:runsdshuv · 26 discussed in chapter v of exhibit sce-07, volume 1. under this mechanism, rates...

(U 338-E)

2021 General Rate Case A.19-08-

Workpapers

Affordability, Post-Test Year Ratemaking SCE-07 Volume 04, Chapter III

August 2019

Workpaper – Southern California Edison / 2021 General Rate Case

Exhibit No. SCE-07 Vol.04 Ch III Witnesses: J. Rumble

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III. 1

POST-TEST YEAR RATEMAKING 2

This chapter presents SCE’s proposal for a Post-Test Year Ratemaking (PTYR) mechanism to 3

provide additional revenues, as necessary, to cover our costs of doing business in calendar years 2022 4

and 2023, including capital investment to meet growing demand and replace aging utility infrastructure, 5

plus performing wildfire risk mitigation activities. Our current PTYR mechanism was adopted in SCE’s 6

2003 General Rate Case and extended, with modifications, in all cases through SCE’s most recent 2018 7

GRC.43 In this case, SCE is proposing a PTYR mechanism as follows. For O&M, SCE proposes to 8

continue using the escalation rate methodology adopted by the Commission in its last three GRCs. For 9

capital, SCE proposes the use of budgeted capital additions rather than the escalation of test year capital 10

additions adopted since SCE’s 2012 GRC. 11

As discussed in more detail below, as a result of Assembly Bill (AB) 1054 and the exclusion of 12

certain fire mitigation capital spending from earning an equity return, SCE proposes to bifurcate its 13

budgeted capital additions between wildfire and non-wildfire. SCE’s proposal for budgeted capital 14

additions and bifurcation are necessitated by AB 1054,44 which leads to minimal wildfire capital 15

additions in the test year followed by a significant increase in wildfire capital additions in the post-test 16

years when SCE’s wildfire capital additions exceed the excluded amount and again become eligible for 17

a full equity return.45 Bifurcating the capital additions demonstrates that non-wildfire capital additions 18

are increasing at a rate less than the latest IHS Markit (Global Insight) forecast for capital while the 19

wildfire capital additions have an abnormal profile due to the impacts of AB 1054 rather than due to any 20

significant change in SCE’s wildfire capital investment strategy. Therefore, the escalation of test year 21

capital additions authorized in the last several GRCs would not provide SCE with adequate funding for 22

the vital wildfire investments SCE must undertake in the post-test years. 23

SCE currently operates under ratemaking that incorporates a revenue balancing account 24

mechanism known as the Base Revenue Requirement Balancing Account (BRRBA). This account is 25

discussed in Chapter V of Exhibit SCE-07, Volume 1. Under this mechanism, rates are designed to 26

43 D.04-07-022, pp. 266-281; D.06-05-016, pp. 290-309; D.09-03-025, pp. 302-307; D.12-11-051, pp. 599-609;

D.15-11-021, pp. 383-392 & pp. 557-558; D.19-05-020, pp. 286-272 & pp. 471-472.

44 AB 1054 is also discussed in Exhibit SCE-07, Volume 1, Section II.A.

45 See Section III.C.3 below.

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recover the authorized revenue requirement, with any variation in recorded revenues (either higher or 1

lower) tracked in a balancing account for subsequent recovery from, or refund to, retail customers. 2

During the period in which the revenue requirement is in effect, any additional revenues that result from 3

customer growth or increased usage per customer are returned to customers by crediting the BRRBA, 4

rather than being available to offset any increased revenue requirement from O&M and capital-related 5

cost increases. 6

Thus, it is necessary to provide for higher authorized revenues to support increased spending in 7

order to reduce wildfire risk and carry out public policies to enhance the distribution grid while 8

constructing new facilities to meet load growth or replace aging infrastructure.46 The increased spending 9

may also represent the impact of price inflation on operating expenses.47 The underlying regulatory 10

principle is to provide SCE with a reasonable opportunity to earn its authorized return on equity in the 11

post-test years, consistent with cost-of-service ratemaking. 12

In this 2021 GRC, SCE is proposing a ratemaking formula that would yield the projected 13

revenue requirement increases for 2022 and 2023 that are shown earlier in this exhibit. SCE proposes to 14

update its revenue requirement projections based on updated price inflation forecasts in annual advice 15

submittals prior to 2022 and 2023. SCE’s proposed PTYR mechanism will allow SCE to recover O&M 16

cost changes resulting from input price changes outside of SCE’s control and capital-related cost 17

changes that result from SCE’s capital expenditure program. SCE has bifurcated the capital section into 18

wildfire and non-wildfire related capital additions.48 As explained later in this exhibit, SCE’s mechanism 19

46 SCE’s rates reflect the embedded cost of existing facilities, which are partly depreciated. Because plant is

valued at original cost (without adjusting for inflation) less accumulated depreciation, new facilities that are added to accommodate load growth will cost more than the average value (for ratemaking purposes) of existing plant. When we replace older facilities with new ones, the associated cost is typically much higher than what is included in rates for the original facilities.

47 As explained more fully below, SCE’s PTYR mechanism outlined in this testimony does not include any offset for additional O&M expense resulting from new customers, increased usage of SCE’s system, or fulfillment of public policy objectives. This feature, which is consistent with previous attrition mechanisms authorized by the Commission, and SCE’s current PTYR mechanism, is an implicit productivity adjustment.

