On April 11, 2019, in FERC ER19-1553, Southern California Edison (SCE) filed changes to its transmission formula rate due to dramatic material changes to SCE’s regulatory and financial conditions that have occurred since SCE filed its currently effective Formula Rate (the “Second Formula Rate”) in October 2017. Beginning in December 2017, several wind-driven wildfires impacted portions of SCE’s service territory and caused substantial damage to both residential and business properties and service outages for some of SCE’s customers. California has unique inverse condemnation laws. These laws provide that an electric utility will be held strictly liable for property damages and legal fees if its facilities are the substantial cause of a fire regardless of fault and even if the utility was fully compliant with all applicable rules and regulations and acted reasonably. As a result of these laws and recent fires, SCE is exposed to significant potential wildfire damage claims. In 2017, the California Public Utilities Commission (“CPUC”) issued a decision holding that it could preclude a utility from recovering these court-assigned costs if it finds the utility was not prudent, even if the source of the alleged imprudent conduct was not directly the cause of the fire. The decision creates significant CPUC-related cost-recovery uncertainty and, as a result, SCE recently announced an accrual of a 2018 fourth quarter non-cash charge against earnings of $1.8 billion due to potential wildfire damages that would be dependent upon CPUC-approval.
SCE filed proposed revisions to its Formula Rate to account for the above risk in a manner sufficient to attract the capital necessary to provide safe and reliable electric service. SCE requested a base ROE that is founded on, and fully supported by, FERC’s established ROE policies. SCE applied the four financial models utilized in the Commission’s October 2018 Order Directing Briefs in the New England Transmission Owner (NETO) ROE cases - which includes the Discounted Cash Flow (“DCF”) model, the Capital Asset Pricing Model (“CAPM”), the historical Risk Premium model, and Expected Earnings—and determined the ROE that is required to reflect the significant non-wildfire regulatory and legislative risks that SCE faces as a public electric utility operating in California. That base ROE is 11.12%. SCE also analyzed how the additional risks it faces as a result of wildfires affect SCE’s ability to attract capital. While these wildfire risks required additional analysis to complement the conventional application of the four financial models, this additional analysis is fully consistent with FERC’s rationale in the NETO Order Directing Briefs because this analysis connects SCE’s circumstance and its unique risks with the capital attraction standard that underlies the Commission’s ROE policies. SCE accordingly requests an increase to its base ROE 0f 6.0% to account for the asymmetric wildfire risk (total base ROE of 17.12%). SCE also asks that, in determining its capitalization and costs of capital, the charge to earnings described above ($1.8 B) be removed from its common equity balance along with any debt incurred related to the wildfire liabilities. SCE’s proposed retail transmission revenue requirement for calendar year 2019 (effective June 12, 2019) is $1,328,294,741, which compares to the current amount for calendar year 2018 of $1,038,486,906.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates.