019 policy year, bringing SCE’s total coverage to $1 billion through December 31, 2018. The 3

following figure illustrates SCE’s initial 2018-2019 policy year insurance tower, as it existed at the 4

beginning of the policy year. 5

35 This $300M policy was the subject of SCE’s Advice 3768-E. The Commission approved Advice 3768-E on

March 13, 2019. The costs of that policy are not included in this Application.

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18

Figure III-4 2018-2019 Wildfire Insurance Tower36

Layer

Carrier(s) Insurance /Reinsurance

Policy Limit ($M)

Attachment Point (includes

SIR)

Coverage Period1/ Total Premium

2/ From To

6 Reinsurance5/ $210 $800 6/30/18 6/30/19 54/ Insurance $350 $450 6/1/18 6/1/19 4 Insurance $90 $360 6/1/18 6/1/19

3 Reinsurance5/ $300 $60 12/31/17 12/31/18

2 Insurance $25 $35 6/1/18 6/1/19

13/ Insurance $25 $10 6/1/18 6/1/19 NA $10 NA NA NA 1/ Chart does not reflect policies that were scheduled to become effective 12/31/18. 2/ Total Premium reflects premium for the entire coverage period. For policies whose coverage

period spans several towers, the total premium is shown in the first tower only (i.e., premium is omitted and policy is shaded in gray in subsequent graphs depicting insurance towers).

3/ Layer 1 provides "multiple event" coverage up to $25 million per occurrence ($50 million limit for policy).

4/ Layer 4 policy included provision for $260 million of $350 million policy limit to move to a $100 million attachment point on 12/31/18 to partially "backfill" expiring Layer 3 policy.

5/ Policy in Layer 3 provides both Property Damage and Bodily Injury coverage, while Policies in Layer 6 only provide Property Damage coverage.

6/ SCE received authority to recover the cost of the Layer 3 policy in Resolution E-4994 and has thus excluded its premium from its tables and workpapers.

36 The carrier names and total premium amounts are redacted in the public version of this testimony.

$0$200$400$600$800

$1,000$1,200$1,400

$1,000 million coverage (excludes SIR)

A-16

19

1

This insurance tower is comprised of six layers totaling $1.01 billion in insurance and reinsurance 2

coverage. Some layers correspond to a single policy covering an entire layer while others include 3

policies from a number of carriers that collectively provide coverage for an entire layer. All else being 4

equal, the premium associated with lower layers in the insurance tower are more expensive, because 5

there is a comparatively higher likelihood of paying out money for insured claims, whereas premiums 6

associated with the higher layers are less expensive because there is a comparatively lower likelihood of 7

paying out money for insured claims. 8

Additionally, since the $300 million reinsurance policy purchased in late 2017 had a relatively low 9

attachment point and SCE knew that it would expire midway through the policy year, SCE negotiated a 10

change in the attachment point for one of the 2018-2019 policies to occur midway through the coverage 11

period on December 31, 2018. Around this same time, SCE also purchased an additional $301 million 12

in insurance and reinsurance coverage, effective December 31, 2018 to June 2019, to cover the second 13

half of the policy year and replace the aforementioned $300 million reinsurance policy purchased in late 14

2017 after it expired. 15

3. 2018-2019 Policies: Second Part of Policy Year 16

The Woolsey Fire began the afternoon of November 8, 2018 and burned nearly 97,000 17

acres in Los Angeles and Ventura Counties, destroying more than 1,500 structures and damaging 341 18

structures. SCE understood that if causation was later tied to electrical equipment, then the magnitude 19

of the Woolsey Fire had the potential to exhaust most of SCE’s 2018-2019 wildfire insurance coverage, 20

leaving SCE and its customers with little coverage for any wildfire events in 2019. Several days after 21

the Woolsey Fire started, SCE learned that the Ventura County Fire Department and California 22

Department of Forestry and Fire (Cal Fire) were investigating SCE electrical infrastructure as a possible 23

cause of the fire. 24

Because SCE previously planned for the expiration of its $300 million reinsurance policy 25

at the end of 2018, it had already acquired some replacement insurance coverage for the December 31, 26

2018 to June 2019 period. Additionally, one of SCE’s policies, provided by the Associated Electric & 27

A-17

20

Gas Insurance Services Limited, provided coverage for multiple events.37 Even so, possible exhaustion 1

of the 2018-2019 insurance policies covering SCE at the time of the Woolsey Fire and the limited 2

additional coverage SCE had already purchased for the first half of 2019 would leave significant holes in 3

