2009 general rate case - southern california edison · 2007-12-19 · 2009 general rate case human...

Application No.: Exhibit No.: SCE-06, Vol. 2 Witnesses: B. Decker

D. Ertel D. Featherstone S. Heller R. Worden

(U 338-E)

2009 General Rate Case

Human Resources (HR) Volume 2 – Total Compensation

Before the

Public Utilities Commission of the State of California

Rosemead, California

November 2007

SCE-06: HR Volume 2 – Total Compensation

Table Of Contents Section Page Witness

-i-

I. OVERVIEW OF TOTAL COMPENSATION..................................................2 S. Heller

A. Introduction............................................................................................2

B. Base Pay.................................................................................................2

C. Short Term Incentive Compensation .....................................................2

D. Long Term Incentive Compensation .....................................................2

E. Recognition Programs............................................................................2

F. Pensions and Benefits ............................................................................2

II. SUMMARY OF HEWITT TOTAL COMPENSATION STUDY....................2

A. Background on Total Compensation Study ...........................................2

B. Reasonableness of Compensation Paid by SCE ....................................2

III. SHORT TERM INCENTIVE PROGRAMS.....................................................2

A. Results Sharing Program........................................................................2

1. Summary of Test Year Request .................................................2

2. Program Description and Scope.................................................2

3. Program Evolution.....................................................................2

a) Program Changes in Response to Concerns Raised in D.06-05-016...................................................2

b) Results Sharing Data Integrity and Program Controls..........................................................................2

(1) New Corporate Ethics and Compliance Function .........................................2

(2) Development and Implementation of Ethics Training...................................................2

(3) Redesign of Results Sharing Program..............................................................2


Table Of Contents (Continued) Section Page Witness

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(4) Increased Focus by Senior Management on Accuracy and Integrity of Results Sharing Data.......................2

(5) Redesign of the Employee Safety Goals ..................................................................2

(6) Implementation of Quality Assurance Procedures and Monitoring System for Customer Information ........................................................2

4. Analysis of Recorded Data, Estimating Methodology, and Test Year 2009 Forecast for Results Sharing Program (FERC Accounts 500, 588, 905, and 920/921) ..............................................................2

5. Ratemaking Policy .....................................................................2

a) Elimination of Memorandum Accounting of Authorized and Recorded Results Sharing Expense ..........................................................................2 R. Worden

IV. LONG TERM INCENTIVES............................................................................2 D. Featherstone

A. Summary of Test Year Request .............................................................2

B. Program Description and Scope.............................................................2

C. Analysis of Recorded Data, Estimating Methodology, and Test Year 2009 Forecast ........................................................................2

V. RECOGNITION PROGRAMS .........................................................................2 S. Heller

A. Cash Awards ..........................................................................................2

B. Non-Cash Awards..................................................................................2

VI. PENSIONS AND BENEFITS PROGRAMS ....................................................2 B. Decker

A. Introduction............................................................................................2

B. Retirement Income-Related Benefits.....................................................2 D. Ertel

1. Pension Program and Expenses .................................................2



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a) Summary of Test Year Request .....................................2

b) Summary Description of SCE’s Pension Plan ................................................................................2 B. Decker

c) Pension Protection Act of 2006—Impact on Benefits ..........................................................................2

d) Pension Protection Act of 2006—Impact on Funding Policy ...............................................................2 D. Ertel

e) Analysis of Recorded and Forecast Costs......................2

f) Pension Costs Balancing Account .................................2

2. Edison 401(k) Savings Plan .......................................................2 B. Decker

a) Summary of Test Year Request .....................................2

b) Summary Description of SCE’s 401(k) Savings Plan...................................................................2

c) Analysis of Recorded and Forecast Costs......................2

C. Medical Programs ..................................................................................2


a) Summary Description of SCE’s Medical Programs ........................................................................2

b) Medical Plans.................................................................2

c) Preventive Health Account ............................................2

d) Employee Assistance Program ......................................2

e) Health Management Incentive Program ........................2

2. Analysis of Recorded and Forecast Expenses ...........................2

a) Rising Prescription Drug Costs......................................2

b) Increased Demand for Services .....................................2



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c) Expanding Medical Technology and Clinical Procedures......................................................................2

d) Pressures in the Health Plan Industry ............................2

e) Upheavals with Health Care Providers ..........................2

f) Increased Costs Due to Legislation................................2

g) Summary Conclusion Regarding Medical Program Forecast for 2009.............................................2

3. Discussion of Post Test-Year Medical Cost Escalation...................................................................................2

D. Dental Plans ...........................................................................................2


2. Summary Description of SCE’s Dental Plans ...........................2

3. Analysis of Recorded Data and Forecast Expenses...................2

E. Vision Service Plan (VSP).....................................................................2


2. Summary Description of SCE’s VSP ........................................2

3. Analysis of Recorded and Forecast Costs..................................2

F. Retiree Health Care and Life Insurance (Post-Retirement Benefits Other than Pensions)................................................................2 D. Ertel


2. Summary Description of Post-Retirement Benefits Other than Pensions (PBOP)......................................................2 B. Decker

a) Flex Retirees ..................................................................2

b) PrimeCare ......................................................................2

c) Medicare Part B Premiums ............................................2



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d) Dental and Vision Coverage ..........................................2

e) Retiree Life Insurance....................................................2

3. Ratemaking Background............................................................2 D. Ertel

a) PBOP Costs Must Be Placed In Independent Trusts Dedicated Solely To PBOP.................................2

b) PBOP Costs Are Reasonable And Necessary To Meet Funding Requirements Based On Fair Actuarial Assumptions, Contributions, And Investments ............................................................2

c) Rate Recovery That Exceeds The Lesser Of Tax Deductible Contributions Or FAS 106 Expense Is Subject To Refund.......................................2

d) PBOP Balancing Account..............................................2

4. Analysis of Recorded and Forecast PBOP Costs.......................2

a) PBOP Costs....................................................................2

b) PBOP Actuarial Fees .....................................................2

5. PBOP Costs Balancing Account................................................2

G. Disability Programs ...............................................................................2 B. Decker


2. Summary Description of SCE’s Disability Program .................2

a) Comprehensive Disability Plan......................................2

b) Long-Term Disability ....................................................2

c) Return to Work Program................................................2

d) Wage Continuation ........................................................2


H. Group Life Insurance .............................................................................2



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2. Summary Description of SCE’s Group Life Insurance Plans ..........................................................................2

a) Employee Life Insurance ...............................................2

b) Dependent Life Insurance ..............................................2

c) Accidental Death & Dismemberment (AD&D) Insurance.........................................................2

d) Business Travel Accident Insurance..............................2

e) Paid-Up Life Insurance ..................................................2


I. Miscellaneous Benefit Programs ...........................................................2


2. Summary Description of SCE’s Miscellaneous Benefits Programs......................................................................2

a) Electric Service Discount...............................................2

b) Awards to Celebrate Excellence (ACE) ........................2

c) Corporate Relocation Program ......................................2

d) Commuter Programs ......................................................2

e) Educational Reimbursement Program ...........................2

f) Severance Benefits.........................................................2

g) Work Life Balance Assistance.......................................2

3. Analysis of Recorded Data and Forecast Costs .........................2

J. Executive Benefits .................................................................................2




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2. Summary Description of Executive Benefits.............................2

a) Executive Retirement Plan.............................................2

b) Survivor Benefit Plans ...................................................2

3. Analysis of Recorded Data and Forecast Costs .........................2

Appendix A Witness Qualifications

Appendix B Hewitt Total Compensation Study

Appendix C Support For SCE’s Forecast Pension Costs

Appendix D SCE’s Forecast PBOP Costs

Appendix E Certification Letter


List Of Figures Figure Page

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Figure IV-1 Long Term Incentives Recorded and Adjusted 2006/Forecast 2007-2009

FERC Accounts 920/921 (Constant 2006 $000) ...................................................................................2

Figure VI-2 Pension & Benefit Plans Recorded and Adjusted 2006/Forecast 2007-2009

FERC Accounts 926 (Non-Labor – Constant 2006 $000; Other – Nominal $000)...............................2

Figure VI-3 Pension Costs Recorded and Adjusted 2002-2006/Forecast 2007-2009 FERC

Account 926 (Nominal $000) ................................................................................................................2

Figure VI-4 401(k) Savings Plan Costs Recorded and Adjusted 2002-2006/Forecast

2007-2009 FERC Account 926 (Nominal $000) ...................................................................................2

Figure VI-5 Medical Programs Cost Recorded and Adjusted 2002-2006/Forecast 2007-

2009 FERC Account 926 (Nominal $000) ............................................................................................2

Figure VI-6 Dental Plans Cost Recorded and Adjusted 2002-2006/Forecast 2007-2009

FERC Account 926 (Nominal $000) ....................................................................................................2

Figure VI-7 Vision Service Plan Costs Recorded and Adjusted 2002-2006/Forecast


Figure VI-8 PBOP Costs Recorded and Adjusted 2002-2006/Forecast 2007-2009 FERC

Account 926 (Non-Labor – Constant 2006 $000; Other – Nominal $000) ...........................................2

Figure VI-9 Disability Programs Cost Recorded and Adjusted 2002-2006/Forecast 2007-


Figure VI-10 Group Life Insurance Costs Recorded and Adjusted 2002-2006/Forecast


Figure VI-11 Miscellaneous Benefit Costs Recorded and Adjusted 2002-2006/Forecast


Figure VI-12 Executive Benefits Cost Recorded and Adjusted 2002-2006/Forecast 2007-



List Of Tables Table Page

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Table II-1 Summary Results of the Total Compensation Study ..................................................................2

Table III-2 Results Sharing – All FERC Accounts Recorded and Adjusted 2002-

2006/Forecast 2007-2009 FERC Accounts 500, 588, 905, and 920/921 (Constant

2006 $000) .............................................................................................................................................2

Table III-3 Results Sharing Program Goals 2006 Plan Year.......................................................................2

Table III-4 Results Sharing – All FERC Accounts Recorded and Adjusted 2002-

2006/Forecast 2007-2009 FERC Accounts 500, 588, 905, and 920/921 (Constant

2006 $000) .............................................................................................................................................2

Table VI-5 U.S. Stocks, U.S. Bonds and SCE Retirement Fund Rates of Return 1997-

2006........................................................................................................................................................2

1

I. 1

OVERVIEW OF TOTAL COMPENSATION 2

A. Introduction 3

SCE’s compensation policies offer employees total compensation that consists of base pay, 4

short-term incentives, long-term incentives, recognition awards, and benefits. Our compensation 5

programs are market-competitive and are designed to reward employees for individual, team and 6

company performance. SCE is undertaking an unprecedented amount of work over the next several 7

years, while at the same time, a shortage of skilled workers exists in the labor market. In order to obtain 8

the highly skilled workforce essential to the Company’s operations, it is essential that SCE offer a 9

competitive compensation package in order to attract and retain a high performing workforce. 10

B. Base Pay 11

Base pay represents the foundation of cash compensation, the fixed component of pay. Base pay 12

recognizes ongoing performance, skills, and knowledge of job responsibilities. The company offers 13

base pay programs that establish and maintain performance-based pay levels that are market competitive 14

and internally equitable; recognize performance that meets or exceeds expectations; and allows for pay 15

differentiation based on performance. 16

C. Short Term Incentive Compensation 17

The success of any company is due to the collective contribution of the entire workforce. The 18

Results Sharing, Management Incentive Program and Executive Incentive Program (RS/MIP/EIP) are 19

short term incentive programs that are designed to attract, retain, and reward employees by providing a 20

market-competitive bonus opportunity linked to performance. The program recognizes and rewards 21

employees for performance in areas such as customer service, safety, cost control, and efficiency. 22

RS/MIP/EIP gives employees a financial stake in achieving utility objectives and drives SCE towards 23

the achievement of its operational goals and improves value for the customer. 24

D. Long Term Incentive Compensation 25

Senior managers and executives are eligible for long-term incentive compensation such as stock 26

options, restricted or deferred stock units, and performance shares. The Company must offer such 27

2

incentives in order to attract and retain top leaders, as the other companies against which SCE competes 1

for leaders also offer such long-term incentive compensation. Long-term incentives also are designed to 2

align the interests of top managers and officers with the long-term interests of shareholders and 3

customers, ensuring that long-range projects such as upgrading of transmission and distribution 4

infrastructure have management support even when they might have adverse short-term impacts on 5

financial or other goals. Finally, long-term incentives aid in retention, both by means of vesting 6

schedules requiring recipients to remain employed through a vesting period in order to keep their grants 7

and by offsetting drops that may occur in short-term compensation. 8

E. Recognition Programs 9

SCE’s recognition programs were created for the purpose of acknowledging employees for 10

desired behaviors and exceptional business results. Recognition programs include both cash and non-11

cash forms of compensation, including informal recognition, Awards to Celebrate Excellence (ACE), 12

and spot bonuses. These programs reward individual and team achievement and complement our 13

comprehensive compensation program by: 14

• Highlighting and encouraging behaviors that contribute to our Company’s success. 15

• Providing a way to recognize outstanding performance and achievements. 16

• Fostering an environment where employees and co-workers can celebrate one another’s 17

successes. 18

• Adding a flexible, personalized component to the SCE compensation programs. 19

F. Pensions and Benefits 20

The ability to attract and retain a skilled workforce is dependent on offering a total compensation 21

package that includes an attractive benefits component. The core benefits offered by SCE include 22

medical, dental, and vision plans, the Edison 401(k) Savings Plan, the pension plan, disability benefits, 23

life insurance, and other benefits, such as Educational Reimbursement Program and the Electric Service 24

Discount. The benefits offered assist SCE in competing in the competitive job market for the limited 25

labor resources available.26

3

II. 1

SUMMARY OF HEWITT TOTAL COMPENSATION STUDY 2

A. Background on Total Compensation Study 3

Total compensation studies have been an element of energy utilities’ GRC proceedings for 4

nearly 20 years. In accordance with the direction provided by the Commission in past GRCs, SCE and 5

DRA jointly selected an independent expert to perform the Total Compensation Study. Consistent with 6

the Commission’s direction, the selected independent expert performed the study and conducted all 7

analyses in regards to benchmark jobs, job matching, and the selection of comparable firms. 8

In planning for SCE’s 2009 GRC filing, SCE and DRA agreed that a competitive selection 9

process should be used to select the independent expert which would perform the Total Compensation 10

Study. In November, 2006, a jointly developed Request for Proposal (RFP) was sent by SCE to three 11

consulting firms: Hewitt Associates (“Hewitt”), Towers Perrin, and Mercer. Based on SCE’s and 12

DRA’s analysis of the proposals submitted by these firms, two firms were selected for interviews. DRA 13

and SCE jointly interviewed two representatives from these on December 28, 2006 and January 3, 2007, 14

respectively. Based on the proposals and the interviews, SCE and DRA jointly recommended that 15

Hewitt perform the Total Compensation Study. Thereafter, Hewitt was retained, and on January 17, 16

2007, Hewitt, DRA, and SCE began the process of developing the 2009 Total Compensation Study.1 17

All three parties worked cooperatively, making decisions by consensus, in resolving the many data 18

gathering and analytical issues further discussed in Hewitt’s report. 19

Although the methodology of the 2006 Total Compensation Study was sufficient for estimating 20

the competitiveness of SCE’s total compensation levels, the project team desired to improve upon the 21

study by: (1) enhancing the transparency and clarity of the study approach; (2) increasing the 22

participation of utilities with nuclear operations; and (3) increasing the number of SCE employees 23

covered in the study. The project team achieved these improvements by: 24

1 Hewitt Final Report is being provided under separate cover as Appendix B of this exhibit.

4

• Describing in more detail the methodology used for the Study. 1

• Providing more detail around all the decisions made. 2

• Including data from several additional utilities with nuclear operations. 3

• Increasing coverage of jobs in each study category, which resulted in coverage across all 4

categories of 65 percent (increased from 62 percent in the 2006 Study). 5

The Hewitt report describes in detail the data gathering process and analysis underlying the Total 6

Compensation Study. In short, the study process entailed the following steps: 7

1. Hewitt, DRA, and SCE selected a sample of SCE jobs from five categories – 8

Physical/Technical, Clerical, Professional/Technical, Manager/Supervisor, and 9

Executive. Collectively, the benchmark jobs represent approximately 65 percent of 10

SCE’s workforce. 11

2. Hewitt, DRA, and SCE identified a marketplace of employers (comparator companies) 12

with which SCE competes to fill the jobs in each of these categories. 13

3. Hewitt, with input from SCE, matched the SCE benchmark jobs to comparable positions 14

at the comparator companies. 15

4. DRA validated the matches of SCE benchmark jobs to comparable positions at the 16

comparator companies by performing a spot-check. The spot-check process covered 17

approximately 70 percent of the total benchmark jobs. 18

5. Hewitt calculated the benefit value for each benchmark job for each comparator company 19

for which they could find a match, in order to present that data on a cash-equivalent basis 20

for comparison purposes. 21

6. Hewitt compared SCE’s total compensation to that of the comparator companies for each 22

benchmark job in each of the five job categories. 23

7. Finally, Hewitt “weighted” the results for each of the five job categories, based on the 24

relative percentage of that category to SCE’s total 2006 payroll to calculate the 25

comparison of SCE’s total compensation to the market. 26

5

Each of these processes is described Hewitt’s Report which details the methodology, data 1

gathering, analyses, and results of the study. 2

B. Reasonableness of Compensation Paid by SCE 3

Table II-1 summarizes the results of the Total Compensation Study was performed by Hewitt 4

Associates for this General Rate Case proceeding. The percentages in Table II-1 are the amounts by 5

which SCE’s base pay, incentive compensation, and benefits deviate from the market, both in the 6

aggregate and for each of the five job categories into which SCE’s workforce was divided for purposes 7

of the study. In this context, total compensation consists of the base salaries, annual incentives, and 8

benefits received by SCE’s workforce. For senior managers and executives, total compensation also 9

includes long-term incentives. The Total Compensation Study shows SCE’s aggregate compensation to 10

be 0.9 percent above market levels. Given the sampling error inherent in such studies, this result shows 11

SCE’s total compensation to be statistically equivalent to the market average. 12

Table II-1 Summary Results of the Total Compensation Study

Job Category Base Pay

Total Cash Compensation2 Benefits

Long Term Incentive

Total Compensation

Physical/Technical 10.4% 10.9% 11.7% - 11.0% Clerical -13.7% -12.3% 9.4% - -8.4% Professional/Technical -1.1% -1.3% 14.6% - 0.9% Manager/Supervisor -4.6% -6.4% 0.1% 13.8% -5.5% Executive 4.1% 17.5% 47.7% -23.5% 2.7% Overall -0.6% -0.5% 10.2% 2.8% 0.9%

Based on the results of the Hewitt study, the Commission should find that the total compensation 13

paid by the Company is at market and reasonable.14

2 Total Cash Compensation equals base pay plus annual incentives.

6

III. 1

SHORT TERM INCENTIVE PROGRAMS 2

A. Results Sharing Program 3

1. Summary of Test Year Request 4

SCE forecasts Results Sharing Program expenses of $106.4 million for Test Year 2009. 5

Table III-2 below, shows recorded and adjusted costs for FERC Accounts 500, 588, 905 and 920/921 for 6

the 2002-2006 plan years, plus forecast costs for the years 2007 through 2009. The total forecast 7

includes the costs for the Management Incentive Program (MIP), an incentive pay program for a small 8

group of senior managers (approximately 7 percent of all employees), and Executive Incentive Program 9

(EIP) costs for the executives who are not officers (less than 1 percent of the employee population). 10

Table III-2 Results Sharing – All FERC Accounts

Recorded and Adjusted 2002-2006/Forecast 2007-2009 FERC Accounts 500, 588, 905, and 920/921

(Constant 2006 $000)

2. Program Description and Scope 11

Results Sharing is a short term incentive program designed to recognize individual, team 12

and Company performance. Results Sharing helps focus employees on activities that have an impact – 13

7

both direct and indirect – on the Company's success. Results Sharing provides pay based on improved 1

results in customer service, safety, cost control, and efficiency that employees help create. The program 2

highlights what is important for employees to do to ensure the success of the Company and provides a 3

financial stake for employees to achieve Company goals driven by customer interests. 4