48 Pursuant to Assembly Bill 1054, SCE is excluding from this proceeding the revenue requirement associated with $1.575 billion in wildfire-related capital expenditures. As discussed in the Application at Chapter III.A and in Exhibit SCE-07, Volume 1, these expenditures are not eligible for an equity rate of return, and recovery of the associated revenue requirement will be resolved through a separate application outside of this GRC. Also, per AB 1054, recovery of the revenue requirement deemed just and reasonable in this proceeding will occur via an application requesting a financing order.

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does not track or recover O&M cost changes that result from other factors, except to the extent those 1

factors are covered by SCE’s proposed Z-factor mechanism.49 2

Under our PTYR mechanism proposal, we may seek recovery of costs imposed on SCE as a 3

result of Commission actions. SCE’s proposed PTYR mechanism, which includes O&M escalation 4

using the GRC escalation rate methodology and capital-related cost increases bifurcated between 5

budgeted wildfire and non-wildfire capital additions, is based on events known and reasonably 6

anticipated as of the date this testimony is being prepared. Subsequent Commission actions or other 7

events may necessitate that SCE propose changes to the revenue requirement produced by this 8

mechanism.50 9

A. Background 10

1. Rate Case Plan 11

Under the Rate Case Plan, as modified by Commission Resolution ALJ-151 and 12

D.89-01-040, and as confirmed in D.14-12-025,51 energy utilities file GRC applications every three 13

years. The Attrition Revenue Requirement Adjustment mechanism was adopted by the Commission52 in 14

the early 1980s to compensate utilities for the increased costs that occurred between test years, and has 15

since been a regular part of energy utility ratemaking.53 Over approximately this same period, the 16

Commission utilized an Electric Revenue Adjustment Mechanism (ERAM) or similar balancing account 17

49 The Z-factor mechanism allows SCE to recover costs associated with exogenous events (“Z-Factors”) that

result in a major cost impact for SCE. See Section III.C.4 below.

50 For example, as noted in SCE’s Application, in many cases, the same crews that support wildfire mitigation activities are responsible for executing SCE’s traditional infrastructure replacement (IR) work. Those crews are finite and in this rate case cycle SCE faces real resource constraints. Accordingly, SCE is proposing the flexibility to adjust its forecast (i.e., before issuance of a final decision) by reducing the forecast for wildfire mitigation programs and increasing the forecast for IR work. Conversely, if it proves necessary during the pendency of this proceeding to adjust the wildfire forecast to perform additional wildfire mitigation work than its original forecast, SCE proposes to be given the opportunity to reduce its IR forecast to align with what its crews’ resources can accomplish.

51 D.89-01-040, 30 CPUC 2d 576; D.14-12-025, p. 40. See also D.16-06-005.

52 In D.92549, issued in conjunction with SCE’s 1981 GRC application, the Commission adopted Staff’s recommendation to implement stepped rate changes for 1982, citing Staff’s argument that “the use of stepped rates would provide a more stable earnings pattern.” 5 CPUC 2d 39, 80.

53 In D.96-09-092, the Commission adopted a five-year performance based ratemaking (PBR) mechanism that provided annual increases in SCE’s distribution rates based on a measure of inflation less a productivity factor, and allowed SCE to retain additional revenues that resulted from sales and customer growth. In anticipation of adopting a PBR mechanism, the Commission did not authorize an attrition mechanism in SCE’s Test Year 1995 GRC (D.96-01-011, 1996 Cal. PUC LEXIS 23, Part 5 of 6, *46-48).

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mechanisms to remove the incentive for SCE to promote electricity sales at the expense of conservation 1

and demand reduction programs. 2

Annual cost increases can be triggered by input price inflation and by plant additions 3

used to maintain and provide service. Cost-of-service ratemaking principles require some means to 4

recognize these cost increases in the authorized revenue requirement. Without such recognition of cost 5

increases, SCE will not have a reasonable opportunity to earn its authorized rate of return after the test 6

year, as evidenced by the projections presented in Chapters II and III of Exhibit SCE-07, Volume 1. 7

Since the BRRBA fixes SCE’s base revenues, SCE must have an explicit ratemaking mechanism to 8

permit it to recover increased costs in the post-test year period. 9

2. Operational Cost Changes 10

After the test year, SCE’s earned rate of return is directly affected by operational and 11

financial cost changes in the post-test years. The PTYR mechanism proposed in this exhibit addresses 12

operational cost changes due to price increases in the goods and services we employ in our operations 13

and the level of capital assets, i.e., rate base, required to operate our business and maintain safe and 14

reliable electric service for our customers. The authorized rate of return, i.e., the costs of long-term debt, 15

preferred equity, and common equity, are not addressed by the PTYR mechanism but instead are 16

covered in SCE’s cost of capital applications. 17

B. Need for Revenue Requirement Increases 18

This section explains why we anticipate that revenue requirement increases will be required 19

during 2022 and 2023. 20

1. Inflation and Productivity 21

In the 1970s and 1980s the US experienced high levels of price inflation. Inflation has 22

stabilized since the 1990s. However, inflation continues to increase the cost of doing business and 23

results in increasing costs for the inputs SCE uses to provide service to our customers.54 The labor and 24

non-labor escalation rate projections presented in Chapter VIII of Exhibit SCE-07, Volume 1 document 25

the O&M inflation expected from 2021 through 2023. We will also incur higher costs for capital 26

54 For example, the price of power wire and cable has increased by almost 19 percent from July 2016 to July

2019, the span of one rate case filing. (Based on the Producer Price Index for power wire and cable, not seasonally adjusted. Refer to WP SCE-07, Vol. 4, Chapter III, pp 2-3. [For reference, this index is PCU3359293359291 in the Federal Reserve Economic Data database.]