SCE’s insurance tower. Failing to purchase replacement insurance coverage could force SCE to pay 4

future claims on a “dollar-for-dollar” basis from authorized GRC revenues or seek recovery from 5

customers through the WEMA, rather than seek reimbursement from its insurers. Accordingly, SCE 6

concluded that it would be prudent and in the best interest of its customers to rebuild its insurance tower 7

to the extent additional coverage reasonably could be secured on the insurance market for the first part 8

of 2019 before the beginning of the 2019-2020 policy year. This decision also accounted for the 9

possibility that acquiring equivalent insurance later in 2019 could be significantly more expensive due to 10

the diminishing general liability and wildfire insurance markets in California for investor-owned 11

utilities, to the extent even available. 12

In early 2019, SCE negotiated three additional insurance and reinsurance policies, 13

effective beginning February 1, 2019 and providing coverage through the 2019-2020 policy year. The 14

following figure illustrates SCE’s insurance tower from February 2019 to June 2019, which is 15

comprised of eight layers totaling approximately $700 million in insurance and reinsurance coverage. 16

Due to the attachment points in the policies secured by SCE and the coverage reasonably available in the 17

market, the second layer remained unfilled such that SCE and its customers would ultimately be 18

responsible for liability in that layer on a “dollar-for-dollar” basis. The tower includes policies SCE 19

acquired during the 2018-2019 renewal period as well as policies SCE had acquired after the Woolsey 20

Fire to replenish its insurance tower. Given the state of the insurance market at the time, some insurers 21

were only willing to offer SCE coverage with a co-insurance provision meaning that SCE would incur a 22

37 Specifically, SCE’s Layer 1 policy provided $25M of wildfire-liability coverage per occurrence, subject to a

limit of $50M of coverage for the policy period.

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21

portion of costs related to insured claims under the policy but significantly less than on a “dollar-for-1

dollar” basis.38 2

Figure III-539 Wildfire Insurance Tower Between February-June 2019

Layer

Carrier(s) Insurance /Reinsurance

Policy Limit ($M)

Effective Attachment

Point (includes SIR)1/

Total Premium

2/

Coverage Period From To

87/ Insurance $50 $686 2/1/19 7/1/20 76/ Insurance $25 $661 2/1/19 6/1/19

65/ Reinsurance8/ $300 $361 2/1/19 7/1/20

54/ Reinsurance8/ $201 $160 12/31/18 6/30/19

44/ Reinsurance8/ $60 $100 12/31/18 6/1/19

34/ Insurance $40 $60 12/31/18 6/1/19

2 NA $25 NA NA NA 13/ Insurance $25 $10 6/1/18 6/1/19

NA $10 NA NA NA

38 For example, a $100 million policy with a 5% co-insurance provision would require the insured to pay $5

million of co-insurance (and the insurer to pay $95 million) in the event of a total loss under the policy. In this example, the coverage for this policy, net of co-insurance, is $95 million.


$0

$200

$400

$600

$800 $701 million coverage (excludes SIR), $686 million coverage net of co-insurance

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1/ "Effective" attachment point reflects limit and attachment changes in the underlying policies. 2/ Total Premium reflects premium for the entire coverage period. For policies whose coverage

period spans several towers, the total premium is shown in the first tower only (i.e., premium is omitted and policy is shaded in gray in subsequent graphs depicting insurance towers). In other words, the premiums for the layers 6 and 8 policies in this graph reflect the premium for both the February-June 2019 period and the 2019-2020 policy year.

3/ As described in footnote 3 of preceding graph, Layer 1 provides "multiple event" coverage up to $25 million per occurrence ($50 million limit for policy). As such, premium is captured in preceding tower and table and is not repeated here.

4/ Layers 3, 4, and 5 were purchased to partially replace expiring Layer 3 $300 million policy. Policies in layers 4 and 5 had original attachment points of $540 million and $740 million, respectively, but included provisions to attach at specified lower points in the tower if preceding coverage was exhausted.

5/ Layer 6 policy is effective February 2019-June 2020. Premium reflected on this table is the premium for the entire policy period. Policy had a $100 million attachment point, but included a provision to attach at a higher point in the tower based on pre-existing coverage (i.e., higher attachment point between February-May 2019). Includes 5% co-insurance.

6/ Layer 7 policy effective February 2019-June 2020. Coverage limit was $25 million for February-May 2019 and $400 million (25% co-insurance) for June 2019-June 2020. Because of this change in coverage limit, the premium reflected on this table is the adjusted premium for the February-May 2019 ($25 million coverage) period only.