3. Program Evolution 5

The Results Sharing program was introduced in 1995. The program was initially based 6

on two main factors – business unit performance and SCE financial performance as reflected by 7

operating income. As the program matured over the years, the emphasis on operational excellence goals 8

in important areas that are aligned with customer interests has increased, while the emphasis on overall 9

financial goals has decreased. The current design of the Results Sharing program places primary focus 10

on operational goals, including but not limited to overall budget performance; the achievement of which 11

employees can directly influence and contribute to through individual and collective performance. 12

a) Program Changes in Response to Concerns Raised in D.06-05-016 13

In August 2006, SCE revised the Results Sharing Program to emphasize 14

achievement of performance goals better oriented toward customer interests. First, rather than 15

evaluating an individual’s award based on their business unit’s results, the focus shifted to overall SCE 16

performance. Aligning the Results Sharing award with corporate results allows consistent payouts 17

across both operations and support areas, and across all business units. Second, target payouts (with no 18

change in maximum payouts) were increased slightly to more closely reflect variable pay targets in the 19

labor markets in which SCE competes for talent. Finally, the use of net operating income as a basis for 20

award levels, the measure of which the Commission viewed as serving substantially shareholder 21

interests, was eliminated and replaced with a set of operational goals in areas such as system reliability 22

and customer service, and departmental budgetary goals, of which the primary beneficiaries are SCE 23

customers. By shifting the emphasis of the award basis from business unit goals and net operating 24

income to SCE goals, including operations and maintenance budget performance, the program is now 25

strongly oriented toward customer service and system reliability. 26

8

Table III-3 Results Sharing Program Goals

2006 Plan Year

System Reliability

Execute wires capital investment plan approved in 2006 GRC Meet construction schedules and planning/permitting targets for major

transmission projects Achieve successful FERC Rate Case outcome

Energy Resources

Execute effective power procurement Secure reasonable long-term procurement rules Find a path to continue to operate Mohave in 2006 on acceptable financial

and commercial terms Achieve energy efficiency savings of 700 million kWh and maintain

demand response capability of 1,000 MW Achieve milestones for SONGS steam generator replacement

Operational Excellence and Cost Control

Implement selected process improvement initiatives Create a solid foundation to enable industry leading utilization of Advanced

Metering Infrastructure (“AMI”) Achieve operational targets Achieve operational, safety, and regulatory performance goals for SONGS

2&3 Enhance SCE’s safety performance through improved safety management

practices and leadership training Achieve fair cost allocation for customers

Customer Experience Implement programs and services to meet customer needs

Achieve 67% of customer with favorable opinion of SCE Achieve 75% of customers satisfied with their service experience

Leadership, Talent and Values

Advance company-wide leadership and talent development programs to support the achievement of SCE 2006 goals

Significantly enhance the effectiveness of the ethics and compliance program through employee training, communication programs, and compliance review processes

These revisions, developed and implemented after D.06-05-016 was issued, 1

effectively address the Commission’s concern that the costs and benefits of the operating income 2

multiplier directly relate to financial performance, an aspect of Results Sharing which the Commission 3

viewed as a shareholder, rather than customer, interest. Success in meeting the business unit budget 4

goals of the revised program does not equate to success measured by operating income, because of the 5

numerous variables which affect operating income that are not a function of meeting O&M budgets. 6

These variables include such general business functions as 401(k) and pension plan contributions, 7

9

franchise fees, property damage claims, workers’ compensation costs, bankers’ fees and cash flow 1

volatility (including interest rate changes). Successful achievement of departmental O&M goals and 2

budget performance does not equate to or compare to net operating income performance. Taken 3

together with the more customer-oriented goals of the revised program, the award basis is much better 4

aligned with customer interests. 5

b) Results Sharing Data Integrity and Program Controls 6

In D.06-05-016, the Commission directed SCE to provide in its 2009 GRC certain 7

additional information about its Results Sharing program: 8

In its next GRC, SCE should provide detailed information on how its final 9 results sharing goals were determined for the 2006-2008 period, what steps 10 were taken to ensure the integrity of both the data and the process for making 11 awards, and any further consequences or any required actions imposed by 12 either SCE or the Commission, as a result of the customer satisfaction and 13 injury & illness recordkeeping investigations.3 14

In response to its internal customer satisfaction and injury & illness recordkeeping 15

investigations, SCE implemented numerous corrective actions to ensure the integrity of its Results 16

Sharing process and data. These corrective actions include the following: 17

• Establishment of a separate Corporate Ethics and Compliance function and the designation of 18

a Corporate Ethics and Compliance Officer with responsibility for overseeing the design 19

implementation, administration, and continuous improvement of SCE’s ethics and 20

compliance program. 21

• Development and implementation of a company-wide ethics training program. 22

• Redesign of the Results Sharing program to base payouts on achievement of primarily 23

corporate-wide goals instead of business unit specific goals. 24

• Increased focus by senior management on accuracy and integrity of Results Sharing data. 25

• Redesign of the Results Sharing employee safety goals to emphasize accuracy and timeliness 26

of reporting. 27

3 D.06-05-016, p. 128.

10

• Change in the customer satisfaction methodology to measure end-to-end customer experience 1

instead of measuring customer satisfaction related to individual transactions. 2

• Implementation of process and system improvements to improve quality and consistency of 3

customer contact information. 4

The following sections describe these corrective actions and the process used to 5

determine final awards under the Results Sharing program. A detailed description of the corrective 6

actions undertaken by SCE in response to its internal investigations was presented in Exhibit 1 of SCE’s 7

testimony in I.06-06-014. 8

(1) New Corporate Ethics and Compliance Function 9

In the wake of SCE’s internal customer satisfaction investigation, and 10

given the increased ethics and compliance focus in corporate America, the leadership at EIX and SCE 11

recognized the need to enhance the focus on ethics and compliance throughout the Company. In 12

February of 2005, at the suggestion of SCE’s management, the Board of Directors established the 13

position of Vice President and Chief Ethics and Compliance Officer (CECO) with responsibility for 14

overseeing the design, implementation, administration, and continuous improvement of SCE’s ethics 15

and compliance program. 16

The CECO functions as an independent and objective party with access to 17

any SCE business records and with accountability at the highest levels of the Company. The CECO has 18

a direct reporting relationship to SCE’s Chief Executive Officer (CEO) and its General Counsel and has 19

unfettered access to the Board of Directors. The CECO reports quarterly to the Audit Committee of the 20

Board about the ongoing activities and the status of the ethics and compliance program. The CECO is 21

also a member of the newly created Senior Ethics and Compliance Council which is comprised of senior 22

officers and business unit leaders, and is chaired by SCE’s General Counsel. The Council provides 23

high-level oversight, sets policies, approves new initiatives, and supports the ethics and compliance 24

program by setting the appropriate tone regarding the importance of ethics and compliance. In addition, 25

the CECO participates in meetings of the Utility Management Committee where the corporate goals, 26

including those used for Results Sharing, are developed. The discussion of prospective goals at these 27

11

meetings includes consideration of ethical implications. The CECO also participates in the quarterly 1

business review process where progress toward goals is reviewed. 2

The goal of the ethics program is to create and sustain a culture where 3

acting ethically, obeying the law, and doing the right thing with respect to customers, employees, 4

regulators, and investors is the expected and everyday course of action. The CECO is also responsible 5

for developing, maintaining and revising policies designed to prevent illegal, unethical or improper 6

conduct. With the assistance of SCE’s Law Department, the CECO monitors legal and regulatory 7

developments to identify potential changes in ethics and compliance requirements. In an effort to 8

ensure the importance of ethics and compliance is understood by all employees, overall communication 9

with employees regarding ethical standards, accurate reporting, and raising concerns has increased 10

through articles in the Edison News as well as articles in business unit publications. The CECO 11

monitors corrective and disciplinary actions for any violations of laws or regulations, and recommends 12

the appropriate and timely reporting of violations to the appropriate government or enforcement agency. 13

The CECO also maintains the Ethics and Compliance Helpline. The 14

CECO ensures that all employees are aware that the Helpline is available to employees to raise ethical 15

issues for possible investigation by the Company. The Helpline is operated by a third-party vendor and 16

employees are given the option of providing their names or remaining anonymous. The third-party 17

vendor provides a written report of every call directly to the CECO who is personally involved in 18

deciding how all critical matters should be handled and which organizations within the Company need 19

to be involved in resolving the issue(s). 20

A more detailed description of the Ethics and Compliance Department is 21

contained in Exhibit SCE-07, Vol.02/A&G. 22

(2) Development and Implementation of Ethics Training 23

As a result of the investigations, SCE also recognized that additional 24

measures were needed to reinforce the Company’s core values and compliance with ethical business 25

standards. Such measures included, for example, revising SCE’s Ethics and Compliance Code and 26

distributing it to all employees; increasing visibility of the Ethics and Compliance Helpline number to 27

12

ensure employees were aware that they could raise concerns 24 hours per day, 7 days per week; and 1

rolling out ethics and compliance training across the Company. 2

In 2005, SCE completely revised and updated its Ethics and Compliance 3

Code to make it clearer and easier to understand for all employees. The Company e-mailed an 4

electronic copy of the Code to all employees and mailed a hard copy to the home address of every 5

employee. The Ethics and Compliance Code outlines the Company’s values and stresses the role of the 6

individual employee in upholding those values. The Code provides guidance regarding appropriate 7

conduct in the workplace, including compliance with all rules, laws and regulations. The Code also 8

provides information regarding the Helpline and where to report unethical or illegal conduct and how to 9

get additional information if necessary. Every year, all non-union employees must complete a certificate 10

in which they answer specific questions about their compliance with the Ethics and Compliance Code 11

and certify that they have read the information and are familiar with the requirements. All employees 12

who are members of a union are requested to acknowledge that they have received the Code and are 13

expected to read and follow it. 14

In 2005 and 2006, all of SCE’s executives, managers and supervisors 15

received comprehensive ethics training which covered the Company’s core values and identified areas 16

for improvement. Training for the remaining employee population was launched in 2006 and will be 17

completed by year-end 2007. The objective of the training session is to review and reinforce the Ethics 18

and Compliance Code, and increase employees’ understanding of their ethics responsibilities. The 19

training sessions increase employees’ awareness of the tools and resources available to assist them for 20

making appropriate decisions. The CECO and an outside consultant conducted the ethics training 21

sessions for executives, managers and supervisors. Business unit executives and managers are 22

conducting the training for all other employees. 23

The Ethics and Compliance Department, in partnership with Controllers 24

and Audit Services, is also piloting in 2007 informational sessions concerning the importance of internal 25

controls and management’s responsibility for such controls. 26

13

(3) Redesign of Results Sharing Program 1

Results Sharing is a “pay for performance” program that links a portion of 2

employee compensation to the achievement of corporate goals. The award amounts paid out under the 3

program are based on the achievement of corporate goals better oriented to customer interests. As 4

previously discussed above, the Company made substantial modifications to the Results Sharing 5

program in 2006, whereby emphasis is now placed on the achievement of corporate goals (in years past, 6

more emphasis was placed on business unit goals). These corporate goals, along with the specific 7

business unit goals, reflect the utility’s operating priorities. By focusing on corporate goals that require 8

business unit collaboration and interdependence in order to succeed, the likelihood is reduced that a 9

small number of employees could surreptitiously manipulate performance reporting and results. 10

(4) Increased Focus by Senior Management on Accuracy and Integrity of 11

Results Sharing Data. 12

The process for establishing corporate and business unit goals, and 13

determining results under the Results Sharing program is as follows. In September of each year the 14

Company identifies the business priorities for the following calendar year, and develops corporate goals 15

accordingly. Once this step is complete, individual business units establish their goals and performance 16

targets for the coming year. The business unit goals generally support the broader corporate goals. 17

Progress towards goals targets is reviewed during the course of the year, 18

usually through the quarterly business review process.4 In January of the following year, goal 19

achievements for the previous year are reviewed and final performance is determined. This review 20

occurs at several levels to ensure consistency and objectivity in determining results. The Results 21

Sharing awards are then based on annual goal achievement. 22

SCE implemented a new certification process in 2005 in an effort to 23

elevate the visibility of goals reporting at the department level (see Appendix E for the communication 24

from SCE’s CEO on the certification requirement). Under the new process, business unit leaders are 25 4 Typically, a performance standard or metric is developed for each goal to monitor progress and to determine final results

at the end of the calendar year.

14

required to certify the accuracy of the performance results being reported by their respective 1

department(s). Reported quarterly results must be certified by a division senior manager or director. In 2

addition, year-end results and goal performance must be certified by the department Vice President 3

before the results can be forwarded onto the Board of Directors for review at that level.5 4

(5) Redesign of the Employee Safety Goals 5

In 2005, SCE significantly redesigned its employee safety performance 6

goals for Results Sharing. The new goals measure SCE’s employee safety program performance by 7

using several factors, rather than focusing exclusively on the number of OSHA recordables reported in 8

each business unit. In 2005, Senior Management developed three key components of the safety goals to 9

reward proactive and prevention-based safety programs, timely reporting of injuries and illnesses, and 10

prevention of employee injuries. The implementation of a goal related to safety programs tracks 11

business unit and Company success in implementing new safety programs or strengthening existing 12

ones. A timely injury and illness reporting goal tracks the reports of injuries to SCE’s Workers’ 13

Compensation Division to determine whether they were reported within one business day (excluding 14

weekends and holidays) from the date of a supervisor’s knowledge of the injury. During 2005 and 2006, 15

89 percent and 92 percent, respectively, of the OSHA recordable injuries were reported in a timely 16

manner. Finally, a prevention of work injuries goal is measured by the OSHA-recordable work injury 17

rate and the TDBU serious work injury rate.6 18

In 2006, SCE also added safety leadership training for supervisors. This 19

four-hour course is designed to educate supervisors and managers on the importance of their behaviors 20

in supporting a safety culture that is focused on prevention of work-related injuries. This highlights the 21

importance of establishing situational- and consequential-awareness using four key safety leadership 22

5 Because the Results Sharing program was redesigned for 2006 and the focus was changed from department goals to

corporate goals, the certification requirement was no longer applicable for 2006. In 2007, SCE has implemented a similar certification requirement around the corporate goals.

6 A “TDBU serious injury” is a subset of OSHA-recordable injuries resulting in major broken bones or fractures, second degree or higher electrical burns or electrical flashes, a fatality, or amputation.

15

skills: job hazard analysis, modeling the right behavior; effective crew communications; and holding 1

people accountable. 2

(6) Implementation of Quality Assurance Procedures and Monitoring System 3

for Customer Information 4

In the Customer Satisfaction Investigation, SCE determined that planners 5

in its Design Organization used various methods to manipulate customer contact information. As a 6

result of its investigation, the Company implemented a number of policy and procedural improvements 7

to ensure the integrity of customer contact information used for and ultimate results of SCE’s customer 8

satisfaction surveys. These policy and procedural improvements include: 9

• Modifications to the procedures used by personnel in TDBU for entering 10

and maintaining customer contact information for work orders, service 11

requests and meter orders. The written policy document that provides 12

guidance to the organization in this area was revised and expanded to 13

ensure all customer contact entries were appropriate and accurate. 14

• Development and implementation of procedures to verify customer 15

contact information input by TDBU personnel. The new procedures 16

require personnel from TDBU’s quality assurance group to contact 17

customers directly to verify that the contact information entered into 18

SCE’s work order and meter order systems is correct. 19

• Development and implementation of a quality assurance system that 20

enables management and staff to monitor the accuracy of customer 21

information. The Customer Contact Data Quality Management System 22

(CCDQMS) was created to record, track, and report inaccurate phone 23

numbers and customer satisfaction enabling behaviors within the TDBU 24

field organizations. The CCDQMS provides quality assurance reports for 25

use by planners, supervisors, managers and quality assurance staff. These 26

reports are used in part to correct inaccurate customer contact data. 27

16

• Changes in the data extraction programs used to compile the customer 1

contact information sent to the third-party survey company were made to 2

correct system errors and improve the quality of the data extracts. These 3

changes include: incorporating the third-party vendor’s invalid phone 4

number checks into the extract programs (e.g., not sending phone numbers 5

with an 800 prefix, etc.); removing SCE-related work and meter orders 6

based on the work order budget codes or requestor names containing 7

“SCE,” “Edison,” or variations thereof; removing orders where the tariff 8

field started with “DE” (Domestic Employees) indicating that an SCE 9

employee or retiree was the customer; and removing meter orders that did 10

not have planner initials because generally that would tend to indicate that 11

the planner had not yet worked on a particular order. 12

• Development of exception reports for TDBU’s Planning organization to 13

identify transactions being excluded from the survey sample. These 14

exclusions could include transactions with invalid phone numbers (e.g. 15

blank or 800 numbers) needing additional follow-up and sample 16

transactions which should not be included in the sample because they were 17

not planning transactions (e.g., meter orders initiated by bookkeeping or 18

account management) or because no service planner had been assigned the 19

transaction (e.g., blank service planner initials). These exception reports 20

are used by TDBU management to work with individual planners to 21

further reduce the percentage of invalid phone numbers. 22

17

4. Analysis of Recorded Data, Estimating Methodology, and Test Year 2009 Forecast 1

for Results Sharing Program (FERC Accounts 500, 588, 905, and 920/921) 2

Table III-4 Results Sharing – All FERC Accounts

Recorded and Adjusted 2002-2006/Forecast 2007-2009 FERC Accounts 500, 588, 905, and 920/921


A combination of factors including the number of eligible employees, target award levels, 3

labor expense, and Company performance drive Results Sharing Program costs. During the five-year 4

recorded period, the Results Sharing eligible employee population grew from 11,371 in 2002 to 14,569 5

in 2006. While the program had minor changes in plan target award levels in years 2002 and 2006, as 6

described earlier in Section 3, plan maximum award levels remained constant. As depicted in Table III-7

4 above, Results Sharing program costs over the five-year recorded period fluctuated slightly with the 8

exception of 2004. While the Company performed well against goals used to determine Results Sharing 9

payouts in 2002 – 2006, the Company decided to reduce the payout in 2004 due to the Customer 10

Satisfaction and Employee Illness and Injury Reporting investigations. 11

18

In our 2006 GRC, we used a five-year (1999 – 2003) average of the Results Sharing 1

payout percentages7 to forecast program expenses for the Test Year. In this GRC, we have simplified 2

our approach and are basing our forecast on the ratio of 2006 recorded Results Sharing program expense 3

to recorded labor expense. Our Test Year forecast was determined as follows: 4

1. We obtained the Results Sharing plan cost for 2006. 5

2. We calculated the expense ratio (stated as a percentage) for the program by 6

dividing the 2006 plan cost by the 2006 recorded labor expense,8 yielding 7

11.83%. 8

3. Since the costs for Results Sharing are directly impacted by our total labor costs, 9

we then applied the expense ratio to the projected non-capital labor forecast for 10

2007 through 2009.9 11

As noted in Table III-4 above, applying the methodology described above resulted in a 12

Test Year 2009 forecast for FERC Accounts 500, 588, 905 and 920/921 of $106.4 million, a $15.1 13

million increase over 2006 recorded costs. The cost increase is due to the significant increase in 14

anticipated labor costs. 15

5. Ratemaking Policy 16

Our Test Year forecast for the Results Sharing program requests recovery from customers 17

of the full costs of the program. SCE’s request is consistent with the Commission’s decision in each of 18

our last two general rate cases, D.04-07-22 and D.06-05-016, where the Commission determined it was 19

appropriate that customers fund the Company’s employee incentive pay program. The Commission also 20

found that as long as the total compensation paid to employees is within the market-based parameters 21

deemed reasonable by the Commission, the allocation of compensation between the various components 22

of total compensation should be left to the utility’s discretion.10 23

7 The payout percentage was stated as a percentage of the maximum award possible under the program. 8 See workpapers for the calculation of the expense ratio. 9 See workpapers for forecast calculation. 10 D.04-07-022, p.217.