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equipment to replace worn-out equipment, to build new facilities to serve both new and existing 1

customers, and for wildfire risk mitigation. 2

In the past, our productivity performance has acted as a partial offset to our increased 3

costs; but generally, productivity improvements cannot cancel out revenue requirement increases, 4

particularly when we cannot keep the revenue increases from output or usage (kWh sales, kW demand) 5

increases. In addition, our revenue requirements will rise because of the costs associated with serving 6

new customers and costs associated with providing new or improved services for existing customers. 7

These factors make a PTYR mechanism necessary to provide SCE a fair opportunity to recover its costs. 8

Under a revenue balancing account, we do not retain any incremental revenue from 9

growth in usage or new customers to offset the increased costs of operation that result from these 10

influences. Under the attrition mechanisms previously authorized by the Commission and SCE’s current 11

PTYR mechanism, it has been assumed that increased O&M costs from customer and usage growth are 12

offset by productivity gains achieved during the attrition years.55 These mechanisms generally have 13

permitted recovery of O&M cost increases due to input price escalation (O&M labor escalation and 14

O&M non-labor escalation) during attrition or post-test year periods, but have not permitted recovery of 15

O&M cost increases due to other factors.56 Limiting recovery of O&M cost increases in this way results 16

in an implicit expectation that productivity gains will offset O&M cost increases from other sources. 17

(Appendix A provides a mathematical analysis of this.) 18

2. Enhancing SCE’s Financial Standing 19

SCE has recently been downgraded due to the uncertainty concerning wildfire liabilities. 20

Because of pending wildfire liabilities, PG&E, one of the US’s largest electric utilities, filed bankruptcy 21

for the second time in less than 20 years on January 29, 2019. In the 17 years since the California energy 22

crisis, SCE has not completely returned to the financial stature that it enjoyed before the California 23

energy crisis.57 California IOUs are again under credit pressure due to the increased risks due to 24

55 D.04-07-022, pp. 273-274.

56 Excepting Z-factors as discussed below.

57 Before the energy crisis, SCE was A-rated by both Moody’s and Standard & Poor’s (corporate or issuer credit rating). SCE did regain the Moody’s rating for a time before the wildfires of 2017 and 2018 but SCE never regained the Standard & Poor’s rating.

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California wildfires and California inverse condemnation policies.58 A reasonable regulatory mechanism 1

that will allow SCE to recover its revenue requirement during 2022 and 2023 will support SCE’s 2

financial health. 3

If SCE can achieve higher credit ratings than it currently possesses, customers will 4

benefit from reduced financing costs. The Commission should extend SCE’s PTYR mechanism to 5

support SCE’s financial standing and provide capital markets the assurance necessary to finance our 6

debt. The PTYR mechanism should provide that capital-related costs will be recovered as investments 7

are made and enter rate base, and also allow timely recovery of reasonable cost increases in O&M 8

expenses that result from cost inflation. 9

SCE should not be limited to a PTYR mechanism that allows it to only recover costs 10

associated with average historical levels of capital additions. Nor should a PTYR mechanism increase 11

the authorized revenue requirement in one year but avoid any increase in another. SCE’s capital 12

expenditures, particularly those related to wildfire risk mitigation,59 will result in substantial revenue 13

requirement increases after the 2021 test year. The Commission should continue the positive steps that it 14

took in SCE’s prior GRC applications to make sure that SCE’s authorized revenue requirement will be 15

sufficient to permit it to make the capital investments that are necessary to maintain and prudently 16

enhance its system and serve its customers.60 17

C. Features of Our Proposed Mechanism 18

We propose a PTYR mechanism with the following features: 19

58 AB 1054 has allowed SCE’s credit ratings to become stable, but at lower (i.e., riskier) levels than the ratings

that prevailed before the wildfires in 2017 and 2018. From the rating agency perspective, AB 1054 does not completely reverse wildfire-related risks.

59 As discussed in Section III.C.3 below, SCE anticipates that the first $1.575 billion of SCE’s fire risk mitigation capital expenditures after the effective date of AB 1054 that may not earn an equity return pursuant to Section 8386.3(e) of the Public Utilities Code will be completed by the end of 2021. Thus, fire risk mitigation capital expenditures during the post-test year period should be eligible to earn a full rate of return when they are placed in service.

60 The use of an actual capital additions budget, as specified in the 2003 GRC decision, is superior to the escalation of test year capital additions, as adopted in the 2006, 2012, 2015, and 2018 GRC decisions, or the escalation of SCE’s revenue requirement, as adopted in the 2009 GRC decision. Of the latter two options, as explained below, escalation of test year capital additions is superior to escalation of SCE’s revenue requirement. The PTYR mechanism adopted in the 2009 GRC contained significant flaws. It does not serve as a model for this case.