7/ Layer 8 policy provides coverage between February 2019 and June 2020. Premium reflected on this table is the premium for the entire policy period.

8/ Policies in Layer 4 and 6 provide both Property Damage and Bodily Injury coverage, while Policy in Layer 5 only provides Property Damage coverage.

4. 2019-2020 Policies 1

For the 2019-2020 policy year, SCE again sought to acquire approximately $1 billion in 2

total wildfire-specific insurance coverage, negotiating new policies to supplement the three existing 3

insurance and reinsurance policies SCE had acquired in early 2019 and continue through the 2019-2020 4

policy year. SCE again saw changes to the insurance market in the 2019-2020 renewal as compared to 5

prior periods (attributable to California utilities facing increased wildfire risks), with material increases 6

in the cost of premiums for coverage available to SCE in the market. Due in part to the fact that two of 7

the 2019-2020 policies include coinsurance provisions, obligating SCE and its customers to cover a 8

portion of insurance claims under those policies, SCE decided that it would be prudent to acquire a 9

slightly higher aggregate amount in coverage for the 2019-2020 policy year to the extent it was 10

reasonably available on the market. The following figure illustrates SCE’s current 2019-2020 policy 11

year insurance tower. 12

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Figure III-640 2019-2020 Wildfire Insurance Tower

Layer Carrier(s) Insurance

/Reinsurance

Policy Limit ($M)

Attachment Point (includes

SIR)

Coverage Period Total Premium1

/ From To

9 Reinsurance5/ $21 $1,200 6/30/19 7/1/20 8 Reinsurance5/ $250 $950 6/30/19 7/1/20 7 Insurance $100 $850 6/1/19 7/1/20 64/ Insurance $50 $800 2/1/19 7/1/20 53/ Insurance $400 $400 6/1/19 7/1/20

42/ Reinsurance5/ $300 $100 2/1/19 7/1/20

3 NA $40 $60 6/1/19 7/1/20

2 Insurance $25 $35 6/1/19 7/1/20

1 Insurance $25 $10 6/1/19 7/1/20 NA $10 NA NA NA


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400$1,171 million coverage (excludes SIR), $1,056 million coverage net of co-insurance

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1/ Total Premium reflects premium for the entire coverage period. For policies whose coverage periods span several towers, the total premium is shown in the first tower only (i.e., premium is omitted and policy is shaded in gray in subsequent graphs depicting insurance towers).

2/ Layer 4 policy effective February 1, 2019-July 1, 2020. As such, premium for the entire policy period is reflected in preceding table. Policy includes 5% co-insurance.

3/ As described in preceding table, Layer 5 policy is effective between February 1, 2019 and July 1, 2020, but includes a change in coverage limit (increases from $25 million to $400 million) and co-insurance amount (0% to 25%) beginning June 1, 2019. As such, the premium reflected on this table is the pro-rated premium for the June 2019-June 2020 ($400 million coverage) period.

4/ Layer 6 policy effective February 1, 2019-July 1, 2020. As such, premium for the entire policy period is reflected in preceding table.

5/ Policy in Layer 4 provides both Property Damage and Bodily Injury coverage, while Policies in Layers 8 and 9 only provide Property Damage coverage.

5. SONGS Adjustments 1

SCE’s historical practice has been to allocate a certain proportion of its general liability 2

insurance (which included wildfire-related coverage) to San Onofre Nuclear Generating Station 3

(SONGS). SCE has continued that practice, as reflected in this Application, using the same allocation 4

methodology and applying it to SCE’s general and wildfire-specific policies. Accordingly, SCE has 5

excluded $11.3 million from this Application, which reflects a $2.3 million allocation to SONGS for the 6

2018-2019 policy year, and an estimated $9 million to SONGS for the 2019-2020 policy year. When 7

the 2019-2020 SONGS allocation is finalized, SCE plans to pass on a pro-rata portion of both years’ 8

allocation to the SONGS co-owners, and to seek recovery of SCE’s pro-rata share from the SONGS 9

Nuclear Decommissioning Trusts. However, to the extent that the final 2019-2020 SONGS allocation 10

differs from the estimate, or SCE is unable to pass on those costs to the SONGS co-owners, or the 11

Commission or other relevant regulatory agency determines that those costs (or a portion thereof) are 12

not recoverable from the Trusts, SCE will transfer the amount not recoverable to its Base Revenue 13

Requirement Balancing Account for recovery from customers consistent with any final Commission 14

decision approving this Application.41 15

SCE believes that maintaining this consistent practice for allocating insurance costs is 16

appropriate because SONGS remains energized and is covered by SCE’s insurance policies. In fact, 17

41 If this Application is still pending, SCE will instead transfer the amount not recoverable to WEMA for

disposition with this Application.