19

There are several reasons why customers should continue supporting employee variable 1

pay programs. As variable pay is an important element of an overall compensation package, provided to 2

employees for services rendered, it is a legitimate business expense that should be recovered in cost of 3

service-based rates. Moreover, variable pay is an “at-risk” component of compensation that orients 4

employees’ efforts toward the customer focused operational priorities of the Company, such as 5

providing quality service. As discussed in the preceding sections, SCE implemented substantial changes 6

to the Results Sharing program in 2006 in response to the concerns raised by the CPUC in D.06-05-016. 7

The end result of those changes was to place even more focus on operational goals that relate to 8

customer interests. 9

a) Elimination of Memorandum Accounting of Authorized and Recorded Results 10

Sharing Expense 11

In SCE’s 2006 GRC, the Commission approved full customer funding of SCE’s 12

Results Sharing program, but also ordered SCE to track in a memorandum account the 2006-2008 13

authorized and recorded Results Sharing costs and credit any shortfall to customers: 14

SCE should track the authorized and recorded Results Sharing costs in a 15 memorandum account. When the actual Results Sharing payouts for 2006, 16 2007, or 2008 are determined, any shortfall in the payment to employees when 17 compared to the authorized amount for that particular year should then be 18 credited to the Base Revenue Requirement Balancing Account.11 19

This order was based on the Commission’s concern “with employee incentive 20

compensation proposals that provide shareholder value without imposing shareholder costs.”12 21

SCE’s statement that operating income has the potential to have the biggest 22 impact on the Results Sharing payout is evidenced by the operating income 23 multiplier which is directly applied in calculating the awards. If the operating 24 goal is 100 percent achieved, the multiplier would be 1.0. At 1.0, ratepayers 25 would be indifferent as to SCE’s financial performance. The multiplier can 26 increase up to a maximum of 2.0 (if 106 percent of the goal is reached) or 27 decrease to 0.5 (if 94 percent of the target is achieved). In general, there is no 28 direct ratepayer benefit related to the operating income multipliers. 29

11 ED.06-05-016, § 15.1.4, (mimeo0, p. 131. 12 Id., p. 132.

20

Even if rates are set based on an operating income multiplier of 1.0, to the 1 extent that SCE exceeds its operating income goal, most of the increased costs 2 of results sharing (up to $59,000,000) could be funded from the resulting 3 increased net operating income goal, the reduced costs of Results Sharing (up 4 to $29,500,000) can be used as a partial offset to the reduced net operating 5 revenue (up to $51,000,000). From the shareholder point of view, the 6 potential cost of up to $8,000,000 in a good earning year would be offset by 7 coverage of reduced earnings of up to $29,500,000 in a bad earning year. The 8 costs and benefits of the operating income multiplier directly relate to 9 financial performance. This aspect of Results Sharing is more of a 10 shareholder, rather than ratepayer, concern.13 11

The concern that led to the Results Sharing memorandum account was thus based 12

on specific facts about the program in the evidentiary record of SCE’s 2006 GRC. However, the 13

Commission also stated in that decision: “In the future, SCE should consider shareholder and customer 14

benefits and costs when developing Results Sharing proposals.”14 As discussed below, SCE has 15

redesigned its Results Sharing program to address the concerns that led the Commission to order a 16

memorandum account. That ratemaking mechanism should be allowed to expire beginning in 2009. 17

As described previously in Section A.3.a), prior to 2006, the Results Sharing 18

program was based on two main factors: (1) business unit or department performance, and (2) SCE 19

operating income. Beginning in 2006, Results Sharing is now based on (1) achieving corporate goals 20

and (2) meeting O&M expense budgets. 21

The Results Sharing program now measures performance against overall 22

corporate goals instead of specific business unit or department goals. Thus Results Sharing payouts are 23

now based on program goals largely operational or customer-oriented in nature, better aligning 24

employee compensation with quality service to SCE customers and leading to greater consistency in 25

award basis and payout determinations. 26

Most significantly, the Results Sharing program is no longer predicated on 27

meeting specific operating income goals. In addition to the corporate operational goals, SCE has one 28

Results Sharing goal of keeping expenses within limits set by annual O&M expense budgets. Meeting 29

13 Id., pp. 129-130. 14 Id., p. 132.

21

annual O&M expense budgets is but one of several factors that contribute to operating income (the pre-1

2006 program goal). Items such as recorded interest expense, property and income taxes, and recorded 2

depreciation expense items which significantly affect operating income but not department budgets - are 3

now excluded from the goals. In other words, even if all SCE business units and departments were to 4

remain within their annual O&M expense budgets, SCE still might not realize its operating income 5

target. Orienting goals toward operational results and managing department budgets greatly diminishes 6

the shareholder stake in Results Sharing goals, thus addressing the concern the Commission raised about 7

SCE’s previous Results Sharing program design. 8

The redesigned Results Sharing program is now on the same footing as other 9

authorized O&M expenses. Orienting SCE business units and departments toward meeting O&M 10

expense budgets is especially important, because we cannot rely upon growth in sales volume to fund 11

increased operating expenses, as most electric utilities outside California anticipate. This focus on 12

meeting annual departmental budgets is an important tool in managing Company operations. 13

As discussed above, the Commission required tracking of 2006-2008 Results 14

Sharing costs because of its concern that SCE shareholders had a special interest in the program’s 15

outcome, due to the focus on net operating income. Because the redesigned program’s focus and 16

rewards are now based on corporate and operational goals, with but one budget-related goal, such 17

tracking is no longer needed or appropriate. From an overall corporate perspective, the incentives are 18

now the same for Results Sharing as they are for all other authorized revenues. There is no longer any 19

unique shareholder benefit associated with Results Sharing. SCE’s redesign of the Results Sharing 20

Program has addressed the concerns that led the Commission to order in SCE’s 2006 GRC that costs be 21

tracked in a memorandum account accordingly; that account can now be eliminated. 22

22

IV. 1

LONG TERM INCENTIVES 2

A. Summary of Test Year Request 3

SCE forecasts expenses of $23.3 million for long-term incentives related costs in Test Year 4

2009. The forecast amount pertains to long-term incentives paid to executives and the management tier 5

immediately below the executive level. Figure IV-1 below, shows recorded costs for FERC Accounts 6

920/921 for the 2002-2006 plan years, plus forecast expenses for the years 2007 through 2009. 7

B. Program Description and Scope 8

In order to hire talented executives, utilities must offer long-term incentive grants. Salary, 9

annual bonus and long-term incentives form the three standard elements of direct compensation for 10

utility executives, as they do for more than 98 percent of U.S. companies with an annual revenue of $10 11

billion or greater.15 Without the compensation value of long-term incentives (which represents from 21 12

percent to 59 percent of executives’ total direct compensation, depending on rank), SCE cannot 13

successfully recruit and retain highly skilled and experienced executives needed to manage essential 14

Company operations. Although the compensation value of the long-term incentives theoretically could 15

be replaced by higher salaries and/or bonuses, this is not desirable because the value of long-term 16

incentives goes beyond the mere compensation value, in that they aid in retention and focus 17

management on the long-term interests of the Company and its customers. 18

Long-term incentives help SCE retain its executives in two ways. Long-term incentives vest 19

over three to four years, requiring executives to remain with the Company in order to vest. They also 20

can offset drops in short-term compensation that otherwise might result in our losing executives to other 21

companies. For example, during the California power crisis, when salaries were frozen and executive 22

bonuses canceled for all SCE executives, we retained all of our key executives. This was due in part to 23

the consideration that if the Company made it through the crisis and returned to fiscal health, their long-24

term incentives would replace some of the income they lost during the crisis. Executives can afford to 25 15 According to the 2006 Hewitt Associates Total Compensation Database, 98% of companies with annual revenue of $10

billion or greater surveyed used long-term incentives.

23

take a longer-term view of their employment with the Company than they otherwise would absent the 1

long-term incentives. 2

Long-term incentives increase management’s focus on the long-term interests of customers. The 3

ultimate value realized from long-term incentives depends in part on the market’s assessment of the 4

extent to which executives have made decisions that will maintain and enhance service delivery and 5

cost-effectiveness for customers in the future and thus increase the value of the Company. In some 6

cases, decisions that are in the long-term interest of customers may have temporary negative effects on 7

earnings or other factors and executives may as a result receive smaller annual bonuses. For example, 8

upgrading the transmission and distribution system may cause short-term financial strains. The prospect 9

of a good payout from the long-term incentive program can support executives’ determination to act in 10

the long-term best interests of customers. 11

Long-term incentive grants are made annually to SCE executives and to the tier of management 12

immediately below the executive level. Award levels are based on survey data on compensation levels 13

and trends, and are intended to form part of a total compensation package for each position that is at the 14

median of total compensation for that position among utilities (or general industry for those positions 15

where SCE competes against the broader labor market). Starting in June 2007, long-term grants to 16

executives have been made under the 2007 Performance Incentive Plan, which was approved by the 17

shareholders of Edison International in April 2007. 18

Long-term incentive grants to executives consist of non-qualified stock options, restricted stock 19

units, and performance shares. The grant dates for these awards are fixed in advance by the Board of 20

Directors, which also must approve the values of the grants and the methodology for converting the 21

values into the number of shares to be granted. The strike prices for stock options are set at the closing 22

price for shares of Edison International common stock on the grant dates. Options vest 25 percent per 23

year over four years as long as the executive’s employment with the Company continues. Restricted 24

stock units vest 100 percent at the end of three calendar years, and are paid out in shares of stock. 25

Performance shares also vest 100 percent at the end of three calendar years, but the level of payout—26

from zero to two times target—depends on how Edison International’s three-year total shareholder 27

24

return (stock price appreciation plus dividends) compares to that of the other 19 large diversified utilities 1

in the Philadelphia Utility Index (except that Sempra is substituted for AES in order to include the other 2

major California electric utility). The mix of options, restricted stock units and performance shares 3

varies by rank and may change from year to year. 4

Long-term incentive grants to the first tier of management below the executive level consist of 5

deferred stock units. The deferred stock units vest 100 percent at the end of three calendar years, 6

provided employment has continued, and are paid out in cash. 7

C. Analysis of Recorded Data, Estimating Methodology, and Test Year 2009 Forecast 8

SCE forecasts expenses of $23.3 million for long-term incentive compensation costs in Test Year 9

2009. The forecast amount pertains to long-term incentives granted to executives and the management 10

tier immediately below the executive level. Figure IV-1 below shows recorded costs for FERC 11

Accounts 920/921 for the 2002-2006 recorded years, plus forecast costs for the years 2007 through 12

2009. 13

Figure IV-1 Long Term Incentives

Recorded and Adjusted 2006/Forecast 2007-2009 FERC Accounts 920/921


Recorded costs for 2002-2005, prior to the time the new FAS123R rules took effect, excluded 14

stock option costs except for the dividend equivalent component. Expense recorded during this period 15

25

was for accruals for dividend equivalents and performance shares. Expenses for 2002 were low because 1

the Company was not paying dividends and, therefore, was not accruing for dividend equivalents, and 2

the performance shares granted in 2000 and 2001 had relatively low values at the end of 2002. The 3

value of outstanding performance shares granted in 2001 and later years increased somewhat in 2003, 4

and increased substantially in 2004 and 2005. Also, in 2004 the Company resumed the payment of 5

dividends and, thus, accruals for dividend equivalents resumed in 2004 and continued in 2005. 6

Projected 2009 expense of $23.3 million for long-term incentive compensation was derived 7

using a budget-based forecast method. This method was chosen because the long-term incentive 8

expense recognition methodology for the years 2002 through 2005 was very different from the expense 9

recognition rules that govern recorded expense from 2006 forward. FAS123R took effect January 1, 10

2006, but 2006 expense, under the FAS123R transition rules, incorporated expense elements that will 11

not be present in 2009 and later years. 12

The budget-based forecast for the years 2007-2009 was based on (1) existing grants made in 13

2004 through 2007 whose expense will be recognized in those years, (2) projected grants for 2008 and 14

2009 based on the assumption that the number of grant recipients will increase in proportion to the 15

projected increase in the total employee population but that the per-recipient grant share numbers will 16

not change, (3) expected rates of forfeiture (grants cancelled prior to vesting) based on historical 17

forfeiture rates, and (4) a projected increase of five percent per year in the stock price. 18

Note that the projected 2009 expense under this method is significantly lower than the expense 19

that would be derived under most of the other possible forecasting methods. 20

26

V. 1

RECOGNITION PROGRAMS 2

A. Cash Awards 3

Cash awards in the form of spot bonuses are an important tool for recognizing and rewarding 4

employees for exceptional performance and outstanding achievement. Spot bonuses are an integral part 5

of our market competitive, comprehensive compensation package. Spot bonuses are intended to 6

recognize an individual or a team for delivering exceptional, measurable results such as: 1) assuming a 7

leadership role above and beyond normal job responsibility; 2) developing a new or innovative program 8

or process that significantly impacts efficiency across one or more business units; and 3) leading a 9

company-wide team or major project that notably exceeds goals, within scheduled time frames and 10

under budget. 11

In SCE’s 2003 GRC, Decision No. 04-07-022, the Commission recognized SCE’s spot bonus 12

program as having customer value: 13

With regard to the latter point, the record shows that the program is consistent with ratepayer 14 interests, even if the program increases shareholder value. If anything, the evidence suggests 15 that benefits of quickly restoring service during storm conditions, successfully managing 16 T&D automation projects, and providing effective leadership can accrue to ratepayers and 17 shareholders alike. Moreover, since awarding of a spot bonus for outstanding performance 18 gives SCE’s managers an alternative to raising an employee’s base salary, the integrity of 19 SCE’s base salary system is kept intact, and the Company’s long-term salary and wage-based 20 benefit costs are not increased. We note that spot bonuses are widely used by U.S. 21 corporations.16 22

The Commission further observed: 23

If it were shown that the Spot Bonus program does not result in employees receiving above-24 market total compensation, and that the program does not produce outcomes that are contrary 25 to ratepayer interests, we would be inclined to include the program costs in the authorized 26 revenue requirements.17 27

In the Total Compensation Study for this GRC, Hewitt, DRA, and SCE discussed all elements of 28

compensation to be included in the study. Spot bonuses were considered but excluded because this data 29

is generally not available in surveys on a position-by-position basis, and wide variances exist in the 30

16 D.04-07-022, p. 212. 17 Id, p. 212.

27

marketplace. For these reasons, DRA and SCE agreed that spot bonuses would not be included in the 1

Total Compensation study for this GRC. 2

Since our 2003 and 2006 GRCs, SCE has brought more rigor to the administration of the spot 3

bonus program.18 An automated spot bonus system was developed to drive the effective use of spot 4

bonuses by creating consistency in use, tracking and reporting of spot bonus activity across the 5

Company. Effective November 1, 2004, all spot bonuses must be submitted via the automated system 6

by a manager, or above. The Business Units developed matrixes for approval of spot bonuses with all 7

Business Units requiring at least 2 levels of management above the requester to approve requests for 8

spot bonuses. All bonuses above $5,000 require officer approval. Reports are now published for 9

executives to create greater transparency around the costs associated with award decisions. Managerial 10

training has been provided on how to use such recognition in an effective manner, a website was created 11

to inform managers on how the compensation programs fit together, and tools were introduced to better 12

educate managers about how to use recognition effectively (e.g., decision-modeling tool). 13

Because spot bonus awards were not benchmarked in the Total Compensation Study, SCE 14

factors this compensation element into our total compensation analysis in the following way. For 2006 15

spot bonus costs were 0.3 percent of our payroll dollars, amounting to $3.28 million. If those costs are 16

added to the SCE payroll dollars reflected in our 2009 Total Compensation Study, Total Compensation 17

levels would still be at only 1.2 percent above market and well within the plus or minus 5 percent 18

sampling error rate. For this comparative analysis only, we added the costs for spot bonus recognition to 19

SCE’s Total Compensation pool and but assumed the comparator companies’ costs remain unchanged 20

(i.e., no increase for any spot bonus expenses). Therefore, the 1.2 percent Total Compensation variance 21

to market actually represents a worst case. Even with the spot bonus costs, our total compensation is 22

still less than 105 percent of market (i.e., 101.2 percent of market with the spot bonus costs included), 23

accordingly, SCE’s total compensation, including spot bonus costs, remains reasonable and should be 24

recovered in rates. 25

18 See workpapers for materials SCE has produced on our spot bonus program.

28

B. Non-Cash Awards 1

Awards to Celebrate Excellence (ACE) is a non-cash recognition program. ACE awards 2

recognize and reinforce behaviors such as exceptional customer service, teamwork, and initiative. ACE 3

awards are given as program points, and can be granted by the employee’s manager or supervisor.19 4

Additional information on the ACE program is provided in the Pensions and Benefits, Miscellaneous 5

Benefits Programs testimony. 6

19 An employee may also be nominated for an award by a peer, but the award amount is very limited.

29

VI. 1

PENSIONS AND BENEFITS PROGRAMS 2

A. Introduction 3

This chapter describes Southern California Edison Company’s (SCE’s or the Company’s) employee 4

pension and benefit plans and programs. Included are expenses related to pension, defined contribution 5

(401(k)), health care, disability, group life insurance, and executive benefit plans. Other employee benefits 6

and programs discussed include the Electric Service Discount, Awards to Celebrate Excellence, the 7

Corporate Relocation Program, commuter programs, the Educational Reimbursement Program, severance 8

benefits, and LifeCare. For Test Year 2009, SCE forecasts $374 million of expense for all employee 9

pension and benefit plans and programs included in the rate request. 10

Our pension and benefit plans and programs are one component of the total compensation package 11

provided to employees. These programs support the Company’s goal of attracting and retaining a high-12

quality workforce. Our benefit strategies provide the Company, employees, and customers with the greatest 13

return on their dollar, while being mindful of the changing requirements of the work force, regulatory and 14

legislative requirements, union involvement, and the need to manage escalating costs, particularly in the 15

areas of health care and disability. 16

In designing the benefit package, the Company evaluates the following: 17

• Each component plan’s design. 18

• Benefits delivered by each plan. 19

• Costs to provide. 20

• Administrative efficiency. 21

• Value to employees and the Company. 22

• Features that are attractive to employees and user-friendly. 23

• How the entire benefits package compares with that offered by comparator companies. 24

30

The following graph depicts total 2002 – 2006 recorded and 2007 – 2009 forecast expenses of SCE’s 1

pension and benefit plans and programs.20 2

Figure VI-2 Pension & Benefit Plans

Recorded and Adjusted 2006/Forecast 2007-2009 FERC Accounts 926

(Non-Labor – Constant 2006 $000; Other – Nominal $000)

B. Retirement Income-Related Benefits 3

1. Pension Program and Expenses 4

a) Summary of Test Year Request 5

For Test Year 2009, SCE forecasts a total of $52.947 million for pension costs. 6

Figure VI-3 below, shows recorded costs for the years 2002 through 2006, plus our forecast costs for 2007, 7

2008, and Test Year 2009. 8

20 All forecast pension and benefit costs are net of any ERP benefits. See SCE-09/ERP.

31

Figure VI-3 Pension Costs

Recorded and Adjusted 2002-2006/Forecast 2007-2009 FERC Account 926

(Nominal $000)

b) Summary Description of SCE’s Pension Plan 1

The SCE Retirement Plan21 contributes to employees’ future financial protection by 2

providing income after employment has ended, while avoiding current taxable income for employees. In 3

1999, we made several changes to our Retirement Plan to make it easier to understand and more portable. 4

These changes also reduced the long-term cost structure for the Retirement Plan. 5

The Cash Balance Account, a new benefit formula under the existing plan, 6

established a more even and consistent benefit buildup over employees’ working years and made it easier to 7

communicate the current value of accrued benefits. We recognized that employees who were later in their 8

working careers could be negatively affected by the pension formula change. Therefore, employees who 9

were at least age 50 or had at least 60 “points” (“points” are a calculation of age plus service) as of the 10

effective date of the change are “grandfathered” under the program revision. “Grandfathered” employees 11

21 A summary of the SCE Retirement Plan is included in the workpapers.

32

receive their retirement benefits calculated under both the old Retirement Plan formulas and the Cash 1

Balance Account feature to determine the benefit most advantageous to the employee. 2

The Cash Balance Account grows through credits made to the Account. There are 3

four types of credits: 4

• Pay Credits: From 3 to 9 percent of the employee’s base pay, depending on age 5

and service. SCE provides pay credits for each month that the employee is 6

credited with at least one hour of service. 7

• Interest Credits: The employee’s account is credited monthly with interest 8

equivalent to the average 30-year Treasury bond rate during August of the 9

preceding year. A seven percent minimum interest rate applied through 10

December 31, 2004. The interest rate for 2006 was 4.46 percent. Refer to the 11

next section c) for information regarding the Pension Protection Act and its effect 12

on interest rates. 13

• Transition Credits: From three to six percent of the employee’s base pay, 14

depending upon age and service. SCE provides transition credits monthly to the 15

accounts of those who are credited with at least one hour of service or credited 16

unpaid leave and were employees as of the date of the plan change. These 17

additional credits are made for eligible employees for a period equal to the 18

employee’s years of vesting service, at the time of the formula change, up to a 19

maximum of eight years, with all transition credits being completed by the end of 20

2007. 21

• Retiree Health Care Credits: Beginning January 2006, SCE contributes an 22

additional $100 per month to the Cash Balance Account of employees not covered 23

by a collective bargaining agreement and employees represented by IBEW Local 24

47, UWUA Local 246 and Teamsters Local 495. For employees represented by 25

SOFA, this benefit was effective April 2007. In April 2007, employees 26

33

represented by SOFA received a one-time lump sum credit of $1,000 to their SCE 1

Retirement Plan cash balance account. 2

Regardless of age, employees may elect distribution of their pension benefit as a lump 3

sum or an annuity. Employees vest (i.e., have a nonforfeitable right) in their Retirement Plan benefit at a 4

rate of 20 percent per year of vesting service, and are fully vested (100 percent) after five years. The current 5

program provides improved beneficiary protection since employees’ accounts are automatically 100 6

percent vested if they pass away while employed. The resulting benefit is then available to their survivors. 7

By making the plan simpler, adding portability features, offering a five-year vesting 8

provision, and changing to a more even build-up in the benefit accrual that is less costly in the long term, 9

SCE has designed the Retirement Plan to both better meet employee needs and SCE’s goals to reduce costs 10

into the future. 11

c) Pension Protection Act of 2006—Impact on Benefits 12

The Pension Protection Act (PPA) was signed into law in August 2006. The PPA 13

contains changes and refinements that will directly affect SCE’s defined benefit and defined contribution 14

plans. In accordance with the PPA, the implementation schedule will stretch over several years. 15

