direct testimony in support of southern california edison ......authorized amount is related to...
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Application No.: 19-07-XXXExhibit No.: SCE-01 Witnesses: D. Heller
D. WongJ. JiangApril 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
SCE-01 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
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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
SCE-01 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
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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
1
I. 1
INTRODUCTION 2
A. Summary of Request 3
Southern California Edison Company (SCE) respectfully requests that the California Public 4
Utilities Commission (CPUC or Commission) authorize SCE’s recovery of costs tracked in SCE’s 5
Wildfire Expense Memorandum Account (WEMA) for wildfire insurance premiums (Insurance 6
WEMA). SCE is seeking recovery of $5051 million for incremental2 wildfire insurance obtained as of 7
the date of this Application for the 2018-2020 policy years (Insurance WEMA Revenue Requirement).3 8
SCE has traditionally maintained approximately $1 billion in wildfire coverage, and was 9
authorized $71.821 million in D.19-05-020 for Test Year 2018 (and $228 million for the entire 2018-10
2020 GRC cycle)4,5 to continue that level of coverage6 for the 2018-2020 GRC cycle. However, as SCE 11
described in Application (A.)18-04-001, SCE’s Application for authority to establish the WEMA, the 12
cost of insurance related to wildfire liability now substantially exceeds the amount reflected in rates 13
authorized by D.19-05-020. From an accounting perspective, SCE has incurred, or will incur, 14
1 $478 million in CPUC-jurisdictional incremental wildfire insurance premiums plus $12 million in CPUC-
jurisdictional financing costs (at a commercial paper rate), $10 million in memorandum account interest, and $5 million in Franchise Fees and Uncollectibles (FF&U).
2 “Incremental” insurance costs tracked in the Insurance WEMA are defined as insurance costs expensed after April 3, 2018, the effective date of the WEMA, that exceed the amount authorized for recovery in D.19-05-020, the Commission final decision approving SCE’s 2018 General Rate Case (GRC) revenue requirement. See SCE Preliminary Statement Part N.52 and D.18-11-051.
3 On February 21, 2019, the Commission approved Resolution E-4994, which authorized SCE to recover $107.156 million in insurance premium costs for a 12-month, $300 million limit policy (effective between December 31, 2017 and December 31, 2018). The cost of that policy is not included in this Application.
4 D.19-05-020 authorized $92.427M in Test Year 2018 for all liability insurance expense recorded in Federal Energy Regulatory Commission (FERC) Account 925, including insurance expense for general liability (wildfire- and non-wildfire related), fiduciary liability, directors’ and officers’ liability, workers’ compensation, nuclear liability, and cyber liability. SCE’s method for determining what portion of that authorized amount is related to wildfire liability insurance expense is described in Chapter IV.
5 As described in Chapter IV, the pro-rated amount authorized for wildfire liability insurance expense for the April 3, 2018, the effective date of WEMA, and December 31, 2020 period is $210 million.
6 Historical coverage for all categories of FERC Account 925 liability insurance expense are listed in Table I-1 in Application (A.)16-09-001, SCE-08, Volume 5C.
2
approximately $719 million in insurance expense for policies purchased or bound as of the date of this 1
Application. It is important to note from a cash perspective SCE has already prepaid the majority of 2
those policy premiums.7 These policies maintain approximately $1 billion (net of co-insurance) of 3
wildfire coverage extending between April 3, 2018 and July 1, 2020, but $478 million8 of that $719 4
million is beyond the amount authorized for recovery in D.19-05-020. In the current regulatory 5
environment, SCE and its customers face potential wildfire-related liability exposure well in excess of 6
historical norms. Accordingly, it is reasonable for SCE to continue to maintain at least $1 billion in 7
wildfire-liability insurance coverage9 and obtain timely cost recovery of the insurance premium costs. 8
SCE will continue to purchase insurance to maintain approximately $1 billion (net of any co-9
insurance) of wildfire coverage for potential wildfire events occurring before December 31, 2020. The 10
policies purchased or bound as of the date of this Application provide approximately $1 billion of 11
wildfire insurance coverage between April 3, 2018 and July 1, 2020. SCE anticipates that it will incur 12
and track additional costs in the Insurance WEMA for July 2020 to December 31, 2020 coverage, and 13
will file another application for recovery of those costs in 2020 or 2021. However, consistent with the 14
discussion below, it is appropriate for SCE to seek recovery of the amounts paid or known today here, 15
and to seek recovery of any additional amounts at a later date through a separate application. 16
7 This includes $588 million that has already been paid as of the date of this Application and $131 million that
will be paid by April 2020. These costs are recorded to SCE’s expense accounts over the insurance policy periods.