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An annual advice letter providing notice of the revenue requirement change for the following 1

year. 2

O&M escalation using the GRC escalation rate methodology, updated at the time of the 3

advice letter submittal and incorporating known labor cost increases at the time of the GRC 4

decision. 5

Capital-related cost increases using SCE’s Board-reviewed capital budget and bifurcated 6

between wildfire and non-wildfire capital additions. 7

A mechanism to address major exogenous changes in SCE’s costs. 8

These features are discussed in more detail in the following sections. Table III-3 below compares 9

SCE’s proposed PTYR mechanism with the PTYR mechanisms authorized since the 2003 GRC case. 10

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Table III-3 Comparison of SCE’s Proposed Post-Test Year Mechanism to Post-Test Year

Mechanisms Authorized in 2003 - 2018 GRCs

1. Annual PTYR Mechanism Advice Letter 1

SCE will submit an annual PTYR mechanism advice letter by December 1, 2021 for 2

2022 PTYR, and by December 1, 2022 for 2023 PTYR, consistent with current procedure. This advice 3

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letter will specify the revenue requirement adjustment for O&M escalation and changes in capital-1

related costs. 2

2. O&M Escalation 3

Chapter VII, Section 2, of Exhibit SCE-07, Volume 1 describes SCE’s methodology for 4

determining escalation rates for labor and non-labor O&M expense. SCE proposes to use the same 5

methodology, with some adjustments, to determine O&M escalation rates to calculate the O&M expense 6

adjustments for 2022 and 2023.61 7

a) Latest IHS Markit (Global Insight)

62 Escalation Rates Will Be Used 8

SCE’s annual revenue change advice letter will be submitted by December 1 of 9

2021 and 2022 for the following year. The advice letter will reflect the latest IHS Markit (Global 10

Insight) escalation rates available on November 1 of the year in which these filings are made. These will 11

be from the “Control” projection. 12

b) Escalation Rates In Post-Test Year Advice Letters Will Be Based On Latest 13

Projections; Previous Forecast Rates Will Not Be Adjusted 14

In its Q4 2021 advice letter submittal, SCE will compute the authorized level of 15

O&M expense for 2022 by applying the latest available 2022 escalation factors (as of November 1, 16

2021) to the authorized level of O&M expense for 2021. 17

A similar approach applies to the O&M escalation adjustment for 2023. In the Q4 18

2022 advice letter submittal, SCE will compute the authorized level of O&M expense for 2023 by 19

applying compound escalation factors for 2022 through 2023 to the authorized level of O&M expense 20

for 2021. These escalation factors will be the latest available (as of November 1, 2022), so actual 21

escalation will be reflected as it is incorporated in the projections.63 This procedure will help ensure that 22

the 2023 O&M escalation adjustment captures all of the latest information for escalation from the test 23

61 Table II-5 in Exhibit SCE-07, Volume 1, page 10 presents SCE’s proposed CPUC-jurisdictional GRC

revenue requirement for 2021 through 2023. In this table, PTYR O&M escalation is captured in line 18. However, the O&M escalation resulted from SCE’s proposed PTYR mechanism is the first difference of the amounts shown, not the total, since the amount shown for 2021 is the cumulative O&M escalation from 2018 to 2021. (This is because most of the O&M expense amounts are “constant dollar” amounts expressed in 2018 dollars.

62 IHS Markit was previously known as “IHS Global Insight.”

63 In this instance, actual escalation will be through the second or third quarter of 2022, depending on how IHS Markit’s forecasting procedure works.

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year forward. However, there will be no true-up to the 2022 authorized level of O&M expense resulting 1

from the incorporation of actual escalation in the first part of 2022. 2

c) Other Differences from Escalation Rates Calculated Through the Test Year 3

The labor O&M escalation rates for 2019 incorporated IBEW collective 4

bargaining agreement wage increases and target wage increases for non-represented employees, as 5

discussed in Chapter VIII, Section 2 of Exhibit SCE-07, Volume 1. For the annual advice letters, union 6

wage increases, and target wage increases for non-represented employees that are granted before the 7

Commission adopts a Phase 1 decision in this GRC Application will be incorporated in the labor 8

escalation rates used in the 2022 and 2023 PTYR advice letters. 9

d) Projected Labor and Non-Labor Escalation Rates for 2022 and 2023 10

SCE’s projected labor and non-labor escalation rates for 2022 and 2023, based on 11

the information available at this time, are presented in Chapter VIII, Section 1 of Exhibit SCE-07, 12

Volume 1. 13

It is important that the escalation rates embedded in SCE’s PTYR mechanism be 14

industry-specific or company-specific, as SCE’s proposed escalation rates are.64 Using a general 15

inflation index such as the Consumer Price Index (CPI), Producer Price Index (PPI), or Gross Domestic 16

Product Chain-Weighted Price Index (GDPPI) is not appropriate. The CPI tracks prices paid by 17

consumers and excludes large categories of SCE’s costs. In addition, it excludes health care costs paid 18

by employers.65 The PPI covers a broad swath of the U.S. economy and is too broad to be applicable to 19

SCE.66 The GDPPI covers the entire U.S. economy. Thus, it is far too broad to serve as an accurate 20

measure of SCE’s input price inflation. The indices SCE has proposed avoid these flaws. 21

e) Benefit Escalation Rates 22

Testimony in Exhibit SCE-06, Volume 3, Section 4 discusses SCE’s benefit 23

program costs for the test year and benefit cost escalation in selected areas for 2022 and 2023. For 24

medical costs, escalation is projected to be seven percent in 2022 and 2023. These projected escalation 25

rates should be applied directly to medical program costs and PBOP (Post Retirement Benefits Other 26

64 This matter is discussed in more detail in the cost escalation testimony presented in Chapter VIII of Exhibit

SCE-07, Volume 1.