Among the relevant changes is that the determination of the applicable interest and 16

the applicable mortality table under Internal Revenue Code section 417(e) are being changed effective 17

January 1, 2008. The SCE Retirement Plan currently uses the applicable interest rate and the applicable 18

mortality table for calculating lump sum distributions. The SCE Retirement Plan also uses the applicable 19

interest rate to calculate interest credits. Regulatory guidance regarding the determination and 20

implementation of the new applicable interest rate and applicable mortality table is expected in the summer 21

or fall of 2007. 22

Pursuant to the PPA, the SCE Retirement Plan will also be amended in the future to 23

provide 100% vesting after three years of service, and will offer a 75 percent Qualified Optional Survivor 24

Annuity (QOSA) payment option to married participants. 25

34

d) Pension Protection Act of 2006—Impact on Funding Policy 1

The Pension Protection Act also made significant changes to pension plan minimum 2

funding requirements and to the rules for determining annual maximum tax deductible contributions. For 3

these purposes, the PPA defines a new obligation measure, the Target Liability, which serves as the basis for 4

measuring funded status (pension plan assets vs. liabilities). The Target Liability is an obligation, or 5

liability, based on retirement benefit accruals to date, which is intended to measure the value of benefit 6

obligations if the plan were to terminate. This is very different from the existing ERISA-required 7

measurement basis, where obligations are measured on an ongoing, projected basis, assuming that a plan 8

will continue to operate indefinitely. 9

The discount rate used in calculating the Target Liability must be based on a 10

3-segment high-quality corporate bond yield curve. Plan obligations measured under ERISA reflect the 11

expected long term rate of return on trust assets, taking into account the plan’s investment policy. The 12

Target Liability must also reflect a specified mortality assumption, which will be developed by the IRS 13

based on the latest available mortality study data. 14

The rules concerning actuarial smoothing of assets are also modified by PPA. Plan 15

sponsors will be able to choose from immediate recognition of market value, or use of a specified asset 16

valuation method, which will generally allow less smoothing than under current pension funding law. 17

The minimum required annual contribution under the PPA is equal to the value of 18

benefits expected to accrue during the current year, plus seven year amortization of any unfunded Target 19

Liability. No employer contributions are required if plan assets exceed the Target Liability by an amount 20

sufficient to also cover the value of current year benefit accruals. As under current law, employer 21

contributions in excess of minimum required amounts can generally be used to offset minimum required 22

contributions in future years, building up a cushion that helps limit the impact of any future underfunding. 23

PPA maximum tax deductibility rules, which generally supersede current law, limit 24

tax deductible contributions to the excess of 150 percent of Target Liability over plan assets. For most 25

plans, including SCE’s, these changes represent a significant liberalization of the pre-PPA tax deductibility 26

limitations. This new rule applies in 2006 and 2007. 27

35

The new PPA funding rules are generally effective beginning in 2008. Except for 1

severely under-funded plans, most of the rules are phased in over a three year transition period. SCE’s 2

Retirement Plan funding position is such that the transition rules are unlikely to affect funding costs during 3

the 2009 GRC cycle. The IRS is expected to provide regulatory guidance in the latter half of 2007 on a host 4

of PPA related funding issues, many of which may affect projected PPA funding levels. 5

Beyond changing minimum funding requirements and liberalizing the maximum tax 6

deductibility limits, PPA says nothing about what funding policy a pension plan should follow. SCE 7

believes that its long-standing pension funding and rate recovery policy continues to be appropriate for 8

ratemaking purposes. This policy, which has been in effect since at least the 1980s, seeks to provide 9

systematic, long-term funding, based on projected pension plan benefits, with contributions and rate 10

recovery calculated to remain level as a percentage of payroll over the life of the plan.22 This policy can be 11

expected to enhance plan participants’ benefit security and provide for intergenerational equity among 12

customers. 13

SCE does not believe PPA minimum required funding is appropriate for determining 14

pension costs for ratemaking purposes. Adoption of this alternative could put participants’ benefits at risk 15

in the event of plan termination and would inevitably result in wide fluctuations in annual contributions that 16

would undermine customer intergenerational equity. 17

Use of PPA minimum required funding for rate recovery purposes would inevitably 18

lead to wide swings in pension costs over time. Retirement Plan assets are currently in excess of estimated 19

PPA Target Liabilities. If SCE limited future funding to the PPA minimum, this cushion would erode, 20

making the plan funding more vulnerable to periods of investment under-performance. In periods of above 21

average investment performance, the PPA funding rules are likely to require no plan contributions. In 22

periods of below average performance, contributions several times in excess of long term funding policy 23

amounts would sometimes be necessary. Intergenerational equity among customers would be compromised. 24

22 SCE’s funding policy has always been bounded by the legally required minimum and maximum tax-deductible limits, so that

funding has always been between the minimum and maximum. This will continue to occur under the PPA.

36

Under SCE’s long-standing pension funding policy, contributions would continue in 1

years when the PPA minimum contributions were zero, building up a cushion that would limit the impact of 2

significant investment under-performance in future years. With only PPA-required minimum funding, the 3

plan’s funded status would deteriorate over time until the plan became under-funded on a termination basis. 4

At that point contributions in the range of $125 to $150 million or more would be required for minimum 5

funding purposes. 6

Replacement of SCE’s long-standing pension funding and rate recovery policy with 7

PPA minimum contributions would likely reduce or eliminate plan contributions in the short run. But, total 8

long term contributions would significantly increase because PPA minimum funding would reduce both 9

trust fund value and the investment earnings for the trust fund that help to pay the long-term costs of the 10

plan. 11

Recent financial markets and SCE Retirement Plan trust fund investment experience 12

is summarized in Table VI-5 below. 13

37

Table VI-5 U.S. Stocks, U.S. Bonds and SCE Retirement Fund Rates of Return

1997-200623

Year S&P 500 Equity

Index Return

Lehman Brothers Aggregate Bond

Index Return SCE Pension Fund

Return

1997 33.4% 9.6% 18.6%

1998 28.8% 8.7% 14.9%

1999 21.1% (0.8%) 24.8%

2000 (9.2%) 11.6% 5.2%

2001 (11.9%) 8.4% (5.3%)

2002 (22.1%) 10.2% (11.6%)

2003 28.7% 4.1% 27.3%

2004 10.9% 4.3% 11.7%

2005 4.9% 2.4% 10.6%

2006 15.8% 4.3% 15.9%

10-Year Annualized Return

8.4% 6.2% 10.5%

10-Year Standard Deviation of Returns

17.3% 3.6% 12.1%

Table VI-5 above, shows that financial market performance, particularly the US stock 1

market, was volatile over the 1997-2006 period. Excellent performance in 1997-99 was followed by poor 2

performance in 2000-2002, and then strong performance since 2003. Investment returns since 2003 have 3

been well in excess of historical averages, but experience has shown that such periods of investment 4

over-performance are eventually followed by periods of under-performance. For example, the very 5

favorable 1997-99 period was followed by the poor 2000-02 period. It is these periods of 6

23 Source: Frank Russell and Mellon Analytical Solutions Historical Rates of Return, Fourth Quarter 2006. SCE pension fund

returns are shown net of investment management fees.

38

under-performance that would inevitably lead to significant contribution volatility, and periods of under-1

funding, if SCE’s funding of the Retirement Plan was limited to PPA required minimum contributions. 2

The issue of whether only required minimum funding or SCE’s long-standing funding 3

policy should be used for ratemaking has been addressed in SCE’s last two GRCs. The Commission’s 4

position in both cases was summarized in the 2006 GRC decision.24 In both cases, the issue was whether 5

the minimum contribution was sufficiently conservative to avoid jeopardizing Retirement Plan beneficiaries 6

or future generations of customers. In the 2003 GRC, there was a significant difference between SCE’s 7

projected funding of $31.450 million, and the DRA’s recommended minimum contribution of zero. The 8

funding recommendations by SCE and DRA in the 2003 GRC are conceptually similar to SCE’s 9

recommended funding policy for the 2009 GRC compared to the projected PPA minimum contribution of 10

zero. In the 2003 GRC, the CPUC adopted SCE’s recommendation. In the 2006 GRC, when there was a 11

much smaller difference between projected amounts under SCE’s funding policy ($51.159 million) and 12

minimum funding ($48.690 million), the CPUC decided that the difference was “not substantial” and the 13

“minimum calculation could therefore be considered sufficiently conservative.”25 As a result, the CPUC 14

authorized the projected rate recovery amounts that reflected minimum funding. 15

As discussed above, with the passage of the Pension Protection Act, there is expected 16

to be a wide difference between SCE’s long-standing funding policy and the PPA-required minimum 17

contribution. SCE believes that continuing its ongoing policy is superior to subjecting the Retirement Plan 18

to a policy of minimum PPA-required funding, which would erode the plan’s funding status to the point 19

where there would be no cushion from the negative financial markets that inevitably occur from time to 20

time. Therefore, SCE’s Retirement Plan cost projections, discussed in Section e) below, are based on the 21

Plan’s long-standing funding policy, not Pension Protection Act minimum required funding. 22

24 See D.06-05-016, pp.172-73. This decision cites the policy expressed in the 2003 GRC decision stating: “If sound actuarial

practice indicates a funding level above ERISA minimum funding requirements, we favor a conservative policy of authorizing expenses for that larger funding level to avoid potential under-funding that could jeopardize the interests of either retirement system beneficiaries or future generations of ratepayers. In light of this policy, the issue in this GRC turns on whether ORA’s approach is sufficiently conservative and in line with actuarial practice. (D-04-07-022, mimeo., pp. 219-220)

25 Id.

39

e) Analysis of Recorded and Forecast Costs 1

As shown in Figure VI-3, Retirement Plan cost in nominal dollars was $0 in 2002, 2

reflecting the maximum tax deductible contribution for that year. This was a follow-on result of the very 3

favorable investment climate that existed through 1999. Even after poor equity market returns in 2000 and 4

2001, the Plan exceeded the IRS full funding limit for 2002, and no tax deductible contributions could be 5

made. After another poor equity market year in 2002, the Plan again began making tax-deductible 6

contributions under the existing funding policy. In 2003, SCE recorded Pension costs of $34.445 million, 7

approximately $3 million higher than the $31.450 million that was forecast for 2003 and authorized in the 8

2003 General Rate Case.26 In 2004, recorded costs were $34.914 million. In 2005, the Plan was in partial 9

full funding, which reduced permitted tax-deductible funding. Total costs for 2005 were $30.216 million. 10

In 2006, SCE was authorized $48.690 million. Actual pension costs under the 11

existing funding policy were $44.429 million, or $4.261 million less than authorized. Under the pension 12

costs balancing account procedure authorized in D.06-05-016, this amount was an overcollection subject to 13

return to customers beginning in 2009. See SCE-11, Volume 1, Chapter 4 for additional detail on the 14

operation of the pension costs balancing account. 15

SCE’s Retirement Plan costs are based on actuarial valuations, which are estimates of 16

future benefit costs. Changes in the value of Retirement Plan trust assets and the projection of pension 17

liabilities cause fluctuations in annual costs. SCE’s rate recovery for Retirement Plan costs is based on the 18

Rate Recovery Allowance calculated by Aon Consulting, the Plan’s actuary, by applying SCE’s 19

long-standing funding policy. In support of SCE’s Test Year 2009 request, Aon prepared projections for 20

2007-2011, which are included in Appendix C. (All costs are total utility.) 21

To determine the forecast of Test Year 2009 costs, Aon used the Frozen Initial 22

Liability (FIL) actuarial cost method. This is the same actuarial cost method that has historically been used 23

to calculate SCE’s Retirement Plan costs in previous General Rate Cases (GRCs). As discussed above in 24

Section 1.d), the Pension Protection Act of 2006 (PPA) redefines the ERISA minimum funding 25

26 See D.04-07-022, p.214.

40

requirements and maximum tax deductibility rules, but pension plan sponsors may use different funding 1

policies, as long as minimum funding requirements are met. For this GRC, the estimates are based on 2

preliminary results of the 2007 Retirement Plan actuarial valuation, which reflects employee census 3

information as of January 1, 2007. 4

Aon’s estimates also include the impact of SCE workforce additions during the 5

2007-11 period. Aon’s projections historically have not included projections of workforce additions beyond 6

those needed to keep the projected eligible employee population at current-year levels. However, the 7

magnitude of workforce additions expected during 2007-11 is significant, and the associated pension costs 8

($3.9 million) for these expected additions are included in SCE’s pension cost estimates. 9

In addition to selecting a cost-allocation method (i.e., FIL), the actuary also must 10

select an asset valuation method. Pension law has historically allowed the actuary to use smoothing 11

techniques in the valuation of Retirement Plan assets, in order to mitigate any wide swings in pension 12

contributions from year to year that might result from volatility in financial market returns. SCE’s 13

long-standing pension funding policy has, since at least the 1980s, incorporated an actuarial asset valuation 14

method that smoothes market value returns over four years. This method was addressed in SCE’s 2003 and 15

2006 GRCs, and the Commission accepted this approach.27 As discussed in Section d) above, the Pension 16

Protection Act of 2006 changed the required asset smoothing method for minimum funding purposes, 17

allowing less smoothing of assets. For this GRC, SCE recommends continuing the four-year asset 18

smoothing method used historically, as this method should result in smoother contribution patterns over 19

time than the PPA method. For this GRC, Aon projected the actuarial value of Retirement Plan assets 20

starting with the January 1, 2007 actuarial value. 21

The actuary also must make a number of assumptions in calculating the required 22

contribution. These assumptions include the interest rate assumption, as well as assumptions regarding 23

mortality, salary increases, rates of employment termination and retirement, expense load, increase in social 24

security taxable wage base, form of benefit payment, and basis of lump sum payments. 25

27 See D.04-07-022, p.214.

41

As shown in Appendix C, Aon projects pension costs of $49.749 million for 2009, 1

$53.424 million for 2010 and $55.669 million for 2011, or a three-year average of $52.947 million for the 2

2009-2011 forecast period. However, there are several factors that may cause actual amounts to deviate 3

significantly from these estimates. As discussed above, financial market returns can be very volatile, as 4

recent and longer term history suggests. Pension costs are likely to continue to be volatile. Therefore, the 5

balancing account for pension costs adopted in SCE’s 2006 GRC decision should continue to remain in 6

effect, so that customers will only pay for actual pension costs incurred. The balancing account is described 7

in Section f) below. 8

f) Pension Costs Balancing Account 9

In this GRC, SCE proposes that the Commission continue using the balancing 10

account for pension costs adopted in the 2006 GRC decision. Under this procedure, the difference between 11

2006-2008 authorized amounts vs. actual pension costs under the existing funding policy will be amortized 12

beginning in 2009, and the difference between authorized and actual 2009-11 pension costs will be 13

amortized beginning in 2012. Any accumulated balances receive interest at the commercial paper rate, 14

consistent with treatment of interest accruals for other SCE balancing accounts.28 As discussed in Section e) 15

above, in the first year of the operation of the Pension Costs Balancing Account, actual costs were 16

$4.261 million less than authorized, resulting in an overcollection in the Balancing Account. 17

SCE continues to believe that a balancing account for pensions will benefit both 18

customers and shareholders. SCE’s pension trust has an investment policy with a significant allocation to 19

equities.29 Significant equity exposure can be expected to lower the long-term costs of funding the 20

Retirement Plan, but will also result in significant short-term volatility in pension asset returns, as 21

experienced in the last several years and shown on Table VI-5. The actuaries’ use of asset smoothing 22

methods mitigates some, but not all, of the volatility, which, absent the balancing account, could result in 23

either windfalls or detriments to customers or shareholders, depending on short-term market volatility 24

within a GRC forecast period. 25 28 See SCE-11, Volume 1, Chapter IV for additional detail on the operation of the pension costs balancing account. 29 The current investment policy is 74 percent equities, 26 percent fixed income.

42

In addition, the pension balancing account gives SCE the ability to make any 1

necessary Retirement Plan design changes at any time, not necessarily coincident with a GRC forecasting 2

cycle, and not receive a windfall or incur uncompensated costs from the resulting Plan cost changes. 3

2. Edison 401(k) Savings Plan 4

a) Summary of Test Year Request 5

For Test Year 2009, SCE forecasts a total of $68.520 million for 401(k) savings plan 6

costs. Figure VI-4, below, shows recorded costs for the years 2002 through 2006, plus our forecast costs for 7

2007, 2008, and the Test Year 2009. 8

Figure VI-4 401(k) Savings Plan Costs


(Nominal $000)

b) Summary Description of SCE’s 401(k) Savings Plan 9

The Edison 401(k) Savings Plan is a defined contribution plan.30 As a part of SCE’s 10

total compensation package, it provides employees an opportunity to defer current income, reducing their 11

30 A summary of the Edison 401(k) Savings Plan is included in the workpapers.

43

taxable income now, and to save for future financial needs. The employee chooses how to invest the 1

deferred income, plus Company matching contributions, with all the monies avoiding current income taxes. 2

The Edison 401(k) Savings Plan offers more than 40 investment funds to provide 3

employees with choices and facilitate investment diversification. The maximum percentage of base pay an 4

employee can defer into the 401(k) Savings Plan is 84 percent, subject to maximum dollar limits determined 5

by the Internal Revenue Service. 6

Other Edison 401(k) Savings Plan features include: immediate eligibility from the 7

date of hire; timely transactions through an automated telephone system, phone representatives and internet 8

access with updates each business day; and weekly processing of loans, withdrawals, and distributions. 9

SCE also provides access to “Financial Engines” financial planning software which allows employees to 10

model future investment and savings strategies. 11

As the result of benefits negotiations, effective January 1, 2005, SCE increased its 12

match of employee contributions for employees represented by IBEW Local 47 and Teamsters Local 495, 13

from 75 cents for each employee dollar contributed to a dollar for dollar match, up to six percent of base 14

pay. This same benefit enhancement also was provided, effective January 1, 2005, to employees not 15

covered by a collective bargaining agreement. As a result of subsequent benefits negotiations, the increased 16

match was provided to employees represented by UWUA Local 246 effective January 1, 2006 and to 17

employees represented by SOFA as of April 1, 2007. 18

c) Analysis of Recorded and Forecast Costs 19

Changes in plan design, size of SCE’s workforce, employees’ base pay, and plan 20

participation rates are the primary drivers of recorded costs in the 401(k) plan. The Edison 401(k) Savings 21

Plan costs increased 45.3 percent ($15.845 million) from 2004 to 2005 primarily due to the increase in the 22

Company match (i.e., from 75 cents for each employee dollar contributed, to a dollar for dollar match, up to 23

six percent of base pay) for employees represented by IBEW Local 47 and Teamsters Local 495, and those 24

not covered by a collective bargaining agreement. The January 1, 2006 increase in the Company match for 25

employees represented by UWUA Local 246 was a significant factor in the 10.7 percent ($5.461 million) 26

increase in plan costs from 2005 to 2006. 27

44

SCE’s cost for the 401(k) plan has a direct relationship to the pay employees receive 1

since SCE’s cost is for matching each employee’s contribution for each dollar the employee defers, up to six 2

percent of base pay. A ‘projection factor’ was developed that reflects the relationship in 2006 between the 3

Company’s cost for the plan and the total dollars spent for employees’ pay (i.e., labor dollars). Since all 4

projections for labor dollars in the General Rate Case are provided in constant 2006 dollars while the Test 5

Year 2009 benefit plan costs are stated in 2009 dollars, the projection factor was adjusted for labor 6

escalation in 2007, 2008 and 2009, using the standard escalation rates developed in SCE 11, Volume 1, 7

Chapter VII, Cost Escalation. Then the resulting adjusted projected factor was applied to the 2009 expected 8

total labor dollars to develop an estimate of SCE’s 401(k) plan costs for 2009. 9

The steps are further detailed below: 10

The projection factor was developed by dividing the recorded 2006 401(k) total 11

plan costs by the 2006 total labor dollars. 12

The resulting projection factor was then escalated by the standard labor escalation 13

factors for the 2007, 2008 and 2009 years. The cumulative result is the adjusted 14

projection factor. 15

The forecast 2009 labor dollars (stated in 2006 constant dollars) were obtained 16

from all SCE business units and totaled. 17

The adjusted projection factor was applied to the total 2009 forecast labor dollars 18

to calculate the expected 2009 401(k) plan costs. 19

C. Medical Programs 20


For Test Year 2009, SCE forecasts a total of $117.274 million for medical program costs. 22

Figure VI-5, below, shows recorded costs for the years 2002 through 2006, plus our forecast costs for 2007, 23

2008, and Test Year 2009. 24

45

Figure VI-5 Medical Programs Cost


(Nominal $000)

a) Summary Description of SCE’s Medical Programs 1

SCE’s medical programs provide employees and their enrolled family members with 2

comprehensive protection, both to help prevent illness and to provide care and treatment when illness or 3

injury occurs. While medical inflation rates were relatively low during the 1990s, starting in 1999 we have 4

seen year-to-year cost increases well above regular inflation, with double-digit rate hikes for multiple years. 5

We persist in our commitment to provide quality health care at reasonable costs for our plan participants. 6

Our health care delivery strategy continues to focus on a cost-effective plan design supplemented with 7

outsourced plan administration and increased medical contributions on the part of employees. As a result of 8

the continued double-digit rate increases, in August 2003, we announced significant changes to the SCE 9

medical program for employees not covered by collective bargaining agreements.31 The initial changes, 10 31 A copy of the announcement brochure is included in the workpapers.