8 As shown in Table IV-4, $478 million is the CPUC-jurisdictional portion (94%) of $719 million in wildfire insurance expense less $210 million authorized in the 2018 GRC (pro-rated for the April 3, 2018 effective date of WEMA).
9 Additionally, the “Wildfire Fund” established by Assembly Bill (AB) 1054, which was approved by Governor Newsom on July 12, 2019, requires each utility to insure the first $1 billion of losses through its own insurance program. See Public Utilities Code Section 3280(f) (emphasis added), which defines “eligible claims” as “claims for third-party damages against an electrical corporation…exceeding the greater of (1) one billion dollars in the aggregate in any calendar year, or (2) the amount the amount of the insurance coverage required to be in place for the electrical corporation pursuant to Section 3293, measured by the amount of that excess.”
3
B. SCE’s Motion for Interim Rate Recovery 1
The current contraction and tightening of the wildfire liability coverage market is expected to 2
persist over the 2021-2023 GRC cycle and will be reflected in the forecast wildfire insurance expense 3
that SCE will request in its 2021 GRC application later this year. This application therefore seeks 4
recovery of the incremental costs associated with the wildfire liability insurance policies SCE has 5
already placed for the 2018-2020 time period, which have already been, or will soon be, prepaid, but are 6
not being fully recovered from customers in the rates authorized in D.19-05-020. Expeditious action is 7
important now: Timely recovery of the Insurance WEMA Revenue Requirement will reduce customer 8
bill volatility by limiting, to the extent possible, the “pancaked” simultaneous recovery of both recorded 9
(2018-2020 incremental costs bound as of the date of this Application and tracked in the Insurance 10
WEMA) and forecast (2021-2023 liability insurance-related operating expenses) costs starting in 2021 11
(i.e., upon implementation of SCE’s 2021 GRC rates). 12
For these and other reasons, SCE is filing a simultaneous Motion for Interim Rate Recovery 13
(Motion) and requesting authority to begin recovering 50% of SCE’s Insurance WEMA Revenue 14
Requirement in distribution rates commencing on October 1, 2019, and amortizing that amount over a 15
one-year period. Those interim revenues collected would be subject to refund with interest if a final 16
decision approves an amount less than what has already been collected through this interim mechanism. 17
If adopted, SCE’s Interim Rate Recovery proposal would have the practical effect of amortizing the 18
Insurance WEMA Revenue Requirement over a two-year period, i.e., from October 1, 2019 to 19
September 30, 2021.10 As shown in Figure I-1 below, SCE has already been authorized to recover 20
approximately $184 million in wildfire insurance premium costs in 2019 ($77 million authorized in 21
D.19-05-020 and $107 million authorized in Resolution E-4994, corresponding with a 0.3¢/kWh system 22
average rate (SAR)), but is currently authorized to recover only $79 million through D.19-05-020 in 23
2020 (corresponding with a 0.1¢/kWh SAR). Allowing SCE to begin recovering a portion of the 24
Insurance WEMA Revenue Requirement in late 2019 and throughout 2020 will mitigate the sharp bill 25
10 See FN 11, infra.
4
impacts that would otherwise result from abruptly commencing recovery of the entire Insurance WEMA 1
Revenue Requirement in late 2020. 2
Figure I-1 Wildfire-related SAR with and without Interim Rate Recovery11,12
Additionally, the current financial pressure affecting SCE is a relevant consideration supporting 3
interim rate recovery. When evaluating SCE’s financial health, one of the credit agencies’ key areas of 4
focus is SCE’s annual cash flow and the level of that cash flow compared to SCE’s overall outstanding 5
debt. Because SCE has already financed with debt and paid to the insurance companies much of the 6
cash related to the requested revenue requirement in this application, it is important that the Commission 7
accelerate the cost recovery of at least a portion of that pre-payment SCE made on behalf of customers. 8
The Commission has found that while a utility’s financial health being in jeopardy is not a 9
necessary prerequisite for authorizing interim rate recovery, it certainly is a relevant factor. For 10
11 The blue bar in the 2021 column represents SCE’s current best estimate of the forecast insurance expense it
will propose in its upcoming 2021 GRC (filing later in 2019). 12 The green “2019 Insurance WEMA Application” bars reflect the recovery of costs being proposed in this
Application. They do not include costs for July 2020 to December 31, 2020 coverage, which will be presented in a future WEMA Application.