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SONGS and its associated electric transmission and distribution lines are located in or immediately 1

adjacent to areas designated as Tier 2 on the Commission’s High Fire Threat District maps. 2

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IV. 1

INSURANCE-RELATED COSTS TRACKED IN WEMA ARE INCREMENTAL TO THE 2

AUTHORIZED AMOUNTS IN THE 2018 GRC 3

This chapter describes the actual activity within the Insurance WEMA. The Insurance WEMA 4

captures two types of entries: expenses for the insurance premiums and the cost of financing those 5

premiums from the date they are prepaid to the date they are expensed in the WEMA. As described 6

below, the costs tracked in the Insurance WEMA are incremental to the amount authorized in the 2018 7

GRC. 8

A. Insurance Expenses Tracked in WEMA are Incremental 9

SCE performed the following test to determine what insurance expenses are “incremental” and 10

thus eligible to be tracked in the Insurance WEMA, and ultimately recovered through this proceeding: 11

1. Quantify the amortization of wildfire insurance expenses for each year based on the 12

policy coverage periods of policies purchased or bound to date;42 13

2. Identify the amount authorized in the 2018 GRC for wildfire insurance expenses;43 14

3. Compare the annual wildfire insurance expenses to the annual authorized amounts to 15

determine what wildfire insurance expenses are considered “incremental,” and quantify 16

the CPUC-jurisdictional portion of the incremental insurance expenses that are, or will 17

be, tracked in WEMA. 18

1. Amortization of Insurance Expenses Based on Policies Bound to Date 19

Although many of SCE’s insurance policies require that the premiums be prepaid, those 20

premiums are amortized and recorded to SCE’s insurance expense accounts over the policy period on a 21

pro rata basis in accordance with accrual accounting. Accrual accounting records expenses when they 22

are “incurred” rather than when they are “paid.” For example, if SCE purchased and prepaid a policy 23

42 Although the expenses for July 2019-July 2020 are “forecast,” the basis for this “forecast” is the Insurance

WEMA Policies’ premiums and policy terms—the majority of which have already been prepaid by SCE. 43 The 2018 authorized amount is pro-rated for the period between April 3, 2018, the effective date of WEMA,

and December 31, 2018.

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that cost $12 million in January 2019, and that policy had a coverage period spanning from July 1, 2019 1

to December 31, 2019, then the prepayment of the policy would be recorded as a prepaid asset on SCE’s 2

balance sheet in January 2019, and the prepaid asset would be amortized and recorded in SCE’s expense 3

accounts in $2 million increments in July, August, September, October, November, and December (i.e., 4

the policy coverage period), even though the $12 million premium was prepaid in January. 5

Table IV-1 below provides a summary of the annual wildfire insurance expenses of the 6

policies purchased or bound to date based on the accrual accounting method described above. The 2018 7

total reflects total wildfire insurance expenses recorded to SCE’s insurance expense accounts between 8

April 3, 2018, the effective date of the WEMA, and December 31, 2018, which includes the April 3, 9

2018 and forward expenses for policies purchased in 2017 but excludes the expenses for the policy 10

recovered through SCE’s Advice Letter 3768-E Z-factor request. The 2019 and 2020 totals reflect the 11

total wildfire insurance expenses of the policies purchased to date that will be recorded, or have already 12

been recorded, to SCE’s insurance expense accounts in 2019 and 2020. 13

Table IV-1 Wildfire Insurance Expenses between April 3, 2018 – December 31, 2020 based on Policies

Bound as of Application Date

Total Amount Expensed/To-Be Expensed Based on Policies Purchased/Bound To Date Description 2018* 2019 2020** Total Total Wildfire Insurance Expense 97,216 392,036 229,959 719,211 *2018 is pro-rated for the period between April 3, 2018 and December 31, 2018. Excludes expense for policy approved for cost recovery in Z-Factor advice letter **As of the date of this Application, the policies purchased/bound to date provide SCE with wildfire insurance liability coverage through July 1, 2020.