46

which were effective in January 2006, increased the participant’s contributions toward the costs of the plans 1

and increased the amount the employees pay at the time services are received. In addition, other changes 2

were made to increase the age and service required to receive retiree medical and reduce SCE’s future 3

retiree health care contributions. The changes are discussed in the sections below. In August 2004, 4

employees represented by IBEW Local 47 and Teamsters Local 495 ratified new benefits agreements 5

containing modifications consistent with these changes. Employees represented by UWUA Local 246 and 6

SOFA also ratified new benefits agreements containing similar modifications in October 2005 and 7

April 2007, respectively. 8

b) Medical Plans 9

Under SCE’s program,32 three types of medical coverage may be available based on 10

an employee’s geographic location: Point of Service (POS), Health Maintenance Organization (HMO) or a 11

Consumer Directed Health Plan (CDHP). All of SCE’s POS, HMO and CDHP plans offer comprehensive 12

medical coverage for employees and their dependents including preventive care, outpatient and inpatient 13

hospital services, physician services, diagnostic laboratory, x-ray and imaging services, mental health and 14

substance abuse services, and therapeutic treatments such as chemotherapy and physical therapy. SCE 15

provides prescription drug coverage through a Pharmacy Benefits Manager (PBM). Employees and their 16

spouses may use a Preventive Health Account as well as a Health Management Incentive (for a description 17

of these benefits, see parts b) and d) of this section). Medical plan coverage is effective on the date of hire. 18

The POS plans feature three levels of coverage that allow the employee (or covered 19

family member) to choose how to obtain medical care each time services are sought: 20

• Tier One: All care is coordinated by a selected primary care physician. 21

• Tier Two: Allows the member to self-refer to contracted providers in the plan’s 22

preferred provider organization. 23

• Tier Three: Allows self-referral to any licensed provider. 24

32 Descriptions of SCE’s medical plans are included in the workpapers.

47

POS plans allow the participant to decide how to access care through the medical 1

delivery system. The cost of the service is determined by the choice made. For Tier One, the participant 2

pays the least amount out-of-pocket, and the care is delivered in the most managed approach since the 3

primary care physician controls the providers used. Direct cost to the participant increases when care is 4

received under Tiers Two or Three as the participant is making the decision about what providers to use. 5

HMOs provide the participant with access to a full spectrum of care within a specific, 6

coordinated delivery system. Care is typically accessed through the selected primary care physician. All 7

care, except emergency services, must be coordinated through the HMO to be covered. Residence in the 8

selected HMO service area is required, so availability depends upon the employee’s location. 9

Consumer Directed Health Plans (CDHPs) combine a high deductible health plan 10

with a personal health reimbursement account and a tiered benefit design. Preventive care is provided at no 11

cost. Online tools are provided to help employees make more informed health care decisions. 12

Effective in 2006, the participant’s cost sharing when accessing primary care services 13

through the HMO or Tier One of the POS option doubled. Participant cost sharing for specialty care 14

increased 200 percent in POS Tier One. The other participant cost sharing features in the medical options, 15

including annual deductibles and out-of-pocket limits, all were increased to higher dollar amounts. For 16

subsequent years, each of these cost sharing features will be subject to annual adjustments to reflect the 17

overall price increase in the respective medical options. For example, if the price for all of the HMO 18

options on average increases by ten percent, the HMO office co-payment will increase by ten percent, in 19

whole dollar increments. Participant prescription cost sharing changed from flat dollar co-payments to a 20

percentage of the drug cost, thereby enhancing patient awareness of prescription expenses and encouraging 21

the selection of alternative, lower-cost prescriptions. In addition, the prescription drug benefit was “carved 22

out” from most medical plan carriers. 23

As summarized in Table VI-6, SCE’s contributions toward medical coverage were 24

reduced for all employees with a phased-in reduction starting in 2006, and fully implemented in 2008. 25

In 2008, SCE’s contribution toward medical coverage for employees represented by 26

IBEW Local 47 and Teamsters Local 495 and employees not covered by a collective bargaining agreement 27

48

will be based on the lowest-cost, non-CDHP plan offered by SCE in the geographic area of the employee’s 1

home. If these employees select an option other than the lowest-cost plan available, they will pay the 15 2

percent contribution for themselves and 20 percent for their dependents of the lowest-cost plan’s price, plus 3

the total difference in cost between the lowest-cost plan and the plan they select. 4

Through the union negotiation process, a different approach to SCE’s contributions 5

for medical coverage was reached for employees represented by UWUA Local 246 and SOFA. In this 6

agreement, a reduced number of medical plan options are offered and the Company’s contribution is fixed at 7

87 percent of the average cost of the plans, weighted by enrollment. As the plans offered are the lower cost 8

options, the Company’s cost is projected to be no greater than what is provided to the other employee 9

groups. 10

The aforementioned changes in SCE’s contribution for medical coverage are 11

summarized in Table VI-6 below: 12

Table VI-6 Company Medical Contributions*

Employee Represented by: Employee Group:

Years

Employees Not Covered by a

Collective Bargaining Agreement

IBEW 47 & Teamsters UWUA 246 & SOFA

2005 90% Employee Coverage 80% Dependent Coverage

89% less $8 per month for Employee and Dependent

Coverage

89% less $8 per month for Employee and Dependent

Coverage 2006 85% Employee Coverage

80% Dependent Coverage 87% Employee Coverage 85% Dependent Coverage

87% of the weighted average plan cost for

Employee and Dependent Coverage

2007 85% Employee Coverage 80% Dependent Coverage

85% Employee Coverage 83% Dependent Coverage



2008 85% Employee Coverage 80% Dependent Coverage based on the lowest-cost,

non-CDHP plan offered in the geographic area

85% Employee Coverage 80% Dependent Coverage based on the lowest-cost,

non-CDHP plan offered in the geographic area



* Except where specified otherwise, SCE’s contribution was based on the price tag of the medical plan option selected by the employee.

49

c) Preventive Health Account 1

The Preventive Health Account provides full-time employees and their enrolled 2

spouse/domestic partner with reimbursement of up to $150 per year per person for completing approved 3

fitness, diet, nutrition, smoking cessation, and other health promotion programs not covered by 4

SCE-sponsored medical plans. If employees or enrolled spouses/domestic partners wish to use their 5

Preventive Health Account for fitness activities, the fitness program design is reviewed to determine if it has 6

the necessary components to improve health status. 7

d) Employee Assistance Program 8

The Employee Assistance Program (EAP) provides confidential, short-term 9

counseling services to employees, retirees and dependents without charge to the participant. The EAP 10

professionals provide counseling for problems such as marital and family tensions, emotional issues, 11

financial strains, dealing with change, job or personal stress, bereavement, or a family member’s substance 12

abuse. Employees do not need to be enrolled in a medical plan to use the EAP services. 13

e) Health Management Incentive Program 14

The Health Management Incentive Program encourages participant’s to use the 15

Health Quotient (HQ), an online health risk assessment, to determine their HQ score and identify potential 16

ways to lower personal health risks such as asthma, diabetes, heart disease, hypertension and tobacco use. 17

Because the program is voluntary, SCE provides incentives to eligible employees and their spouses (or 18

domestic partners) who are willing to participate. Provided all program rules are met, the incentives are 19

awarded as follows: 20

• For completing the online health risk assessment – 10 Award perQs are 21

credited to the employee’s Awards to Celebrate Excellence account. If no 22

eligible risks are identified, participants receive an additional $50 credit 23

toward their Preventive Health Accounts for the next plan year. 24

• If one or more eligible risks are identified and participants agree to participate 25

in their medical plan’s Health Management/Disease Management program, 26

they will receive an additional $100 or $200 Company contribution for 27

50

medical coverage for the next plan year ($200 will be contributed if both the 1

employee and spouse/domestic partner qualify). 2

2. Analysis of Recorded and Forecast Expenses 3

A combination of factors including changes in the number of employees enrolled in the 4

plans, the mix between plan type selection (e.g., HMO vs. POS options), utilization experience, and medical 5

inflation rates, drive medical plan costs As shown in Figure VI-5, the largest single annual increase of 6

$20.712 million occurred between 2003 and 2004. This was primarily due to an increase in the medical 7

plan trend, which was 19 percent across all the plan options when weighted by enrollment. 8

Costs were forecast by multiplying the projected number of eligible employees by the 9

projected per-eligible-employee cost. The projected number of eligible employees was derived by dividing 10

the forecast labor cost for 2009 (stated in 2006 constant dollars) by the 2006 average per-employee labor 11

cost. Projected per-eligible-employee costs were determined by calculating the cost per employee for 2006, 12

then applying a forecast trend rate for each year. There are multiple factors currently impacting the cost of 13

medical care and consequently the trend rates into the future. The most significant ones are discussed 14

below. 15

a) Rising Prescription Drug Costs 16

Prescription drugs continue to represent one of the fastest growing components of 17

medical plan costs. The dollars spent in the U.S. for prescriptions increased almost five-fold between 1990 18

($40.3 billion) and 2005 ($200.7 billion), with double-digit rate increases in the years between 1994 and 19

2003.33 In a study of the drivers of health care cost increases, it was noted that while prescription drugs 20

make up approximately 11 percent of costs, “they are accountable for producing roughly 17 percent of the 21

increase.”34 Actuaries at the Department of Health and Human Services project that prescription drug 22

spending will continue to grow at between nine and 12 percent annually through most of the next decade.35 23

33 Henry J. Kaiser Family Foundation, Prescription Drug Trends, May 2007, at 1. 34 Benefits Roundtable, Understanding the Drivers of Health Care Cost Inflation, Corporate Executive Board, 2005, at 21. 35 Henry J. Kaiser Family Foundation, supra, at 3.

51

There are multiple reasons why prescription drug costs have been increasing at such a 1

rapid pace. Pharmaceutical companies have increased their emphasis on promoting the use of drugs in a 2

variety of ways, with spending directed toward consumers increasing from $0.8 billion in 1996 to 3

$4.2 billion in 2005.36 Advertising direct-to-consumers has a positive return-on-investment to the 4

pharmaceutical manufacturers, with 25 percent of the target audience seeking more information through a 5

doctor visit and receiving a prescription for a previously unnoticed medical need.37 The impact of this trend 6

can be seen in the number of prescriptions dispensed per individual, which has increased from 7.9 in 1994 to 7

12.4 in 2006.38 Drug companies are able to charge 60-70 percent more for branded prescription drugs in the 8

United States compared to other industrialized countries.39 9

Several developments within the pharmaceutical industry demonstrate that pressures 10

that increase spending are continuing. Although generic substitution for brand-name drugs has been 11

perceived as a means of controlling costs, recent trends have shown this may not consistently occur. There 12

is a wide range in the charges for newly available generics, with the generic costing 60 percent of the brand 13

name product at one pharmacy chain, and as little as 5 percent at another drugstore,40 resulting in generic 14

substitution having a less-than-anticipated impact on cost management. New drug discoveries may provide 15

incremental gains at very steep prices. For example, newly approved cancer therapies can cost from 16

$35,000 to as much as $100,000 for an annual supply, and although they may help some patients, they 17

typically only extend lives for a few months.41 Specialty drugs, scientifically engineered difficult-to-18

administer medications, represent the most significant component driving drug trend. Spending increased 19

16.1 percent in 2006, driven by treatments for complex diseases including hemophilia, multiple sclerosis, 20

36 Id. at 2. 37 Benefits Roundtable, supra, at 50. 38 Henry J. Kaiser Family Foundation, supra, at 2. 39 Steven Pearlstein, Adding Up Reasons for Expensive Health Care, Washington Post, February 14, 2007. 40 Sarah Rubenstein, Why Generic Doesn’t Always Mean Cheap, Wall Street Journal, March 13, 2007. 41 Daniel Costello, Setting a Price For Putting Off Death, Los Angeles Times, March 18, 2007.

52

rheumatoid arthritis and cancer. Costs average $6,000 per year, but for some medications may be as high as 1

$250,000 annually.42 2

Increasing disease prevalence (e.g., diabetes, asthma), aging population (e.g., 3

osteoporosis and hypertension) and improved diagnosis (e.g., hyperlipedemia) have contributed to the 4

growth in utilization43 and consequently the continuing increases in prescription spending. 5

b) Increased Demand for Services 6

The utilization of medical services is driven by multiple factors. 7

PricewaterhouseCoopers has identified the major drivers as including increased consumer demand, aging 8

population and lifestyle changes.44 Increased consumer demand is driven by direct-to-consumer advertising 9

and the ever greater available information on medical treatments.45 The total number of adults who have 10

used the internet to search for medical information reached 136 million in 2006.46 The aging population 11

contributes to cost increases, particularly as the baby boom generation ages into their more disease-prone 12

years.47 Today’s lifestyle with increasingly sedentary work, raises the risk of chronic illnesses among 13

workers.48 Also on the rise are lifestyle-related increases in utilization of health services due to obesity, 14

smoking, drug abuse and inactivity.49 Contributing to demand for services is the poor quality of care. 15

These include under use of evidence-based care, overuse of services, misuse of care (errors) and wasted care 16

which cumulatively represents 30 percent of health care expenditures.50 As poor quality care does not 17

effectively address the presenting medical issue, additional services are required. 18

42 Medco, 2007 Drug Trend Report, at 2 and 21. 43 Id. at 12. 44 PricewaterhouseCoopers, The Factors Fueling Rising Healthcare Costs 2006, at 11. 45 Id. at 12. 46 Laura Landro, Social Networking Comes to Health Care, Wall Steet Journal, December 27, 2006. 47 Benefits Roundtable, supra, at 32. 48 World Economic Forum, Working Towards Wellness, 2007, at 12. 49 PricewaterhouseCoopers, supra, at 11. 50 Midwest Business Group on Health, Reducing the Costs of Poor-Quality Health Care, 2003, at i, 6-7.

53

c) Expanding Medical Technology and Clinical Procedures 1

Medical capabilities have continued to grow rapidly with increasingly sophisticated 2

diagnostic tools, innovative medical equipment, and new therapeutic regimens. As new technology is 3

developed, it is frequently more expensive than the technology it is replacing.51 New imaging technologies 4

are at a higher cost than existing, and this also occurs with new prescription drugs that are replacing older 5

drugs including generics.52 When lower cost procedures are developed, they are at times required to be 6

performed within a high-cost infrastructure, which is what happened with angioplasties, so cost savings are 7

not initially obtained.53 New technology will frequently increase the number of services. Angioplasties and 8

stents have replaced coronary-bypass surgeries with the number of bypass surgeries reduced by 100,000 9

each year, but replaced by more than 1,000,000 stint procedures.54 Technology costs are increasing as new 10

uses are recognized as medically appropriate. Recently, guidelines were published recommending M.R.I. 11

scans for women with breast cancer. The scans cost ten times the cost of mammography so may add 12

$1 billion a year in costs for the one to two million women who should have the more costly diagnostic 13

procedure.55 In a study of the number of CT and M.R.I. scanners in the United States compared to other 14

industrialized countries, the excess capacity results in more than 84.7 million extra procedures per year at a 15

cost of $26.4 billion.56 The excess capacity, low utilization and high profits from the procedures combine to 16

incentivize doctors to order greater numbers of tests.57 The study concludes that many service decisions are 17

ambiguous, with evidence that not all are necessary.58 18

51 PricewaterhouseCoopers, supra, at 11. 52 Id. at 11. 53 Mark D. Smith, Interview – Disruptive Innovation: Can Health Care Learn From Other Industries? Health Affairs, March

13, 2007. 54 Steve Lohr, Risks and Rewards Who Pays for Efficiency? New York Times, June 11, 2007. 55 Denise Grady, Much Wider Use of M.R.I.’s Urged for Breast Exam, New York Times, March 28, 2007. 56 McKinsey Global Institute, Accounting for the Cost of Health Care in the United States, January 2007, at 44. 57 Id. at 43. 58 Id. at 44.

54

d) Pressures in the Health Plan Industry 1

In some markets, particularly in California, there is diminishing competition between 2

plans as the absolute number of plans has fallen due to mergers and acquisitions. In October 2003, two of 3

the largest Blue Cross/Blues Shield plans, California based WellPoint Health Network and 4

Indianapolis-based Anthem Inc., joined together to create WellPoint Inc., a $21.8 billion company with 5

26 million members.59 For a short period of time, WellPoint was the largest insurance company in the 6

United States; however, with United Healthcare’s subsequent acquisition of PacifiCare, it regained the 7

number one position.60 United Healthcare covered approximately 27 million Americans in 2005 and 8

increased its membership by 29 percent in two years.61 The consolidation has led to fewer, but very large, 9

plans. California has five Health Maintenance Organization (HMO) plans that have more than 1.5 million 10

enrollees each with a combined share of 80.6 percent of the HMO market as of December 2005.62 The 11

number of plans has dropped sharply due to acquisitions, insolvencies and changes in business strategies. 12

The impact of market consolidation is potentially significant, with competition diminished and dominant 13

insurers imposing “take-it-or-leave-it” contracts that directly impact the provision of care.63 Over the past 14

few years, health care delivery in California has become more dominated by for-profit HMOs, with four of 15

the six plans with the greatest enrollment in California being for-profit.64 Through market consolidation, the 16

two largest insurers, WellPoint and United, now control 33 percent of the United States market and have 17

posted record profits.65 18

Another factor that has impacted health plan costs is the effect of unreimbursed and 19

under reimbursed health care. Providers compensate for unreimbursed health care services, typically 20

59 Allan Baumgarten, California Health Care Market Report 2006, California Health Care Foundation, at 15. 60 Id. at 15-16. 61 American Medical Association, Competition in Health Insurance, 2005, at 1. 62 Allan Baumgarten, supra, at 13-15. 63 American Medical Association, supra, at 1. 64 Allan Baumgarten, supra, at 12-14. 65 American Medical Association, supra, at 1.

55

provided to uninsured patients by increasing their fees to patients with medical coverage.66 This cost-1

shifting also occurs due to payments from Medicaid (MediCal in California) that does not cover the 2

provider’s costs.67 3

e) Upheavals with Health Care Providers 4

Starting in the early 1990s, reimbursements to medical providers, including hospitals 5

and physician groups, shifted toward capitated payments, a fixed dollar amount for each covered member 6

each month, not tied to services received. This reimbursement system moderated health care cost increases 7

as the financial risk was assumed by the providers, with rates locked in through contracts that had to be 8

renegotiated to achieve increased income. Now, market forces are shifting and physicians operating in this 9

model are seeing a steady erosion of their patient base.68 The impact on hospitals is even more striking, 10

with capitation arrangements all but abandoned over the past five years.69 In California, because capitation 11

was more broadly used by health plans to manage costs, this change has had a significant impact on costs as 12

providers change their culture from a conservative treatment approach to one focused on maximizing 13

fee-for-service payments.70 14

Another consequence of the market changes is the reduced role of primary care 15

physicians. Some plans have eliminated their requirements for patients to see primary care physicians to 16

obtain referrals to specialists, meeting consumers’ demands for easier access, but also reducing the 17

competition in the delivery system.71 This shift has the potential to increase costs since primary care 18

physicians historically have addressed medical problems when they first occur, before they become complex 19

and more difficult to treat.72 20

66 Allan Baumgarten, supra, at 6. 67 PricewaterhouseCoopers, supra, at 9-10. 68 Allan Baumgarten, supra, at 4. 69 Id. at 46. 70 Id. at 5. 71 PricewaterhouseCoopers, supra, at 11. 72 Gautam Naik, Faltering Family M.D.s Get Technology Lifeline, Wall Street Journal, February 23, 2007.