0.00.20.40.60.81.01.21.41.6
Apr Oct Jan Jul Apr Oct Jan Jul
2018 2019 2020 2021 2018 2019 2020 2021
SAR without Interim Rate Recovery SAR with Interim Rate RecoveryGRC Authorized/To-Be Requested Authorized in Resolution E-4959 2019 Insurance WEMA Application
5
example, in D.19-04-039, the Decision authorizing Pacific Gas and Electric interim rate recovery in 1
A.18-03-015, the Commission authorized rate recovery due to -- among the other reasons discussed 2
above that it considered relevant -- PG&E’s current financial condition.13 Here, while SCE’s current 3
financial condition14 is not as dire as PG&E’s, nor is it at the healthy, investment-grade level that 4
traditionally facilitates California utilities’ access to relatively low-cost capital to the benefit of 5
customers. 6
C. Organization of Testimony 7
In support of its request, SCE has organized its testimony in the following manner: 8
• Section II provides background on the WEMA; 9
• Section III summarizes the wildfire insurance policies procured to date and describes why 10
the costs of those policies are reasonable; 11
• Section IV summarizes the amount tracked in WEMA and describes how they are 12
incremental to the amount authorized in the 2018 GRC; and 13
• Section V outlines SCE’s cost recovery proposal. 14
13 See also D.02-07-031 (authorizing rate recovery for Sierra Pacific while the Commission considered its GRC
request, rejecting ORA’s argument that a utility’s financial viability must be in jeopardy for interim rate recovery, and noting that the inquiry has “expanded” to include consideration of “fairness to both the utility and the public.”); D.88-05-074 (authorizing interim rate recovery for SCE in an Energy Cost Adjustment Clause proceeding and noting that relevant precedent did not depend on “the existence of an emergency, but all relate[d] to preserving the financial integrity of the utility, minimizing costs incurred by ratepayers, and ensuring rate stability for Edison’s customers.”).
14 SCE was until very recently on “negative credit watch” with the potential for downgrades to sub-investment grade, or “junk” credit ratings. In direct response to AB 1054, as of July 29, 2019, SCE’s credit outlook has returned to “stable,” but SCE’s credit ratings still remain below historical norms.
6
II. 1
WEMA BACKGROUND 2
On April 3, 2018, SCE filed A.18-04-001 requesting authorization to establish the WEMA to 3
track incremental unreimbursed wildfire liability-related costs, including: 4
1. Payments to satisfy wildfire claims, including any co-insurance, deductibles, and other 5
insurance expense paid by SCE; 6
2. Outside legal expenses incurred in the defense of wildfire claims; 7
3. Payments made for wildfire insurance and related risk-transfer mechanisms; and 8
4. Costs of financing these amounts. 9
In D.18-11-051, the Commission approved SCE’s request, including SCE’s request to make the 10
WEMA effective as of the application filing date, April 3, 2018. Specifically, D.18-11-051 clarified that 11
the WEMA should “track costs on an event-by-event basis,” but that “costs that are not specific to a 12
particular wildfire event, such as insurance premium costs, should be segregated by cost type.”15 The 13
proposal set forth in this application is limited to the recovery of premium costs and the costs of 14
financing those amounts tracked in the Insurance WEMA (i.e., Categories 3 and 4 above) based on 15
policies purchased or bound as of the date of this Application.16 16
15 D.18-11-051 at p. 6 (emphasis added). 16 This Application seeks recovery only of the 2018-2020 incremental insurance costs resulting from the
premiums (plus commercial paper-based financing costs) associated with the relevant policies described in detail below. Some of those policies also have potential co-insurance costs, which are at this point contingent and not certain. In other words, if – but only if -- there is a wildfire event that the relevant policy covers, SCE (and its customers) will be responsible for paying the co-insurance amount (analogous to making a co-pay for medical insurance). If such an event occurs, and SCE realizes those co-insurance costs, SCE will track those costs in its WEMA and seek recovery of those costs in a future application.
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.”
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.
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
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
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$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
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
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.
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
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
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.
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.
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 $300M policy was the subject of SCE’s Advice 3768-E. The Commission approved Advice 3768-E on
March 13, 2019. The costs of that policy are not included in this Application.