65 D.04-07-022, p. 278.

66 In some GRCs in the 1980s, the Commission adopted non-labor escalation indexes that incorporated PPI sub-indexes, but never the entire PPI.

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Than Pensions) costs without any updating when the PTYR advice letters are submitted. It is reasonable 1

to apply these escalation rates to PBOP costs, since PBOP costs are dominated by medical costs. 2

For other benefit categories, SCE will use the escalation rates shown in the table 3

below. 4

Table III-4 Benefit Escalation Rates67

3. Capital-Related Cost Increases 5

SCE regularly invests in long-lived capital assets to support and expand its system and to 6

support other objectives, including wildfire risk mitigation. The calculations that translate this 7

investment into a revenue requirement are discussed as some length in Exhibit SCE-07, Volume 2, and 8

SCE does not repeat that discussion here. The principal items in the revenue requirement that are 9

affected by capital additions are depreciation expense (which recovers the cost of capital assets over 10

their service lives), return (which is the cost of financing the remaining unrecovered cost of capital 11

assets until they are fully depreciated), and taxes (income taxes, levied on the common and preferred 12

equity return that is part of the financing cost mentioned above, and property taxes, which are related to 13

the value of the asset).68 14

67 Please see WP SCE-07, Vol. 04 – Ch. III pp. 4-5 – Cross References for Benefit Escalation Rates.

68 Table II-5 in Exhibit SCE-07, Volume 1, page 10 presents SCE’s proposed CPUC-jurisdictional GRC revenue requirement for 2021 through 2023. In this table, depreciation expense appears at line 19, return appears at line 26 (labeled “Net Operating Revenue”), and income and property taxes appear at lines 21 and 23. The amounts shown are based on SCE’s entire rate base, including capital additions placed in service over many historical years.

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SCE’s proposed methodology is to use SCE’s budget-based forecast to set capital 1

additions in the PTYR mechanism. As part of this methodology, SCE proposes to bifurcate non-wildfire 2

capital additions from wildfire capital additions. For the former, SCE’s PTYR mechanism includes 3

capital costs associated with a budget-based forecast of non-wildfire capital additions, significant 4

portions of which are already subject to a true-up mechanism.69 For the latter, SCE proposes a three-year 5

budget (2021-2023) for fire risk mitigation capital expenditures that will also be subject to a balancing 6

account.70 7

This proposed bifurcated budget-based methodology is necessary due to Assembly Bill 8

(AB) 1054. AB 1054 was signed by the Governor on July 12, 2019 and took effect immediately as an 9

urgency statute.71 Section 18 of AB 1054 modified Section 8386.3(e) of the Public Utilities Code to 10

specify that $1.575 billion of SCE’s fire risk mitigation capital expenditures after the effective date of 11

AB 1054 will not earn an equity return. SCE anticipates that capital expenditures falling within the 12

scope of Section 8386.3(e) will be completed by the end of 2021. Thus, fire risk mitigation capital 13

expenditures during the post-test year period should be eligible to earn a full rate of return when they are 14

placed in service. 15

By excluding the first $1.575 billion of SCE’s fire risk mitigation capital expenditures 16

after the statute’s effective date from earning an equity return, AB 1054 results in SCE’s wildfire-related 17

capital additions being suppressed by approximately $622 million in the test year and an additional $181 18

million in the first post-test year.72 This, in turn, leads to a significant increase in wildfire capital 19

69 Much of SCE’s non-wildfire capital spending is already subject to true-up in established mechanisms, such as

the Pole Loading and Deteriorated Pole Program Balancing Account and the Safety and Reliability Investment Incentive Mechanism. See generally Exhibit SCE-07, Volume 1, Chapter V.

70 See Exhibit SCE-07, Volume 1, Section V.B.1 for discussion concerning SCE’s proposal to create two new two-way balancing accounts: the Wildfire Risk Mitigation Balancing Account (WRMBA), which will record the costs of all system hardening and enhanced operational practices, and the Vegetation Management Balancing Account (VMBA), which will record the costs of all vegetation management activities, including non-wildfire-related routine vegetation management costs.

71 AB 1054 is codified as Chapter 79, Statutes of 2019. (See https://www.sos.ca.gov/administration/bill-chapters/.) Text of the bill is available at http://leginfo.legislature.ca.gov/faces/billPdf.xhtml?bill_id=201920200AB1054&version=20190AB105495CHP.

72 See Exhibit SCE-07, Volume 1, Section II.A (“[I]n this GRC SCE has excluded the revenue requirement associated with $1.575 billion of capital expenditures forecast to be spent on fire risk mitigation efforts. Consistent with AB 1054, the Commission must find the first $1.575 billion spent on fire risk mitigation efforts to be just and reasonable prior to SCE recovery of the investment.”).