56

In some regions, hospital systems have consolidated thereby gaining greater ability to 1

negotiate higher payment rates.73 However, hospitals are facing cost pressures due to the competition for 2

nurses.74 The recruiting, training and lost productivity costs effectively double the amount hospitals spend 3

on each new nurse.75 Additionally, new technology innovation erodes hospital margins as it allows some 4

new procedures to become standardized and therefore moved to the out-patient setting, reducing hospital 5

revenue. Those procedures that are more complex and plagued with higher innovation costs, remain in the 6

hospital, forcing facilities to increase their charges.76 7

f) Increased Costs Due to Legislation 8

The U.S. Congress and state legislators continue to take a proactive role in mandating 9

how health care should be delivered. The Health Insurance Portability and Accountability Act has required 10

major changes in both administrative procedures and technology support at all types of providers’ practices, 11

medical plans and for employers, including SCE. Although not specifically focused on health care issues, 12

the passage of the Sarbanes-Oxley Act has required corporations, such as insurance companies, to invest 13

heavily in compliance systems to meet the new requirements for financial reporting.77 Currently in 14

California, Governor Schwarzenegger and the democratically controlled Legislature are offering proposals 15

to reform health care in the state. The Governor’s proposal would require all individuals to obtain health 16

insurance, providers to pay a ‘fee’ to help subsidize coverage for the poor and businesses to spend at least a 17

specified percentage of payroll on employee healthcare.78 The Democratic proposals also seek to cover 18

more Californians, through state insurance pools and subsidies for lower-income families.79 Although SCE 19

currently provides comprehensive coverage for our employees and their eligible family members, with a 20

73 PricewaterhouseCoopers, supra, at 14. 74 Id. at 14. 75 Benefits Roundtable, supra, at 78. 76 Id. at 69. 77 Linda Tucci, Sarbanes-Oxley, HIPAA Compliance Spending Soars, AMR Finds, SearchCIO.com, April 27, 2005. 78 Jordan Rau, Healthcare Reform’s Unlikely Ally: Big Business, Los Angeles Times, May 7, 2007 79 California HealthCare Foundation, Comparison of California Health Coverage Expansion Proposals, 2007, at 1-3.

57

new law the specific requirements regarding who must be covered, the level of employer subsidy, the 1

definition of eligible services, initiatives for chronic disease management, incentives for lifestyle changes, 2

etc. have the potential for substantially increasing costs, particularly when the proposals are this ambitious 3

and far reaching. 4

g) Summary Conclusion Regarding Medical Program Forecast for 2009 5

The California Employer Health Benefit Survey indicates that the health care trends 6

for 2006 were ten percent for HMO plans and nine percent for POS plans.80 An April 2007 health care 7

trend survey projects an average 10.9 percent increase for HMOs, 10.8 for POS plans and 10.7 for 8

Consumer Directed Health plans for the next 12 months.81 For HMO plans, the combined data for 9

approximately 160 companies showed a rate increase for 2008 of 14.1 percent, well above the increases 10

experienced in 2006 of 12.4 percent and 11.7 percent for 2007.82 11

To assist in determining what cost escalation rate to use to project the costs of our 12

medical plans, we contacted each of the medical plans and asked them to provide their current underwriting 13

projections. The letters we received indicated expected escalation rates ranging from 10.2 to 20.6 percent 14

for 2007, from 9.1 to 14 percent for 2008, and from 10 to 16 percent for 2009.83 15

To help evaluate this information, we also researched recent experience of other 16

California-based employers. The Pacific Business Group on Health Negotiating Alliance, which covers 17

approximately 300,000 enrollees, indicates an expected increase of 9 to 11 percent for 2008.84 85 CalPERS, 18

with more than 1,200,000 enrollees, experienced increases of 10 percent and 13.8 percent, depending on the 19

plan type.86 In light of the much greater number of enrollees that Pacific Business Group on Health 20

80 California HealthCare Foundation, California Employer Health Benefits Survey, November 2006, at 13. 81 Aon Consulting, Inc. Aon Consulting’s Spring 2007 Health Care Trend Survey, April 12, 2007, at 1. 82 Susan Kelly, HMO Rates Expected to Climb Next Year Amid Competition, Financial Week, July 2, 2007. 83 Copies of the letters from the carriers are included in workpapers. 84 Source Ema Hoo, PBGH, July 5, 2007. 85 While SCE is an active member of Pacific Business Group on Health, we do not participate in the Pacific Business Group on

Health Negotiating Alliance. 86 Allan Baumgarten, supra, at 10.

58

Negotiating Alliance and CalPERS have compared to the 55,000 we represent, a higher trend rate for SCE 1

would be expected. 2

Due to the significant pressures on medical plan costs discussed above, particularly 3

prescription costs, increasing demand for services and disruption in the delivery system, we have projected a 4

trend rate of ten percent for each of the years 2007, 2008 and 2009. However, due to the plan design 5

changes outlined earlier, specifically increased employee contributions for medical coverage and greater 6

cost sharing at the time services are used, the 2008 trend is fully offset and a net escalation of zero has been 7

used for that year’s projection. 8

3. Discussion of Post Test-Year Medical Cost Escalation 9

The factors that are increasing the expected costs of medical care for the years 2007 through 10

2009 will continue to have an impact during 2010 through 2011. In reviewing the current health care 11

environment, each of the significant cost drivers contributing to health care cost escalation show no 12

tendency toward diminishing or losing their upward impact on the overall cost picture. 13

The challenges with cost escalation are further compounded with the lack of readily available 14

solutions. Historically, increased enrollment in HMOs where care was more tightly managed was an 15

effective means of reducing cost increases. With the move in California away from HMOs with its 16

capitation model of shifting risk to providers, physicians are modifying their practice patterns to take 17

advantage of the return to fee-for-service reimbursement where doing more is financially rewarded.87 Now, 18

compared to all other plan types, HMOs are experiencing some of the highest cost increases, ranking ahead 19

of Preferred Provider Organization and POS type plans.88 Although employers have seen reductions in the 20

health care trend in the last year, this has typically been a product of increasing the contributions by 21

employees and by adopting plan provisions that require more cost sharing as services are used such as 22

changes in copays and coinsurance to encourage the cost-effective use of prescription drugs. SCE has 23

adopted these plan design changes, which are expected to entirely offset the medical trend escalation for 24

87 Id. at 5. 88 California HealthCare Foundation, California Employer Health Benefits Survey, November 2006, at 13.

59

2008. However, this has not addressed the systemic issues within a health care system that continues to 1

react and adapt to find new ways to generate revenue. 2

The multiple forces contributing to health care cost escalation were discussed in detail 3

earlier. The most significant ones are summarized below: 4

• Rising prescription drug costs are driven by manufacturer price increases, increasing 5

number of prescriptions, changes in types of drugs used with new higher-priced drugs 6

replacing older, less-expensive drugs and supported by direct to consumer advertising. 7

• As consumers have become more empowered with information resources and influenced 8

by direct marketing, their demand for services increases. This is compounded by an 9

aging population that uses more health services and workforce that leads an increasingly 10

sedentary lifestyle. 11

• The continuing introduction of new technology that enhances treatment capability, but is 12

at least initially more expensive, is performed more frequently and for whichever greater 13

recommended uses are identified, adds to the cost pressures. 14

• Medical plan consolidations continue, resulting in fewer insurers remaining to compete in 15

local markets, making it easier for these mega-carriers to dominate the market and ensure 16

their profitability. 17

• Upheavals in the health care delivery system are continuing as providers seek to adapt to 18

different reimbursement schemes, plan designs that change patient behavior in seeking 19

care and integration of new medical technology and procedures that require changes in 20

the delivery infrastructure. 21

• Additional legislated and regulatory mandates add to the future financial burden of 22

providers, medical plans and consequently, employers’ costs. 23

Based on these major factors and the volatility currently being experienced in the health care 24

system, the post test-year medical cost escalation is projected to be 9 percent in 2010 and 7.5 percent in 25

2011. 26

60

D. Dental Plans 1


For Test Year 2009, SCE forecasts a total of $16.906 million for dental plan costs. Figure 3

VI-6, below, shows recorded costs for the years 2002 through 2006, plus our forecast costs for 2007, 2008, 4

and Test Year 2009. 5

Figure VI-6 Dental Plans Cost


(Nominal $000)

2. Summary Description of SCE’s Dental Plans 6

Employees, retirees, and their eligible dependents can choose from three dental plans: Delta 7

Dental, Blue Cross Dental Net, and Safeguard.89 Delta Dental is a self-funded plan administered by Delta 8

Dental of California. Under this plan, SCE pays an administrative fee plus expenses for actual dental 9

services rendered. Blue Cross Dental Net and Safeguard are dental maintenance organizations for which 10

SCE pays a fixed monthly fee to cover dental services for each enrolled member. 11

89 A description of SCE’s dental plans is contained in the workpapers.

61

The Company contribution for dental coverage is based on the weighted average cost of the 1

three dental options. Effective January 1, 2006, the Company’s contribution was reduced from 108 percent 2

to 106 percent of the average of the three dental options’ cost weighted by enrollment. Subsequently, the 3

Company’s contribution, as a percentage of the average cost, will be reduced as follows: 104 percent in 4

2007; 102 percent in 2008; and 100 percent in 2009. Delta Dental, the most expensive plan, requires an 5

employee contribution. All three dental plans provide 100 percent coverage for preventive services, while 6

requiring various levels of cost sharing for other dental services. 7

Dental program changes were negotiated with IBEW Local 47, Teamsters Local 495, UWUA 8

Local 246, and SOFA which also apply to employees not covered by a collective bargaining agreement. 9

They became effective in 2005 and 2006, depending on when the union negotiations were completed. 10

These include improvements to the Delta Dental preventive benefits increasing the number of eligible 11

cleanings from two to three per year, Delta Dental child orthodontic benefit increasing from $1,600 to a 12

lifetime maximum of $2,000, and modifications to the Delta Dental Plan to add a Preferred Provider 13

Organization network, with lower costs for both the employee and SCE. Also, the Safeguard and Blue 14

Cross Dental Network designs were revised, increasing the procedures covered, but also updating the cost 15

sharing required as services are used. 16

3. Analysis of Recorded Data and Forecast Expenses 17

Dental program costs increased each year from 2002 to 2005. As shown in Figure VI-6, the 18

largest increase was in 2004 to 2005 and was due to benefit improvements primarily in preventive services. 19

A decrease of $2.186 million occurred between 2005 and 2006. This was primarily due to a decrease in the 20

Company contribution and the implementation of Delta Dental’s Preferred Provider Organization network. 21



the forecast labor cost for 2009 (expressed in 2006 dollars) by the 2006 average per-employee labor cost. 24

Projected per-eligible-employee costs were determined by applying the initial forecast dental trend rate of 25

4.87 percent for 2007 through 2009, to the per-eligible-employee cost. The dental forecast trend rate was 26

calculated using the weighted average (based on enrollment) of the projections provided by three dental 27

62

plans.90 The trend rate for each year then was reduced by 2 percent to reflect the reduction in Company 1

contributions. 2

E. Vision Service Plan (VSP) 3


For Test Year 2009, SCE forecasts a total of $3.138 million for VSP costs. Figure VI-7, 5

below, shows recorded costs for the years 2002 through 2006, plus our forecast costs for 2007, 2008, and 6

Test Year 2009. 7

Figure VI-7 Vision Service Plan Costs


(Nominal $000)

2. Summary Description of SCE’s VSP 8

Vision care benefits are available for employees, retirees, and their eligible dependents. At 9

SCE, vision care is provided through a self-funded plan administered by VSP. SCE pays an administrative 10

90 See workpapers for copies of the letters from the plans and worksheet calculating the weighted average.

63

fee to use VSP’s network of vision care providers and claims processing services, plus the cost of the actual 1

services rendered. 2

Vision benefits include annual eye exams with a $20 co-payment, corrective lenses and 3

frames or contact lenses based on a negotiated schedule, and a corrective eye surgery benefit. For the 4

surgery benefit, pre-approval is required and in most cases, a VSP network provider must be used.91 In 5

2005, as a result of benefit negotiations with IBEW Local 47 and Teamsters Local 495, SCE increased the 6

lifetime maximum corrective eye surgery benefit (which is available for only one covered family member) 7

from $1,000 to $2,000, increased the amount payable for elective contact lenses from $100 every 24 months 8

to $125 twice every 24 months, and increased the wholesale frame allowance from $40 to $45. These 9

changes also were implemented for employees not covered by a collective bargaining agreement. In 2006, 10

these improvements were implemented for employees represented by UWUA Local 246 and SOFA. 11

3. Analysis of Recorded and Forecast Costs 12

Vision program costs are comprised of two components, claims experience and 13

administration. Annual changes in claim experience have a direct correlation to changes in employee 14

population and utilization of the benefits. Vision program costs increased each year between 2002 and 15

2006. As shown in Figure VI-7, the largest single annual increase of $544,000 occurred from 2004 to 2005. 16

This increase was primarily due to the benefit enhancements made in 2005 discussed above. 17



the forecast labor cost for 2009 (expressed in 2006 dollars) by the 2006 average per-employee labor cost. 20

Projected per-eligible-employee costs were determined by applying the forecast vision trend rate of 21

1.5 percent for 2007 through 2009 to the per-eligible-employee 2006 cost. The vision trend rates were 22

based on projections provided by VSP, the vision plan administrator.92 23

91 A description of the plan is included in the workpapers. 92 See the workpapers for a copy of VSP’s letter providing the trend rates.

64

F. Retiree Health Care and Life Insurance (Post-Retirement Benefits Other than Pensions) 1


For Test Year 2009, Edison forecasts a total of $58.589 million for Post-Retirement Benefits 3

Other Than Pensions (PBOP) costs, which include $58.412 million for PBOP trust contributions and 4

tax-deductible retiree PBOP costs, and $177,000 for actuarial fees. Figure VI-8, below, shows recorded 5

costs for the years 2002 through 2006, plus our forecast costs for 2007, 2008, and Test Year 2009. 6

Figure VI-8 PBOP Costs


(Non-Labor – Constant 2006 $000; Other – Nominal $000)

2. Summary Description of Post-Retirement Benefits Other than Pensions (PBOP) 7

SCE offers other post-retirement benefits in addition to pension benefits. These benefits 8

include post-retirement medical, dental, vision, Medicare Part B premium reimbursement, Employee 9

Assistance Program (EAP), and term life insurance. According to Financial Accounting Standard 106, SCE 10

is required to accrue a liability for the costs of these retiree benefits. SCE offers these benefits as an 11

important part of its program to attract and retain a qualified workforce. In general, retirees participate in 12

the same medical, dental, vision, and EAP programs as employees as described above in Sections C., D., 13

65

and E., although some plan features may differ. The differences in the benefits provided retirees are 1

highlighted below: 2

a) Flex Retirees 3

“Flex” retirees are employees who retired on January 1, 1991 or later. They and their 4

dependents have the same general health plans as employees and the same plan features. Retirees must be 5

age 55 or older with at least ten years of service to be eligible for the retiree health plans under the current 6

plan provisions. If an employee worked less than 25 years before retiring, a surcharge is applied to their 7

medical plan contributions. Employees who had shorter careers with SCE pay a greater portion of their 8

retiree medical plan costs. In August 2003, significant changes to the SCE retiree medical program were 9

announced, to be phased in over four years, beginning in 2006.93 The changes increase the retiree’s share of 10

plan cost as well as increase the amount the retiree pays at the time of service. 11

In 2006, the patient’s cost at the time of service to access primary care through POS 12

Tier One or the HMO doubled. POS Tiers Two and Three deductible amounts and out-of-pocket stop loss 13

amounts for both the POS and the HMO increased as well. After 2006, the co-payment and deductible 14

amounts are adjusted annually at the same rate the cost for the plans increase. For example, if the average 15

HMO cost increases by 10 percent, the HMO office co-payment will increase by 10 percent. Retiree 16

prescription cost sharing will increase as well by moving from a specific flat dollar copay to 20 percent co-17

insurance. 18

In 2008, SCE’s contribution toward medical coverage will be based on the lowest 19

cost medical plan option offered in a given geographic area. If retirees select a plan other than the lowest 20

cost plan available, they will pay the difference in cost between the lowest cost plan and the plan they select 21

plus 15 percent of the lowest cost plan’s price tag for their coverage and 20 percent of the lowest cost plan’s 22

price tag for their spouse’s coverage. 23

Beginning in 2009, SCE will place a limit or cap on the amount the Company 24

contributes toward retiree medical coverage. The amount SCE contributes will be 85 percent for retirees 25

93 Copy of the announcement brochure is included in the workpapers.

66

and 80 percent for dependents of the 2008 cost of the lowest cost medical plan option available plus an 1

annual escalation amount that, for each year, is based on the greater of the increase in the Consumer Price 2

Index (CPI) or 50 percent of the lowest cost medical plan’s rate increase, subject to a maximum annual 3

percentage increase of the CPI increase plus 2 percent. In addition, in order to receive the highest Company 4

contribution for retiree medical, employees will be required to retire at age 60 or later with at least 15 years 5

of service. For employees who retire at least at age 55 with 10 years of service and do not meet the criteria 6

for the highest contribution, retiree health care is available, but SCE will only contribute 50 percent for 7

retirees and dependents instead of the 85 and 80 percent, respectively, for those entitled to the highest 8

contribution. These changes that begin in 2009 will not affect employees who are eligible to retire on or 9

before December 31, 2008 or those who did retire by that date. 10

b) PrimeCare 11

PrimeCare is available only to employees who retired before January 1, 1991, and 12

their dependents. This plan requires no deductible and pays 100 percent of covered expenses when care is 13

coordinated through the patient’s primary care provider. When the patient directly accesses contracted 14

providers, the benefit is 80 percent of the contracted fee. For non-contracted providers, the benefit is 15

80 percent, subject to the reasonable and customary limitation. The changes for Flex retirees described 16

above do not apply to PrimeCare retirees. 17

c) Medicare Part B Premiums 18

Employees who retired before January 1, 1989 receive full Medicare Part B premium 19

reimbursement. Employees who retired on or after January 1, 1989 and before January 1, 1993 receive 20

premium reimbursement frozen at December 31, 1992 level. Employees who retired on or after January 1, 21

1993 receive no Medicare Part B premium reimbursement. 22

d) Dental and Vision Coverage 23

The Company provides dental and vision coverage for retirees using the same 24

external plans as for employees. Effective in 2006, SCE’s contribution towards these plans for retirees who 25

retired in 1991 or later will be reduced from 100 percent to: 2006 – 90 percent; 2007 – 75 percent; and 2008 26

67

– 50 percent. Also, to reduce adverse selection, retirees must be continuously enrolled in these programs. If 1

they drop coverage, they may not re-enroll for any subsequent years. 2

e) Retiree Life Insurance 3

SCE first provided Retiree Life Insurance in 1978. The Company provides a modest 4

amount of Retiree Life Insurance ($2,500 or $5,000) for employees who retire under the SCE Retirement 5

Plan. 6

3. Ratemaking Background 7

In 1993, Edison conformed its accounting practices with Statement of Financial Accounting 8

Standards No. 106 (FAS 106), “Employer’s Accounting for Post-Retirement Benefits Other than Pensions.” 9

FAS 106 requires PBOP to be accounted for on an accrual basis. 10

In 1990, the California Public Utilities Commission (the Commission) issued Order 11

Instituting Investigation (I.90-07-037) into the ratemaking treatment of PBOPs. In the Phase II Decision of 12

the OII, (D.92-12-015), the Commission established the conditions under which PBOP rate recovery would 13

be allowed for periods beginning on or after January 1, 1993. The 2006 GRC Decision (D.06-05-016) also 14

authorized balancing account treatment for PBOP costs. Applying the Phase II Decision criteria and the 15

2006 GRC balancing account treatment, PBOP rate recovery for the Test Year 2009 is based on the 16

following: 17

a. SCE will use independent trusts dedicated solely to PBOP; 18

b. PBOP costs are reasonable and necessary to meet funding requirements and are based on 19

fair actuarial assumptions, contributions, and investments; and 20

c. Rate recovery that exceeds the lesser of tax deductible contributions or FAS 106 expense 21

will be subject to refund to customers. 22

d. PBOP costs are subject to a two-way (symmetrical) balancing account. 23

Each of these conditions is discussed below. 24

a) PBOP Costs Must Be Placed In Independent Trusts Dedicated Solely To PBOP 25

SCE has established the following funding vehicles for its PBOP obligation. The 26

vehicles and the PBOP benefits they cover are: 27

68

• A Voluntary Employees’ Beneficiary Association (VEBA)94 Trust to fund PBOP 1

benefits except life insurance for all represented employees, retired represented 2

employees, and their spouses and dependents (Represented Employee VEBA 3

Trust). 4

• A VEBA trust to fund post-retirement life insurance benefits for all active 5

employees and retirees (Life Insurance VEBA Trust). 6

• Two VEBA trusts to fund a portion of non-life insurance PBOP for Management 7

and Administrative (M&A) employees retiring after December 31, 1992, and their 8

spouses and dependents (1992 and 1999 M&A VEBA Trusts). 9

• A 401(h)95 sub-account of the Retirement Plan Trust that covers non-life 10

insurance PBOP benefits for the M&A group in excess of the amounts covered by 11

the 1992 and 1999 M&A VEBA Trusts. 12

SCE contributes on a tax-deductible basis to these trusts, and invests the trust assets 13

to fund the PBOP obligation. The trusts periodically reimburse SCE for retiree PBOP benefits that were 14

payable from the trusts, but paid by SCE. At the end of 2006, PBOP trust fund assets were $1.743 billion. 15

Also included in SCE’s PBOP cost amounts are tax-deductible costs associated with 16

Management and Administrative employees who retired before January 1, 1993 (the adoption date of FAS 17

106) and their spouses and dependents. This latter group has also been called the “pay-as-you-go” group. 18

PBOP costs for this group are tax-deductible, but are not funded through PBOP trusts. In its 2003 GRC 19

Decision, the Commission stated that “Even though these costs are not paid out of a trust, they are 20

nevertheless valid tax-deductible PBOP costs for which customer funding is appropriate and reasonable.”96 21

94 Established pursuant to Section 501(c)(9) of the Internal Revenue Code of 1986. Contributions to VEBA trusts are tax-

deductible. Investment returns are exempt from tax for the Represented Employee and Life Insurance VEBA trusts. The M&A VEBA investment returns are taxable.