18
Figure III-4 2018-2019 Wildfire Insurance Tower36
Layer
Carrier(s) Insurance /Reinsurance
Policy Limit ($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)
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
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 $50M of coverage for the policy period.
21
portion of costs related to insured claims under the policy but significantly less than on a “dollar-for-1
dollar” basis.38 2
Figure III-539 Wildfire Insurance Tower Between February-June 2019
Layer
Carrier(s) Insurance /Reinsurance
Policy Limit ($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.
39 The carrier names and total premium amounts are redacted in the public version of this testimony.
$0
$200
$400
$600
$800 $701 million coverage (excludes SIR), $686 million coverage net of co-insurance
22
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 $1 billion in 2
total wildfire-specific insurance coverage, negotiating new policies to supplement the three existing 3
insurance and reinsurance policies SCE had acquired in early 2019 and continue through the 2019-2020 4
policy year. SCE again saw changes to the insurance market in the 2019-2020 renewal as compared to 5
prior periods (attributable to California utilities facing increased wildfire risks), with material increases 6
in the cost of premiums for coverage available to SCE in the market. Due in part to the fact that two of 7
the 2019-2020 policies include coinsurance provisions, obligating SCE and its customers to cover a 8
portion of insurance claims under those policies, SCE decided that it would be prudent to acquire a 9
slightly higher aggregate amount in coverage for the 2019-2020 policy year to the extent it was 10
reasonably available on the market. The following figure illustrates SCE’s current 2019-2020 policy 11
year insurance tower. 12
23
Figure III-640 2019-2020 Wildfire Insurance Tower
Layer Carrier(s) Insurance
/Reinsurance
Policy Limit ($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
40 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$1,171 million coverage (excludes SIR), $1,056 million coverage net of co-insurance
24
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.
25
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
26
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.
27
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
28
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.
29
3. Description of Incremental Test 1
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.
30
B. Insurance-related Financing Costs Tracked in WEMA are Incremental 1
SCE proposes to recover $11.670 million47 in incremental CPUC-jurisdictional insurance-related 2
financing costs.48 As described in Section A.1, SCE prepays most of its insurance premiums and 3
records the payments as prepaid assets on its balance sheet until the premiums are recorded to SCE’s 4
expense accounts over the course of the policy period. SCE uses “working cash,” or capital supplied by 5
investors to meet day-to-day utility operational requirements, to finance those premiums from the date 6
they are prepaid to the date they are fully amortized in SCE’s expense accounts. SCE has tracked, and 7
will continue to track, in WEMA the incremental cost of that financing49 as calculated using the short-8
term commercial paper rate.50 9
Additionally, consistent with all of SCE’s other balancing and memorandum accounts, interest at 10
the short-term commercial paper rate accrues on the WEMA balance51 to capture the cost of carrying the 11
balance in the account until it is collected from customers. The interest that accrues on the WEMA 12
balance is not duplicative of the financing entries described above—the financing entries capture the 13
cost incurred between when the policies are prepaid and when they are fully expensed in SCE’s 14
47 The financing costs for the period between July 2019 and December 2020 are estimated based on an assumed
short-term commercial paper rate of 2.50%. SCE will use 1/12 of the most recent month’s interest rate on Commercial Paper (prime, 3 months) published in the Federal Reserve Statistical Release, G.13, consistent with the monthly interest rate used in its balancing and memorandum accounts.
48 The total (CPUC- and FERC-jurisdictional) incremental insurance-related financing cost is $12.427 million. 49 As shown in WP-Chapter 4 Financing, SCE accrues financing costs on the “net cash amount,” defined as
policy payments less authorized 2018 GRC revenue. The net cash amount balance is calculated on a monthly basis from when prepayments occur until expenses are transferred to WEMA. This balance is used to calculate the incremental financing costs.
50 In a GRC, SCE is entitled to what is effectively a weighted-average-cost-of-capital return on insurance premium pre-paid expenses it makes on behalf of customers through the working cash mechanism that adds such costs to rate base. Here, however, SCE is only seeking recovery of a commercial paper interest rate for financing costs, but specifically reserves its rights to continue the traditional ratemaking treatment for such costs in future GRCs and future WEMA filings, or to calculate financing costs for future WEMA filings based on specific sources of financing issued to support wildfire claims, insurance, and expenses as defined in section II herein.
51 See SCE Preliminary Statement N.52. Additionally, as clarified in Sheet 2 of Preliminary Statement N, “[i]nterest shall accrue monthly to interest-bearing Memorandum Accounts by applying the Interest Rate to the average of the beginning and ending balance.