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additions in the post-test years as the AB 1054 suppression of capital additions is phased out and all of 1

SCE’s wildfire capital additions become eligible for a full equity return. These impacts of AB 1054 2

mean that a PTYR mechanism that escalates SCE’s test year capital additions (as authorized in the 2006, 3

2012, 2015, and 2018 GRC decisions) would not provide SCE with adequate funding for the vital 4

wildfire investments SCE must undertake in the post-test years.73 74 5

a) Non-Wildfire Capital Additions 6

For non-wildfire spending, SCE’s PTYR mechanism includes capital costs 7

associated with a budget-based forecast of non-wildfire capital additions. SCE’s budget-based forecast 8

gives the best detailed guidance available at this time concerning the non-wildfire capital expenditures 9

that SCE should make in order to maintain and enhance its electric system and support the strategic 10

objectives Mr. Payne outlines in SCE-01, Volume 1. 11

Table III-5 Budgeted Non-Wildfire Capital Additions, 2021-202375

($ millions)

As can be derived from Table III-5, SCE’s budget-based forecast of a 2.6% 12

increase in 2022 and a (-0.5%) decrease in 2023 for non-wildfire capital additions results in a 2.1% 13

overall increase over the post-test year period. This 2.1% overall increase for the post-test year period is 14

less than the 2.49% annual increase over 2018 authorized capital additions authorized in the 2018 15

GRC.76 This lower increase for non-wildfire capital additions reflects SCE’s shift in focus toward 16

wildfire spending. 17

b) Wildfire Capital Additions 18

SCE’s PTYR revenue requirement also includes capital costs associated with 19

SCE’s three-year budget for wildfire capital expenditures. SCE’s budget-based forecast gives the best 20

73 See Exhibit SCE-04, Volume 5.

74 Refer to WP SCE-07, Vol. 04, Ch. III – pp. 8-9 – Weighted Average of Capital Escalation Rates.

75 Budgeted test year 2021 non-wildfire capital additions shown for comparison purposes.

76 D.19-05-020, p. 285.

Line No. 2021 2022 2023

1 3,186.2 3,269.6 3,252.0

Proposed Capital Additions

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detailed guidance available at this time concerning the vital wildfire risk mitigation investments SCE 1

must undertake in the 2021 GRC cycle. Our projected wildfire capital additions for 2022-2023 are 2

shown in the table below.77 3

Table III-6 Budgeted Wildfire Capital Additions, 2021-202378

($ Millions)

This projection reflects both SCE’s shift in focus toward necessary wildfire 4

spending and the low test year capital additions for wildfire spending due to the AB 1054 exclusions. As 5

seen in Figure III-10 below, there is a significant increase in wildfire capital additions in the post-test 6

years as the AB 1054 suppression of capital additions is phased out and all of SCE’s wildfire capital 7

additions become eligible for a full equity return. 8

77 SCEs total wildfire and non-wildfire capital additions, by project, can be found in WP SCE-07, Vol. 04, Ch.

III – pp. 6-7 – Annual Net Capital Additions 2019-2023 by Function/Type.

78 Budgeted test year 2021 wildfire capital additions shown for comparison purposes.

Line No. 2021 2022 2023

1 92.4 638.9 975.1

Proposed Capital Additions

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Figure III-10 Budgeted Wildfire Capital Additions and AB 1054 Capital Addition Exclusions

2021 - 2023 ($ Millions)

The revenue requirement associated with these capital additions (both non-1

wildfire and wildfire) is included in SCE-07, Volume 1. 2

4. Treatment of Major Exogenous Cost Changes 3

In SCE’s current PTYR mechanism, SCE may seek to recover costs associated with 4

exogenous events (“Z-Factors”) that result in a major cost impact for SCE. The existing Z-Factor 5

mechanism allows either SCE or the Public Advocates Office at the Commission (Cal Advocates) to 6

submit a Letter of Notification to the Executive Director to identify any potential Z-Factor event. 7

There are no current Z-factors. SCE is at risk for events that do not have a financial impact of more than 8

$10 million. In addition, there is a $10 million “deductible amount” applied on a one-time basis to the 9

first year’s revenue requirement associated with any approved Z-Factors. Costs associated with two 10

named contingencies, new municipal utility formation and P.U. Code Section 463 projects, are treated as 11

Z-Factors but without the $10 million threshold or the $10 million deductible.79 12

79 The Z-factor mechanism was established in SCE’s 2003 Test Year General Rate Case. See D.04-07-022,

pp. 278-279; Finding of Fact 231, p. 346. Continuation was authorized in SCE’s 2006, 2009, 2012, 2015, and 2018 Test Year General Rate Cases. See D.06-05-016, p. 308, Ordering Paragraph 7, p. 382; D.09-03-025,

(Continued)

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35

The existing Z-Factor mechanism should be continued. Although the Z-factor mechanism 1

has not been activated frequently, the Z-Factor mechanism has provided reasonable assurance that a 2

clear process is in place to deal with unanticipated major variations in SCE’s costs. 3