95 Established pursuant to Section 401(h) of the Internal Revenue Code of 1986. Contributions to the 401(h) account are tax-deductible, and investment returns are exempt from taxes.

96 D.04-07-022, p. 227

69

b) PBOP Costs Are Reasonable And Necessary To Meet Funding Requirements Based 1

On Fair Actuarial Assumptions, Contributions, And Investments 2

Since SCE adopted FAS 106, SCE’s PBOP actuary, Aon Consulting (Aon), has 3

prepared an annual valuation of the projected costs of PBOP benefits. Projections of 2007, 2008, and SCE’s 4

Test Year 2009 request for PBOP costs are based on estimates prepared by Aon, which are attached as 5

Appendix D. The actuary must make a number of assumptions in calculating PBOP costs. As discussed in 6

Aon’s annual valuations, these assumptions are reasonable, both individually and collectively. 7

c) Rate Recovery That Exceeds The Lesser Of Tax Deductible Contributions Or FAS 8

106 Expense Is Subject To Refund 9

Each year, since the adoption of FAS 106, SCE’s tax-deductible PBOP trust funding, 10

plus tax-deductible amounts for the pre-1993 Management and Administrative Group retiree costs, have 11

been targeted at the FAS 106 expense amount calculated by Aon. As explained below in Section 4, PBOP 12

trust contributions for 2004 and 2005 were below the rate recovery amounts authorized by the Commission 13

in SCE’s 2003 GRC Decision (D.04-07-022). In 2006, in accordance with the 2006 GRC decision, SCE 14

returned $143.975 million of PBOP overcollections during 2003-2005. 15

d) PBOP Balancing Account 16

In the 2006 GRC, SCE proposed a PBOP balancing account to record the difference 17

between authorized and recorded PBOP costs. SCE’s proposal was uncontested. The 2006 GRC decision 18

was silent on SCE’s uncontested proposal. Therefore SCE established the PBOP Balancing Account in 19

2006.97 See Exhibit SCE-11, Volume 1, Chapter 4 for additional information on the operation of the PBOP 20

Balancing Account. As described below in Section 5, SCE recommends that the PBOP Balancing Account 21

be continued in this GRC. 22

97 D.06-05-016, p.8 states: “As a general matter, with respect to individual uncontested issues in this proceeding, we find that

SCE has made a prima facie just and reasonable showing, unless otherwise stated in this opinion.”

70

4. Analysis of Recorded and Forecast PBOP Costs 1

a) PBOP Costs 2

As shown in Figure VI-8, PBOP costs over the 2002-2006 recorded period ranged 3

from a high of $120.890 million in 2002 to a low of $64.840 million in 2006. The significant drop in PBOP 4

costs from 2003 to 2004 was primarily a result of PBOP plan design changes and the passage of the 5

Medicare Prescription Drug Improvement and Modernization Act. In 2005 and 2006, costs were lower than 6

expected as a result of favorable retiree health care claims experience and better than expected performance 7

of PBOP trust investments. In 2006, recorded PBOP costs (excluding PBOP actuarial fees) were 8

$64.779 million, $12.430 million less than authorized PBOP costs of $77.209 million. As discussed above 9

in Section 3.d), PBOP rate recovery (excluding PBOP actuarial fees) is subject to a balancing account, so 10

any PBOP overcollections will be returned to customers. 11

SCE’s Test Year 2009 request for PBOP costs is based on estimates prepared by 12

SCE’s PBOP actuary, Aon Consulting. As shown in Appendix D, Aon projects Net Periodic Postretirement 13

Benefit Costs (PBOP Costs or FAS 106 Expense) of $57.099 million for 2009, $58.866 million for 2010, 14

and $ 59.272 million for 2011, or a three-year average of $58.412 million for the 2009-2011 forecast period. 15

Aon projected these costs on a total utility basis in nominal dollars. The estimates were prepared in 16

accordance with generally accepted actuarial principles as well as in accordance with FAS 106. 17

To measure projected PBOP costs, assumptions concerning future events must be 18

made. These assumptions must reflect the actuary's best judgment of future events affecting the post-19

retirement benefits being valued. Each individual assumption should be reasonable on its own merits as 20

well as consistent with the other assumptions used. Aon used 2006 actuarial valuation results as a basis for 21

2009-2011 projected PBOP costs. The underlying data and actuarial assumptions include: active and 22

retiree census data measured as of January 1, 2006, post-retirement health claims information for 2005, a 23

5.75 percent discount rate, a 7.5 percent expected long-term rate of return on assets,98 PBOP trend rates, and 24

other actuarial assumptions. In addition, Aon’s estimates include the impact of SCE workforce additions 25 98 7.5 percent was assumed for assets in trusts exempt from taxation; 4.75 percent was used for assets in trusts subject to

unrelated business income tax.

71

during the 2007-11 period. Aon’s projections historically have not included projections of workforce 1

additions beyond those needed to keep the employee census at current-year levels. However, the magnitude 2

of workforce additions expected during 2007-11 is significant, and the associated PBOP costs ($10.2 3

million) for these expected additions are included in SCE’s PBOP estimates. 4

b) PBOP Actuarial Fees 5

SCE also requests $177,000 in the Test Year for PBOP-related actuarial fees that are 6

not chargeable to the PBOP trusts. These fees cover the costs associated with General Rate Case support, 7

ongoing actuarial valuations and other projects. SCE expects these fees, which are projected based on a 8

three-year average of 2004-2006 fees, to continue in Test Year 2009 and after. The request is $33,000 less 9

than the $210,000 authorized in the 2006 GRC. 10

5. PBOP Costs Balancing Account 11

As discussed in Section 3.d) above, in the 2006 GRC, SCE proposed, and the Commission 12

adopted, a two-way (symmetrical) balancing account for PBOP costs The PBOP balancing account records 13

the difference between authorized rate recovery for tax-deductible PBOP trust funding (including the 14

pre-1993 “pay-as-you-go” group costs) and actual PBOP costs beginning in 2006. PBOP actuarial fees are 15

excluded from the balancing account. Any over-collection or under-collection for 2006-2008 will be 16

amortized beginning in 2009. In this GRC, any over-collection or undercollection over 2009-2011 will be 17

amortized beginning in 2012. Any accumulated balance will receive interest at the commercial paper rate, 18

consistent with treatment of interest accruals for other SCE balancing accounts.99 In 2006, recorded PBOP 19

costs (excluding PBOP actuarial fees) were $64.779 million, $12.430 million less than authorized PBOP 20

costs of $77.209 million. 21

SCE continues to believe a balancing account for PBOPs is needed to protect both customers 22

and shareholders. PBOP cost projections are complicated on the liability side by high and volatile health 23

care trend rates. On the asset side, similar to SCE’s pension fund, the PBOP investment policy has a 24

99 See Exhibit No. SCE-11, Volume 1, Chapter IV for additional discussion on the ratemaking treatment of the PBOP Balancing

Account.

72

significant allocation to equities.100 Significant equity exposure is expected to lower the long-term costs of 1

funding PBOP benefits, but it also may cause significant shorter-term volatility in PBOP asset returns, as 2

experienced in the last several years. In addition, unlike the pension fund, SCE does not use asset 3

smoothing methods in PBOP actuarial calculations. This could result in either a windfall or a detriment to 4

customers or shareholders, depending on short-term market volatility within a GRC forecast period. 5

Also, a PBOP balancing account gives SCE the ability to make any necessary plan design 6

changes at any time, not necessarily coincident with a GRC forecasting cycle, and not receive a windfall or 7

incur uncompensated costs from the resulting plan cost changes. 8

Under the authorized PBOP balancing account procedure, the Commission will continue to 9

review SCE’s PBOP costs in General Rate Cases, and approve the forecast amounts it determines to be 10

reasonable. SCE will continue to target tax-deductible PBOP funding amounts at the FAS 106 expense 11

levels calculated by its PBOP actuaries each year. The balancing account will protect both customers and 12

shareholders from volatility associated with PBOP costs. 13

G. Disability Programs 14


For Test Year 2009, SCE forecasts a total of $23.658 million for the disability program costs. 16

Figure VI-9, below, shows recorded costs for the years 2002 through 2006, plus our forecast costs for 2007, 17

2008, and Test Year 2009. 18

19

100 The current PBOP investment policy is 80 percent equities, 20 percent fixed income.

73

Figure VI-9 Disability Programs Cost


(Nominal $000)

2. Summary Description of SCE’s Disability Program 1

Disability benefits provide income protection if an employee becomes ill or injured and 2

unable to work. If employees are not totally disabled but are unable to return to their prior positions, the 3

disability program assists employees in finding other jobs that can be performed within their medical 4

restrictions. The components of the Disability Program are explained below.101 5

a) Comprehensive Disability Plan 6

The Comprehensive Disability Plan (CDP) is SCE’s voluntary short-term disability 7

plan, offered in lieu of California State Disability Insurance (SDI). Benefits from CDP replace the salary of 8

an employee who is ill or injured and unable to perform his/her regular job. Plan benefits for full-time 9

employees include full-pay sick leave which accrues based on length of service; extended benefits which 10

pays the greater of 60 percent of an employee’s hourly base pay, the amount that would be payable under 11

101 A description of the program is included in the workpapers.

74

the SDI, or 130 percent of federal or state minimum wage, not to exceed base pay, for up to 52 weeks; 1

hospital days to cover lost work days due to inpatient and some outpatient procedures; paid time off for 2

illness in the family, health care appointments; and paid time off to attend to the illness of family members 3

as required under California’s Sick Leave Statute. Beginning January 1, 2004, the Comprehensive 4

Disability Plan was expanded to include provisions required under California’s Paid Family Leave Law for 5

all participating full, part-time, and temporary employees. Part-time and temporary employees enrolled in 6

the Comprehensive Disability Plan are only eligible for extended benefits and Paid Family Leave benefit 7

provisions. 8

To ensure consistent application of plan provisions, improve confidentiality of 9

employee medical information and enhance the management of disability absences, processing of claims for 10

absences longer than three days are administered by an external vendor with technical expertise in the 11

management of disability programs. The change to intervention at three days became effective October 3, 12

2005 (previously only claims that were 30 days in duration or longer were adjudicated externally), for 13

employees not covered by a collective bargaining agreement and employees represented by IBEW Local 47 14

and Teamsters Local 495. This external process was effective in March 2006 for employees represented by 15

UWUA Local 246 and SOFA. 16

b) Long-Term Disability 17

For disabilities that began before July 1, 2005 (March 6, 2006 for employees 18

represented by UWUA Local 246 or SOFA), the Long-Term Disability Plan (LTD) provides partial income 19

replacement to full-time eligible employees who are ill or injured and unable to perform any reasonable job 20

for SCE for six months or longer. For disabilities beginning after those dates, the definition of a qualifying 21

disability for the first two years of disability is the inability to perform one’s regular job. After the initial 22

two-year disability period, LTD benefits are available only if the employee is unable to perform any 23

reasonable job for SCE. 24

During open enrollment each year, employees actively-at-work may select LTD 25

coverage at 50, 60, or 70 percent of their pre-disability monthly base rate of pay. Once approved for LTD, 26

if the employee remains totally disabled, LTD benefits continue until retirement age and beyond, depending 27

75

upon the employee’s age at the time of the disability. Employees approved for LTD are required to apply 1

for Social Security Disability Insurance (SSDI), and if approved, the amount paid by SSDI is deducted from 2

the LTD benefit. If the employee fails to comply, an estimate of the Social Security benefit is calculated 3

and deducted from the disability benefit. 4

c) Return to Work Program 5

The Return to Work Program was designed to help SCE retain the critical skills of 6

employees who have permanent work restrictions that prevent them from performing their regular jobs by 7

assisting them in returning to productive work. Participation is voluntary for eligible employees receiving 8

CDP and/or LTD and mandatory once CDP benefits have exhausted. The Return to Work Program 9

provides assistance in locating appropriate alternative or modified employment wherever available, both 10

inside and outside the Company. The Return to Work Program provides skill assessment, job market 11

evaluation, career training, job search training, and opportunities for temporary work assignments. While in 12

this program, employees receive 70 percent of base pay, for up to 30 months (extensions are possible under 13

very limited circumstances). 14

d) Wage Continuation 15

Wage Continuation was discontinued as of October 3, 2005 for employees not 16

covered by a collective bargaining agreement as well as employees represented by IBEW Local 47 and 17

Teamsters Local 495 unless they were receiving benefits under this provision as of October 2, 2005. Wage 18

Continuation was discontinued as of March 6, 2006, for employees represented by UWUA Local 246 and 19

SOFA unless they were receiving benefits under this provision as of March 5, 2006. The program provides 20

benefits to eligible employees who are determined to be medically unable to return to their regular job, but 21

are capable of performing another job for SCE. These benefits continue until the employee returns to work, 22

retire, enter the Return to Work Program, or 18 months pass, whichever first occurs. If the participating 23

employee has received 30 months of Return to Work benefits and 18 months of Wage Continuation 24

payments, and a successful job placement has not been made, the employee is terminated from SCE unless 25

specific criteria are satisfied. 26

76


Significant changes to the disability program were implemented in 2005 (in 2006 for 2

employees represented by UWUA Local 246 or SOFA), including: using an external vendor to manage 3

disabilities after 3 days instead of 30 days (resulting in reduced CDP costs); changing the definition to 4

qualify for LTD benefits for the first two years from unable to perform any job for the Company to unable 5

to perform your own job (resulting in increased LTD costs); using Permanent Disability awards from 6

Workers’ Compensation as an offset to all program benefits (resulting in reduced disability program costs); 7

reducing the total amount of time an employee could remain off work under CDP and the Return to Work 8

Program before employment ended (resulting in reduced Return to Work Program costs); and eliminating 9

Wage Continuation benefits on a going-forward basis. Due to the change in the definition to qualify for 10

LTD benefits, the plan’s actuaries revised the accrual required for the claims reserves causing a one-time 11

increase in recorded costs for 2005. 12

There have also been a number of changes in laws which have impacted disability costs. On 13

January 1, 2004, the State of California eliminated the Vocational Rehabilitation Maintenance Allowance 14

(VRMA) for work-related injuries occurring on or after January 1, 2004 and reduced the amount that could 15

be awarded via Permanent Disability. This resulted in a reduction of offsets from the disability program, 16

therefore increasing the disability program benefits payable to employees. In 2004, SCE was required to 17

add a Paid Family Leave benefit to the CDP plan. This resulted in additional costs. The State of California 18

also increased the maximum short-term disability benefit payable in 2003, 2004, 2005, and 2006, while at 19

the same time the state-mandated employee contribution rate decreased, resulting in greater expenses to 20

SCE in the funding of the plan and paying of CDP benefits. 21

Disability program administration fees increased in July 2004 due to California’s mandated 22

Paid Family Leave benefits and the requirement for the vendor to provide these services. A new vendor was 23

selected to administer the revised disability program changes in October 2005, in addition to taking on the 24

administration of the federally-mandated Family and Medical Leave Act and related claims, which resulted 25

in an increase in administrative fees. 26

77

These plan design, legally mandated, and administrative changes, as well as the growth and 1

salary increases of SCE’s workforce, led to disability program costs increasing each year from 2002 through 2

2005. The largest increase, which occurred from 2004 to 2005, was $4.915 million and was due largely to 3

the one-time increase in the accrual required for claims reserves as a result of the change in the definition of 4

a qualifying disability for LTD benefits. Disability program costs then decreased by $2.481 million 5

between 2005 and 2006. The impact of the cost-saving plan design changes that were implemented in 6

October 2005 and March 2006 were significant factors in this decrease. 7

Test-year costs were forecast by multiplying the projected number of eligible employees by 8

the projected per-eligible-employee cost. 9

The projected number of eligible employees was derived by dividing the forecast labor cost 10

for 2009 (expressed in 2006 dollars) by the 2006 average per-employee labor cost. As pay rates coupled 11

with utilization rates determine disability expenses, projected per-eligible-employee costs were derived by 12

applying the labor escalation rate (developed in SCE 11, Volume 1, Chapter VII, Cost Escalation) for 2007, 13

2008 and 2009 to the 2006 per-eligible-employee disability cost. Increases in CDP costs are expected due 14

to continuing state-mandated increases in CDP benefit amounts and reductions in employee contributions, 15

as well as legislated changes to broaden eligibility for Paid Family Leave. To reflect the expected impact of 16

these regulatory and legislative changes, an increase of one percent per year was added in addition to the 17

labor escalation. 18

H. Group Life Insurance 19


For Test Year 2009, SCE forecasts a total of $1.643 million for Group Life Insurance plan 21

costs. Figure VI-10, below, shows recorded costs for the years 2002 through 2006, plus our forecast costs 22

for 2007, 2008, and Test Year 2009. 23

78

Figure VI-10 Group Life Insurance Costs


(Nominal $000)

2. Summary Description of SCE’s Group Life Insurance Plans 1

Group Life Insurance includes expenses for five separate types of coverage. Each of them is 2

discussed below.102 3

a) Employee Life Insurance 4

There are two components of the Employee Life Insurance program: 5

Company-provided life insurance, and supplemental insurance. Historically, employees could choose life 6

insurance coverage options of $15,000 or from one-to-six times their base pay. The Company provided 7

employees with a contribution sufficient to purchase $15,000 of coverage. The cost of each option was, and 8

102 Descriptions of the plans are included in the workpapers.

79

continues to be, based on the employee's age as of January 1 of the Plan Year,103 salary as of August 1 of the 1

prior year, and the option chosen. As agreed through the collective bargaining process with IBEW Local 47 2

and Teamsters Local 495, effective in January 2005, the Company-paid coverage increased to one times the 3

employee’s base pay up to $30,000, and supplemental insurance coverage options were expanded to one-to-4

eight times base pay. These changes were also implemented in January 2005 for employees not covered by 5

a collective bargaining agreement, and then were subsequently implemented in January 2006 for employees 6

represented by UWUA Local 246 and SOFA. 7

b) Dependent Life Insurance 8

In 2003 and 2004 employees could purchase spouse’s coverage of $5,000 and/or 9

children’s coverage of $2,000. There was, and continues to be, no Company contribution toward this 10

coverage. The employee’s cost depended upon whom the employee covered and the option selected. 11

Beginning in January 2005, SCE increased the options available for spouses to $5,000, $15,000 or one-to-12

four times of the employee’s base pay (up to 50 percent of the employee’s coverage) to a maximum of 13

$250,000. The options available for children also increased to $5,000, $10,000 or $15,000. These 14

improvements were available for employees represented by IBEW Local 47, Teamsters Local 495, and 15

employees not covered by a collective bargaining agreement. These same changes were available for 16

employees represented by UWUA Local 246 and SOFA in January 2006. 17

c) Accidental Death & Dismemberment (AD&D) Insurance 18

Initially during the record period, employees chose Company-provided AD&D 19

coverage of $10,000 or $10,000 plus two, four, six, eight, or ten times base pay (maximum $1,000,000). 20

SCE provided employees with a contribution sufficient to purchase $10,000 of coverage. Employees also 21

could cover their spouse and/or children. The spouse’s coverage is 50 percent of the employee’s coverage, 22

and the children’s coverage is 10 percent of the employee’s coverage (maximum of $50,000). The cost is 23

based on the employee’s salary as of August 1 of the prior year and the option chosen. As specified in 24

ratified benefits agreements, effective January 1, 2005, the Company-provided AD&D coverage increased 25 103 Plan Year refers to the period of time on which records of the plan are kept. For SCE's pension and benefit plans, the Plan

Year is the calendar year.