31
accounts, while the WEMA interest entries capture the cost between when costs are expensed in WEMA 1
and when the balance in WEMA is recovered from customers. SCE forecasts $9.857 million to accrue 2
in interest in the Insurance WEMA by July 2020.52 3
52 Assuming SCE’s cost recovery proposal is adopted, on October 1, 2019, SCE will transfer $252.5 million
from the Insurance WEMA to the BRRBA for cost recovery over a one-year period. If SCE’s interim rate recovery proposal is adopted, the interest that will accrue in the Insurance WEMA and be recovered from customers will be approximately $3 million less than the $$9.337 million forecast here (estimated based on assumed July 2019 and forward commercial paper rate of 2.50%).
32
V. 1
COST RECOVERY OF INSURANCE WEMA REVENUE REQUIREMENT 2
A. SCE’s Interim Rate Recovery Proposal 3
SCE proposes that the Commission authorize an Insurance WEMA Revenue Requirement of 4
$505 million for incremental wildfire-liability insurance costs ($478 million for insurance premium 5
expense, $12 million for forecast financing costs (at a commercial paper rate), and $10 million for 6
forecast memorandum account interest, plus $5 million for FF&U). As described in the Motion for 7
Interim Rate Relief accompanying this Testimony, SCE is requesting authority to begin recovering 50% 8
of the Insurance WEMA Revenue Requirement on October 1, 2019. SCE proposes that an Interim Rate 9
Recovery annual revenue requirement of $253 million be reflected in distribution rates beginning 10
October 1, 2019, and that the amount remain in place until a final decision is issued in this proceeding 11
(Interim Rate Recovery Period). Upon receiving a final decision in this proceeding, SCE will include in 12
customer rates the remainder of the amount authorized in this proceeding (i.e., amount authorized in this 13
proceeding less the amount already transferred from the Insurance WEMA to the Base Revenue 14
Requirement Balancing Account (BRRBA)) and amortize it over twelve months).53,54 15
Under SCE’s proposal, SCE will transfer the Interim Rate Recovery annual revenue requirement 16
(less FF&U) from the Insurance WEMA to the distribution sub-account of BRRBA upon approval of 17
SCE’s Motion for Interim Rate Relief. If a decision resolving this Application has not been issued by 18
October 1, 2020, SCE will continue to make monthly transfers of 1/12th of the Interim Rate Recovery 19
annual revenue requirement (less FF&U) from the Insurance WEMA to the distribution sub-account of 20
53 Assuming SCE’s proceeding schedule is adopted as proposed, a final decision resolving this proceeding will
be issued by July 2020, which would allow for the recovery of the remaining Insurance WEMA Balance between October 1, 2020 and September 30, 2021. Put simply, SCE’s proposal effectively amortizes the Insurance WEMA Balance over a two-year period, from October 1, 2019 to September 30, 2021.
54 If a final decision approves an amount less than what has already been collected through this interim mechanism, any over-collection would be returned to customers with interest that is calculated at the three-month commercial paper rate.
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BRRBA until a final decision has been issued.55 Upon receiving a final decision in this proceeding, 1
SCE will calculate the difference between the authorized amount56 and the amount transferred during the 2
Interim Rate Recovery Period, and recover or refund the difference from/to customers. 3
B. SCE’s Cost Recovery Proposal if Interim Rate Recovery is Denied 4
If the Commission does not grant SCE’s Motion for Interim Rate Recovery – which it should 5
grant – SCE proposes that the full authorized amount approved in this proceeding be recovered from 6
customers over a one-year period starting upon Commission issuance of a final decision. 7
55 Or until SCE has transferred the full Insurance WEMA revenue requirement proposed in this proceeding to
the BRRBA, whichever comes first. 56 Upon receiving a final decision in this proceeding, SCE will submit an advice letter setting forth the final
Insurance WEMA Revenue Requirement that reflects the actual financing costs and actual interest that has accrued in the Insurance WEMA based on the actual commercial paper rate and the date the Insurance WEMA balance is transferred to BRRBA.
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Direct Testimony in Support of Wildfire Insurance Cost Recovery 24
Application,25
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SCE’s
Direct Testimony in Support of Wildfire Insurance Cost Recovery Application,
Direct Testimony in Support of Wildfire Insurance Cost Recovery Application,
Direct Testimony in Support of Wildfire Insurance Cost Recovery Application,