2. Overview of Wildfire Insurance Expenses Authorized in SCE’s 2018 GRC Request 14

As stated in its 2018 GRC, the test year premiums for liability insurance were estimated 15

by SCE’s insurance broker, Marsh. Marsh’s assessment of the market was based on overall insurance 16

market conditions and projected trends in the insurance industry. SCE’s test year forecast for total 17

liability insurance was $92.427 million. The 2018 GRC final decision adopted SCE’s total liability test 18

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year forecast of $92.427 million. Table IV-2 below shows the amount authorized for 2018-2020 total 1

SCE liability insurance expenses in nominal dollars. 2

Table IV-2 Authorized for Total Company Liability Insurance between 2018-2020

Total Authorized for Company Liability Insurance Expense in D.19-05-020 Description 2018 2019 2020 Total Total Authorized for Company Liability Insurance 92,427 99,158 101,409 292,994

As described in Exhibit 08, Volume 5 of SCE’s 2018 GRC, SCE’s test year forecast of 3

$92.427 million includes forecast amounts for “General Liability” and Supplemental Wildfire Insurance 4

that provide coverage against third-party lawsuits alleging injury or damage caused by SCE facilities,44 5

as well as forecast amounts for other types of liability insurance such as fiduciary, directors and officers, 6

and workers’ compensation. To determine the amount authorized for wildfire insurance expenses, SCE 7

reduced the amount authorized for General Liability insurance by 20%45 and added the full amount 8

authorized for Supplemental Wildfire Reinsurance. Table IV-3 below shows the amount authorized for 9

2018-2020 wildfire insurance expenses in nominal dollars based on this methodology. The amount 10

authorized for 2018 has been pro-rated for the period between April 3, 2018, the effective date of 11

WEMA, and December 31, 2018. 12

Table IV-3 Authorized for Wildfire Insurance between April 3, 2018 – December 31, 2020

Authorized Wildfire Insurance Expense for April 3, 2018-December 31, 2020 2018* 2019 2020 Total Total Authorized for Wildfire Insurance 54,371 77,051 78,800 210,222 *2018 is pro-rated for the period between April 3, 2018 and December 31, 2018.

44 As described on pages 8-9 of Exhibit 08, Volume 5 of SCE’s 2018 GRC, SCE’s 2018 GRC forecast of

“General Liability Insurance” expenses include the cost of wildfire-specific and non-wildfire-specific liability insurance policies, as well as the cost of general liability policies that cover both wildfire and non-wildfire exposures. SCE’s 2018 GRC forecast also includes expenses for Supplemental Wildfire Insurance.

45 See Section III-B.1.

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3. Description of Incremental Test1

SCE compares annual expenses (Table IV-1) to annual authorized amounts (Table IV-3)2

to determine what costs are “incremental,” and multiplies that incremental amount by the CPUC-3

jurisdictional allocation factor of 93.91%46 to determine what is eligible to be tracked in WEMA. Table 4

IV-4 below summarizes the incremental test results.5

Table IV-4 Incremental Insurance Expense to be Tracked in WEMA

Amount to be Tracked in WEMA 2018* 2019 2020 Total

Total Wildfire Insurance Expense Table IV-1 97,216 392,036 229,959 719,211 Total Authorized for Wildfire Insurance Table IV-2 54,371 77,051 78,800 210,222

Incremental Wildfire Insurance Expense Line 1 - Line 2 42,845 314,985 151,159 508,988

Insurance Expense to be Tracked in WEMA Line 3 x CPUC Allocation 40,236 295,802 141,953 477,991

*2018 amount reflects the pro-rated amount for April 3, 2018 to December 31, 2018

As noted throughout this testimony, SCE is seeking recovery of the incremental wildfire 6

insurance expenses recorded starting April 3, 2018, the effective date of the WEMA, for policies 7

purchased or bound to date. SCE expects to procure additional insurance coverage for the 2020-2021 8

policy year in late 2019 and early 2020. The 2020 amortized expense for those policies will all be 9

considered incremental and tracked in the WEMA because, based on policies bound to date, SCE has 10

already exhausted the amount authorized for wildfire insurance expenses in the 2018 GRC. 11

46 See D.19-05-020 at p. 270, which adopts SCE’s CPUC-jurisdictional allocation factors as proposed in Exhibit SCE-09.

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Appendix B REDACTED IN ENTIRETY

SCE WEMA SCE-01C Appendix B

CONFIDENTIAL POLICY BINDERS

C-2

Documents

SCE-06 V.02 Testimony...26 projects which support SCE’s commitment to Operational & Service Excellence. 27 B. Summary of O&M and Capital Request 28 In this volume of testimony, SCE