5. The Commission Should Not Require a Separate Application to Implement Post-4

Test Year Ratemaking 5

In authorizing PTYR for 2004 and 2005, the Commission mandated that if SCE’s 6

revenue requirement increase was to exceed $150 million in either year, SCE would be required to 7

submit an application for that year, rather than an advice letter.80 The Commission stated that it was 8

unwilling to permit greater rate increases to be implemented through the “streamlined” advice letter 9

process. 10

Unlike that GRC application, however, this application contains testimony supporting 11

SCE’s proposed capital expenditures through 2023, not just through the test year. There is no substantial 12

component of SCE’s PTYR mechanism not addressed by testimony in this application. The Commission 13

should not require SCE to submit a second application in 2021 or 2022 to reapprove its proposed 14

mechanism. 15

D. The Post-Test Year Mechanism Adopted in SCE’s 2009 GRC Contains Two Fundamental 16

Analytic Errors That Shortchanged SCE’s Revenue Requirement 17

In SCE’s 2009 GRC, the Commission adopted a simplified post-test year mechanism that simply 18

increased SCE’s revenue requirement in 2010 and 2011 by specified percentages. However, that 19

approach contained a methodological error because the Commission’s calculations overlooked SCE’s 20

year-end 2008 balance of Construction Work in Progress (CWIP).81 21

Continued from the previous page p. 306, Conclusion of Law 213, p. 390, Ordering Paragraph 5, p. 393; D.12-11-051, p. 609; D.15-11-021, pp. 390, 392, Finding of Fact 487, p. 527, Conclusion of Law 125, p. 546, Ordering Paragraph 19.c, p. 557; D.19-05-020, p. 285, Finding of Fact 223, p. 394, Conclusion of Law 186, p. 428, Ordering Paragraph 4.c, p. 437.

80 D.04-07-022, p. 281; Conclusion of Law 53, p. 355.

81 See FERC Uniform System of Accounts for Electric Utilities, 18 CFR, Part 101, Account 107: A. This account shall include the total of the balances of work orders for electric plant in process of construction. B. Work orders shall be cleared from this account as soon as practicable after completion of the job. Further, if a project, such as a hydroelectric project, a steam station or a transmission line, is designed to

(Continued)

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36

In SCE’s 2009 GRC, as in this 2021 GRC, we proposed a method for the Commission to 1

authorize revenue requirements for the two attrition or post-test years (in that case 2010 and 2011, in this 2

case 2022 and 2023).82 Our PTYR proposal included detailed testimony on our capital expenditures for 3

2010 and 2011. However, in lieu of reviewing our entire capital forecast, the Commission instead 4

adopted a ratemaking method that indexed our total 2009 adopted revenue requirement by 4.25 percent 5

for 2010 and 4.35 percent for 2011. The post-test year revenue requirement should provide for recovery 6

of authorized costs and a reasonable opportunity to earn the authorized rate of return. But the PTYR 7

formula adopted in our 2009 GRC contained a fundamental methodological error83 that effectively 8

shortchanged our authorized revenues and jeopardized SCE’s ability to earn its authorized rate of return. 9

It can take many months for some capital projects to be completed and placed into service. 10

During the construction period, as we expend funds on those projects, we accrue an Allowance for 11

Funds Used During Construction (AFUDC), which recognizes the financing costs being incurred during 12

construction.84 The AFUDC accrual is eventually added to the overall cost of the asset, along with 13

corporate overheads, then transferred to “Plant-in-Service” and the cost recovered over its operating life. 14

During the period before the asset enters service, the costs are recorded in Construction Work in 15

Progress (CWIP), FERC Account 107. 16

Continued from the previous page consist of two or more units or circuits which may be placed in service at different dates, any expenditures which are common to and which will be used in the operation of the project as a whole shall be included in electric plant in service upon the completion and the readiness for service of the first unit. Any expenditures which are identified exclusively with units of property not yet in service shall be included in this account.

82 SCE’s 2009 PTYR proposal is described in A.07-11-011, Exhibit SCE-11A, Vol. 1 and summarized in D.09-03-025 § 14.

83 SCE first brought this methodological error to the Commission’s attention in SCE’s 2006 General Rate Case. See Application 04-12-014, Exhibit 87, p. 8.

84 See FERC Uniform System of Accounts for Electric Utilities, 18 CFR, Part 101, Electric Plant Instruction 3(17): Allowance for funds used during construction (Major and Non-major Utilities) includes the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used, not to exceed, without prior approval of the Commission, allowances computed in accordance with the formula prescribed in paragraph (a) of this subparagraph. No allowance for funds used during construction charges shall be included in these accounts upon expenditures for construction projects which have been abandoned.

17



37

The Commission’s decision on our 2009 GRC effectively “stranded” Construction Work In 1

Progress (CWIP) associated with authorized 2009 capital expenditures. That is, 2010 authorized 2

revenues were not enough to recover the revenue requirement in 2010 when the 2009 CWIP balance is 3

also considered. Our Results of Operations (RO) model, which we are required by this Commission to 4

rely upon and that has also been used and endorsed by the Commission staff, includes estimates of the 5

capital expenditures in-service dates. Our rate base forecast thus depends on both the capital expenditure 6

amount and the forecast in-service dates. The rate base forecast, in turn, affects the revenue requirement. 7

For example, if there is a $100 million project and the annual revenue requirement is $17 8

million, with an in-service date of June 1, the first year’s revenue requirement would be $8.5 million. 9

The second year’s revenue requirement would be $17 million. The first-year revenue requirement is pro-10

rated, but the following year the project would be in rate base for a full year, and the revenue 11

requirement is for an entire year. Use of this simplified example, overlaid with 4.25 percent and 4.35 12

percent escalation, is graphically depicted in the figure below. 13

18



38

Figure III-11 Illustrative Revenue Requirement Example

E. Conclusion 1

SCE’s proposed PTYR mechanism is a reasonable approach to help ensure not only that SCE’s 2

utility operations are adequately funded to safely and reliably serve our customers during the post-test 3

year period but also that SCE’s continuing investments in wildfire risk mitigation are adequately funded 4

during the post-test year period. It also reflects SCE’s intent to ask only for what is needed and to 5

maintain our commitment to customer affordability. SCE respectfully requests that the Commission 6

adopt SCE’s post-test year request as proposed.7

8.50

17.00 17.00

9.258.86

0.00

10.00

20.00

Year 1 Year 2 Year 3

(Mil

lio

ns

of

Do

llar

s)

Revenue Requirement Authorized Revenues (4.25% & 4.35%)

19

2021 General Rate Case Workpapers SCE-07, Vol. 04, Ch. III

DOCUMENT PAGE(S) WP SCE-07 Vol. 04 – Ch. III – PRODUCER PRICE INDEX FOR POWER WIRE AND CABLE, NOT SEASONALLY ADJUSTED

2 – 3

WP SCE-07 Vol. 04 – Ch. III – CROSS-REFERENCES FOR BENEFIT ESCALATION RATES

4 – 5

WP SCE-07 Vol. 04 – Ch. III – ANNUAL NET CAPITAL ADDITIONS, 2019-2023 BY FUNCTION/TYPE

6 – 7

WP SCE-07 Vol. 04 – Ch. III – WEIGHTED AVERAGE OF CAPITAL ESCALATION RATES -

8 - 9



EXHIBIT SCE-07 VOLUME 4, CHAPTER III POST-TEST YEAR RATEMAKING

WORKPAPERS WITNESS: JONATHAN RUMBLE

1



PRODUCER PRICE INDEX FOR POWER WIRE AND CABLE, NOT SEASONALLY ADJUSTED

2



SCE 07 Vol 4 Section B.1Federal Reserve Economic DataLink: https://fred.stlouisfed.orgFederal Reserve Bank of St. LouisPCU3359293359291

Frequency: Quarterlyobservation_date PCU3359293359291 observation_date PCU3359293359291

2000-01-01 116.7 2010-01-01 220.22000-04-01 122.4 2010-04-01 225.02000-07-01 118.5 2010-07-01 227.12000-10-01 118.1 2010-10-01 236.12001-01-01 117.3 2011-01-01 252.62001-04-01 113.8 2011-04-01 254.12001-07-01 111.1 2011-07-01 257.82001-10-01 109.6 2011-10-01 244.12002-01-01 110.6 2012-01-01 246.12002-04-01 111.6 2012-04-01 252.42002-07-01 109.3 2012-07-01 255.42002-10-01 107.4 2012-10-01 252.12003-01-01 109.9 2013-01-01 251.42003-04-01 115.1 2013-04-01 249.92003-07-01 117.6 2013-07-01 243.82003-10-01 116.2 2013-10-01 244.92004-01-01 119.4 2014-01-01 245.82004-04-01 124.9 2014-04-01 245.62004-07-01 123.2 2014-07-01 245.62004-10-01 134.7 2014-10-01 248.82005-01-01 136.7 2015-01-01 240.62005-04-01 139.5 2015-04-01 242.52005-07-01 150.7 2015-07-01 235.02005-10-01 166.9 2015-10-01 227.02006-01-01 174.1 2016-01-01 222.12006-04-01 206.2 2016-04-01 218.92006-07-01 225.8 2016-07-01 211.22006-10-01 216.3 2016-10-01 214.82007-01-01 200.0 2017-01-01 214.72007-04-01 216.7 2017-04-01 209.92007-07-01 225.9 2017-07-01 218.32007-10-01 232.5 2017-10-01 238.52008-01-01 241.5 2018-01-01 229.72008-04-01 228.7 2018-04-01 241.82008-07-01 225.8 2018-07-01 #N/A2008-10-01 199.4 2018-10-01 252.22009-01-01 178.7 2019-01-01 252.42009-04-01 178.9 2019-04-01 253.82009-07-01 187.72009-10-01 206.4 Increase 4/2016-4/2019 15.96%

Increase 4/2002-4/2019 127.49%

Producer Price Index by Industry: Other Communication and Energy Wire Manufacturing: Power Wire and Cable, made from Nonferrous Metals (Purchased Wire), Index Dec 1982=100, Quarterly, Not Seasonally Adjusted

3



CROSS-REFERENCES FOR BENEFIT ESCALATION RATES

4



5



ANNUAL NET CAPITAL ADDITIONS, 2019-2023 BY FUNCTION/TYPE

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7



WEIGHTED AVERAGE OF CAPITAL ESCALATION RATES

8



9

:runsdshuv · 26 discussed in chapter v of exhibit sce-07, volume 1. under this mechanism, rates...

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