80

from $10,000 to $30,000, with each of the coverage choices being modified to be $30,000 plus the same 1

multiples of base pay. This was implemented first for employees represented by IBEW Local 47, Teamsters 2

Local 495, and employees not covered by a collective bargaining agreement. Subsequently, these same 3

modifications were implemented in January 2006 for employees represented by UWUA Local 246 and 4

SOFA. 5

d) Business Travel Accident Insurance 6

Business Travel Accident Insurance currently provides employees with coverage 7

equal to two times the employee’s base pay up to maximum of $250,000. SCE executives have $300,000 in 8

coverage, or $400,000 if they are elected officers. This coverage is paid for by the Company and no 9

employee contributions are required. 10

e) Paid-Up Life Insurance 11

The paid-up life insurance plan is only available to employees who elected coverage 12

prior to August 1, 1983. As of March 2007, there were 125 paid-up life insurance policy holders. The 13

eligible employees selected either one or two times their base pay and made contributions toward their 14

coverage at the rate of $1.00 per month for each $1,000 of coverage. SCE’s contribution varies based on the 15

coverage amount the employee selected and the employee’s age. 16


Costs increased each year from 2002 through 2006. The largest increase of $422,000 18

occurred from 2002 to 2003 and was due primarily to timing of payment processing. 19



the forecast labor cost for 2009 (expressed in 2006 dollars) by the 2006 average per employee labor cost. 22

Projected per-eligible-employee costs were determined by applying a forecast life insurance trend rate of 23

0 percent for 2007 and 2009, and 5.19 percent for 2008 to reflect the new premium rates to be 24

implemented.104 25

104 See workpapers for a copy of the letter confirming the premium increases and the worksheet calculating the weighted impact.

81

I. Miscellaneous Benefit Programs 1


For Test Year 2009, SCE forecasts a total of $7.705 million for miscellaneous benefit 3

program costs. Figure VI-11, below, shows recorded costs for the years 2002 through 2006, plus our 4

forecast costs for 2007, 2008, and Test Year 2009. 5

Figure VI-11 Miscellaneous Benefit Costs


(Nominal $000)

2. Summary Description of SCE’s Miscellaneous Benefits Programs 6

Miscellaneous benefit programs include the Electric Service Reimbursement, Awards to 7

Celebrate Excellence, Corporate Relocation, Commuter Programs, Educational Reimbursement, Severance 8

Benefits and Work Life Balance Assistance.105 9

105 Descriptions of the programs are included in the workpapers.

82

a) Electric Service Discount 1

The Electric Service Discount (Edison’s Rate Schedule DE) provides a 25 percent 2

discount on domestic electric service for full-time employees who live in SCE's service territory and have 3

six months of service. Retirees are also eligible for this rate. Employees whose work assignment precludes 4

them from living in SCE’s service territory are eligible to receive a comparable 25 percent reimbursement 5

for their electric service. 6

The expenses associated with the 25 percent discount for employees (and retirees) 7

within SCE’s service territory are addressed as a rate design issue. Only the expenses associated with the 8

25 percent reimbursement are included in this Test Year request. 9

b) Awards to Celebrate Excellence (ACE) 10

The ACE program encourages the recognition of special one-time efforts and their 11

results, as well as consistent professional efforts that help SCE meet its goals, particularly in providing 12

excellent customer service and working safely. ACE gives co-workers and supervisors an opportunity to 13

recognize and reward this outstanding behavior. Achievement and Celebration Awards are employee-14

nominated to recognize the work of other employees as teams or individuals, while the Excellence Award is 15

manager-sponsored and recognizes outstanding job performance by teams and individuals. Employees who 16

earn ACE awards receive certificates of recognition and program points that can be accrued and redeemed 17

for over 1,500 items. The costs for the awards are paid by SCE. 18

c) Corporate Relocation Program 19

The Corporate Relocation Program reimburses expenses for management employees 20

who are requested to relocate for business reasons or are recruited to join SCE due to their specific skills. 21

SCE also provides relocation reimbursements to bargaining-unit employees under certain circumstances if 22

SCE requests them to move to other work locations or when recruiting employees with specific skills not 23

readily available within the SCE service territory. The program reimburses expenses for such things as 24

moving of household goods, temporary living expenses, and, in special circumstances, the purchase of an 25

employee's or applicant's home. The costs for the program are paid by SCE. 26

83

d) Commuter Programs 1

SCE offers several commuter programs that encourage employees to use mass transit 2

alternatives. Participation in the commuter programs is voluntary. The commuting programs include: 3

• The Enterprise Rideshare program allows employees to participate in vanpools 4

and carpools on established routes. 5

• The Transit Voucher Option provides vouchers to employees who travel to and 6

from work by public transit (rail, train, or bus) or are members of a qualified 7

vanpool route. Employees are eligible for a tax-free voucher of up to $60 per 8

month. 9

• The Guaranteed Ride Home Program offers transportation home for employees 10

who use one of the commuter choice options to get to work but experience a 11

personal emergency or unexpected work requirement that prevents them from 12

using that option to get home. 13

e) Educational Reimbursement Program 14

The Educational Reimbursement Program encourages and assists employees to 15

develop their work-related skills. Employees may be reimbursed up to $5,250 per calendar year for tuition 16

and books when enrolled in a pre-approved degree, certificate, or correspondence program at an approved 17

institution. The educational program must benefit SCE and relate to the employee’s present job, 18

development plan, career path, or rehabilitation plan. All approved institutions must meet U.S. Department 19

of Education eligibility requirements. 20

f) Severance Benefits 21

The severance benefits are for employees who become excess due to business 22

necessity (e.g., organization re-design, re-engineering, or job elimination). Through the severance benefits 23

we assist severed employees transition to other external employment by providing income replacement 24

(calculated based on years of service or age), outplacement services to assist in searching for a new position, 25

educational reimbursement to help in the costs for retraining, and extended health coverage (for a period 26

based on the employee’s years of service). 27

84

g) Work Life Balance Assistance 1

To help with managing personal responsibilities, SCE offers LifeCare®, Inc. to 2

employees and retirees. The goal is to help participants find information, resources, and providers needed to 3

address daily life issues and effectively handle these personal responsibilities, so that they can be more 4

effective when working. LifeCare offers assistance on a wide range of dependent care and personal issues, 5

including child care services, adult/elder care services, prenatal planning, adoption preparation, summer 6

vacation dependent care, emergency dependent care, schools to address specific needs, college planning and 7

specialized care for dependents of all ages. LifeCare also provides referrals for concerns with financial 8

planning, legal issues, health and wellness resources, etc. 9

LifeCare referral and consulting services are free of charge to eligible employees and 10

retirees, however, users are responsible for any fees associated with the providers and programs selected. 11

Use of LifeCare services is voluntary and confidential. 12

3. Analysis of Recorded Data and Forecast Costs 13

Program usage and employee population are the primary drivers of miscellaneous benefit 14

costs. As shown in Figure VI-11, the cost of miscellaneous benefits decreased from 2002 to 2004 and then 15

increased in 2005 and again in 2006. 16


projected per-eligible-employee composite cost. The projected number of eligible employees was derived 18

by dividing the forecast labor cost for 2009 (expressed in 2006 dollars) by the 2006 average per-employee 19

labor cost. Projected per-eligible-employee costs for these programs were assumed to increase at the 20

non-labor escalation rate (as developed in SCE 11, Volume 1, Chapter VII, Cost Escalation) through 2009. 21

J. Executive Benefits 22


For Test Year 2009, SCE forecasts a total of $23.954 million for executive benefit costs. 24

Figure VI-12, below, shows recorded costs for the years 2002 through 2006, plus our forecast costs for 25

2007, 2008 and the Test Year 2009. 26

85

Figure VI-12 Executive Benefits Cost


(Nominal $000)

2. Summary Description of Executive Benefits 1

The Executive Benefit Program is part of the competitive compensation package used to 2

attract and retain well-qualified executives. SCE competes for executives from both utilities and companies 3

in other industries. The total compensation provided to SCE’s executives, which includes executive 4

benefits, is comparable to that offered by comparator companies, as demonstrated by the 2009 GRC Total 5

Compensation Study.106 The Executive Benefit Program includes the Executive Retirement Plan and 6

survivor benefit plans as well as other benefits that are not included in the rate request due to their negligible 7

cost to SCE. 8

The following is a brief summary of plan provisions.107 9

106 See Appendix B. 107 Summaries of the plans are included in the workpapers.

86

a) Executive Retirement Plan 1

The primary purpose of the Executive Retirement Plan is to restore benefits that 2

executives cannot receive in the qualified SCE Retirement Plan due to limits the Internal Revenue Code 3

(IRC) has imposed on covered compensation and payable benefits in qualified plans. In addition, for senior 4

officers (elected vice presidents and higher ranking officers, and associate general counsel) and a few 5

executives grandfathered when benefits for non-senior officers were reduced in 1995, the covered 6

compensation for purposes of determining benefits is salary plus bonus, rather than salary only. 7

The Executive Retirement Plan retained one of the prior benefit formulas when the 8

SCE Retirement Plan adopted in 1999 a cash balance account formula with graded vesting over five years 9

(i.e., 20 percent vesting per year). The prior formula retained in the Executive Retirement Plan has no 10

vesting until five years of service, a large reduction in value for termination of employment prior to early 11

retirement eligibility (age 55 with at least five years of service) and graded reductions for early retirement at 12

ages prior to 61. These features were preserved in the Executive Retirement Plan because of their value in 13

retaining needed executives longer, and to older ages. 14

All Executive Retirement Plan benefits are offset directly by SCE Retirement Plan 15

benefits and by a portion of the executive’s Social Security benefit. First, the total benefit is calculated 16

under the Executive Retirement Plan. Next, the payment from the qualified SCE Retirement Plan is 17

subtracted as well as up to 40 percent of the Social Security benefit. Only the residual is paid from the 18

Executive Retirement Plan. In addition to the lump-sum and annuity-payment options of the SCE 19

Retirement Plan, the Executive Retirement Plan offers monthly payments over periods of five or ten years, 20

except that executives who leave before age 55 are restricted to a joint and survivor annuity commencing at 21

age 55. 22

Enhanced retirement benefits are available under the Executive Retirement Plan if an 23

executive is involuntarily severed not for cause. The benefit available is equal to the added value of 24

incorporating one additional year of age and service to the Executive Retirement Plan calculation. The 25

median lump sum value of retirement severance benefits for top officers calculated as if they had been 26

severed as of December 31, 2006 is approximately $67,000. The retirement severance benefit for senior 27

87

officers who lose their positions in connection with a change in control of the holding company is two 1

additional years of age and service (three for SCE’s CEO) instead of one additional year. 2

Executive Retirement Plan expenses are based on an annual actuarial valuation using 3

the methodology prescribed by the Financial Accounting Standard 87 and calculated by the actuarial 4

division of Hewitt Associates. 5

b) Survivor Benefit Plans 6

In 1995, SCE replaced the old survivor benefit plans, which provided both pre- and 7

post-retirement survivor benefits to all executives, with a new plan, the Survivor Benefit Plan. The new 8

plan provides only a pre-retirement survivor benefit and only provides it to elected vice presidents and 9

higher ranking officers, associate general counsel, and a limited number of grandfathered executives. 10

Survivors of other executives are not eligible for benefits under the new plan. 11

The Survivor Benefit Plan provides to the survivor of an eligible executive who dies 12

in-service a benefit that is equal after taxes to twice the value of the executive’s annual cash compensation 13

(salary plus bonus) at the time of death, payable either in a lump sum or in monthly payments over five to 14

ten years. 15

A few executives (of which all but three have retired) who were enrolled in the prior 16

survivor and long-term disability plans at the end of 1992 elected to keep the prior plans rather than accept 17

the new Survivor Benefit Plan. In order to do so, they had to forgo additional accrual in the Executive 18

Retirement Plan and also accept an annual salary reduction ranging from $2,700 to $8,000 each year (with 19

the amount based on an actuarial determination of the incremental cost to SCE of their keeping the prior 20

plans). 21

Expenses in these survivor and disability plans are determined by actuarial valuation 22

performed by Hewitt Associates. 23

88

3. Analysis of Recorded Data and Forecast Costs 1

The annual costs are determined by actuaries108 based on salary and bonuses, length of 2

service, expected retirement age, and expected mortality. On average, executive benefits program costs 3

increased 20.96 percent annually between 2002 and 2006. As shown in Figure VI-12, the largest single 4

annual increase of $5.464 million occurred between 2005 and 2006. This was due to the combined impact 5

of an increase in the number of eligible executives, an increase in the average length of service, salary 6

increases, and larger executive bonuses paid in 2006. 7

Expenses were forecast by multiplying the average executive benefit cost per employee in 8

2006 escalated to 2009 at the standard labor escalation rates, by the projected number of employees in the 9

Test Year. This method accounts for the expected increase in salaries and in the number of executives. 10

Increases in executive benefit expense that would otherwise have resulted from increases in the average age 11

and service of participants are expected to be offset as new senior officers with reduced Executive 12

Retirement Plan benefits replace officers who are grandfathered under the old plan. 13

108 A copy of the most recent actuarial report is included in the workpapers.

Appendix A

Witness Qualifications

A-1

SOUTHERN CALIFORNIA EDISON COMPANY 1

QUALIFICATIONS AND PREPARED TESTIMONY 2

OF BARBARA L. DECKER 3

Q. Please state your name and business address for the record. 4

A. My name is Barbara L. Decker, and my business address is 8631 Rush Street, Rosemead, California 5

91770. 6

Q. Briefly describe your present responsibilities at the Southern California Edison Company. 7

A. I currently hold the position of Director, Benefits in the Human Resources Department. My 8

responsibilities include employee benefit plan design, carrier selection, collective bargaining for 9

benefit-related issues, development of policy positions, legislation monitoring, communication, and 10

benefit program performance analysis. 11

Q. Briefly describe your educational and professional background. 12

A. In April 1988 I joined Southern California Edison as the Manager of Health Care Plans and Claims 13

Administration. During my tenure at Edison, I have managed the redesign of the Retirement Plan, 14

the Edison 401(k) Savings Plan, and the employee and retiree health care programs; the design and 15

implementation of involuntary severance plans and a flexible benefits program; represented the 16

Company in collective bargaining in multiple benefits negotiations; and worked with several joint 17

employer alliances to improve the quality of health care. Prior to joining Edison, I was the Manager 18

of Benefits Analysis at Wells Fargo Bank, Welfare Plans Manager for Crocker Bank, and a benefits 19

analyst at Safeway Stores, Inc. In total, I have more than 35 years of experience in the employee 20

benefits field. 21

Q. What is the purpose of your testimony in this proceeding? 22

A. The purpose of my testimony in this proceeding is to sponsor portions of Exhibits SCE-06, Volume 23

2, Entitled Human Resources, Total Compensation as identified in the Table on Contents thereto. 24

Q. Was this material prepared by you or under your supervision? 25

A. Yes, it was. 26

Q. Insofar as this material is factual in nature, do you believe it to be correct? 27

A-2

A. Yes, I do. 1

Q. Insofar as this material is in the nature of opinion or judgment, does it represent your best judgment? 2

A. Yes, it does. 3

Q. Does this conclude your qualifications and prepared testimony? 4

A. Yes, it does. 5

A-3



OF DAVID E. ERTEL 3


A. My name is David E. Ertel, and my business address is 2244 Walnut Grove Avenue, Rosemead, 5

California 91770. 6

Q. Briefly describe your present responsibilities at the Southern California Edison Company (SCE). 7

A. I am the Manager of Investments in the Treasurer’s Department. I am responsible for managing the 8

trust investment programs for Edison’s pension fund, PBOP trusts, nuclear decommissioning trusts, 9

and investment funds for the 401k plan. In this capacity, I work to establish strategic trust 10

investment strategies, select and monitor investment managers and investment funds. I am also 11

responsible for trust fund administration related to contributions, withdrawals and investment 12

activity for the pension fund, PBOP trusts and nuclear decommissioning trusts. 13


A. I received a Bachelor of Arts degree in Economics from Cal State Los Angeles. I received a MBA 15

with a concentration in Finance from Cal State Los Angeles. I joined SCE in 1980 as a regulatory 16

analyst in the Revenue Requirements Department. I transferred to the Treasurer’s Department 17

Investments Division in December 1986. I worked as a senior analyst until January 1995, when I 18

assumed my present position. 19


A. The purpose of my testimony in this proceeding is to sponsor portion of Exhibit SCE-06, Volume 2, 21

entitled Human Resources, Total Compensation as identified in the Tables of Contents thereto. 22


A. Yes, it was. 24


A. Yes, I do. 26


A-4

A. Yes, it does. 1


A. Yes, it does. 3

A-5



OF DIANE FEATHERSTONE 3


A. My name is Diane Featherstone, and my business address is 2244 Walnut Grove Avenue, Rosemead, 5

California 91770. 6


A. I am Senior Vice President, Human Resources. I have responsibility for all labor relations and 8

human resources functions including staffing, total compensation, employee development, client 9

services, and benefits administration for Edison International and Southern California Edison. 10


A. I have a BA Degree in economics and history from Towson University in Baltimore, Maryland and a 12

MA Degree in economics from the University of Virginia. I am a Certified Public Accountant and a 13

Certified Fraud Examiner. 14

15

I was elected Vice President and General Auditor for Edison International and Southern California 16

Edison on September 9, 2002. Before joining Edison, I was Vice President, Management Consulting 17

and Auditing at Constellation Energy Group in Baltimore, MD. Before that I was President and 18

CEO of Constellation Energy Source and Managing Director of Strategic Planning for Constellation 19

Power Source. Over a nine-year period at Baltimore Gas and Electric Company, I held several 20

management positions in Human Resources, where I had responsibility for compensation, executive 21

compensation, employee benefits design and administration, employee policies, human resource 22

information systems, organizational development, and training for a workforce of 8,000. I served as 23

plan administrator for all retirement and health and welfare plans. I also held several managerial 24

positions in finance and accounting while at Baltimore Gas and Electric Company. 25


A-6

A. The purpose of my testimony in this proceeding is to sponsor portion of Exhibit SCE-06, Volume 1, 1

entitled Human Resources, Total Compensation as identified in the Tables of Contents thereto. 2


A. Yes, it was. 4


A. Yes, I do. 6


A. Yes, it does. 8


A. Yes, it does. 10

A-7



OF SUSAN HELLER, M.D. 3


A. My name is Doctor Susan Heller, and my business address is 8631 Rush Street, Rosemead, 5

California 91770. 6


A. I currently hold the position of Corporate Medical Director and Director of Corporate Compensation 8

in the Human Resources Department. My responsibilities include occupational health services, non-9

occupational disability programs and compensation. 10


A. I received a Bachelor of Science Degree in Engineering Operations from Iowa State University in 12

1981, a Doctor of Medicine (M.D.) Degree from the University of Iowa in 1987 and a Masters in 13

Business Administration (MBA) from the University of California, Irvine in 2003. I joined SCE in 14

1990 as a physician for one of the company’s health care clinics. In 1995, I assumed additional 15

responsibility for managing the company’s non-occupational disability program and occupational 16

health programs. In 2004, my responsibilities were expanded to include responsibility for Corporate 17

Compensation. 18


A. The purpose of my testimony in this proceeding is to sponsor a portion of Exhibit SCE-06, Volume 20

2, entitled Human Resources, Total Compensation as identified in the Tables of Contents thereto. 21


A. Yes, it was. 23


A. Yes, I do. 25


A. Yes, it does. 27

A-8


A. Yes, it does. 2

A-9



OF RUSSELL G. WORDEN 3


A. My name is Russell G. Worden, and my business address is 2244 Walnut Grove Avenue, Rosemead, 5

California 91770. 6


A. I am presently a Director of Regulatory Affairs in Edison’s Regulatory Policy & Affairs Department, 8

and the Test Year 2009 General Rate Case Manager. My responsibilities have previously included 9

management of SCE’s 2003 and 2006 general rate cases. 10


A. I received an Associate of Arts degree from Cabrillo College, in Aptos, California in 1974. I 12

graduated from San Francisco State University in 1977 with a Bachelor of Arts degree in Political 13

Science, cum laude. After college, I joined the Washington, D.C. staff of U.S. Senator Richard 14

Stone (D-FL) where I served as a Legislative Aide until December 1980. From January 1981 until 15

March 1985, I served as a Legislative Assistant to then Congressman Ron Wyden (D-OR). In March 16

1985, I joined the Washington, D.C. office of Southern California Edison as a Governmental Affairs 17

Assistant, and in May 1988, I transferred to Edison’s Regulatory Policy & Affairs Department. I 18

was promoted to my current position in February 2006. 19


A. The purpose of my testimony in this proceeding is to sponsor Exhibit SCE-06, Volume 2, entitled 21

Human Resources, Total Compensation as identified in the Table of Contents thereto. 22


A. Yes, it was. 24


A-10

A. Yes, I do. 1


A. Yes, it does. 3


A. Yes, it does. 5

Appendix B

Total Compensation Study

The Exhibit Identified By This Appendix B, the Total Compensation Study,

Will Be Submitted Under Separate Cover Upon Receipt From Its Preparer, Hewitt Associates LLC

Appendix C

Support For SCE’s Forecast Pension Costs

Appendix D

SCE’s Forecast PBOP Costs

Appendix E

Certification Letter

2009 general rate case - southern california edison · 2007-12-19 · 2009 general rate case human...

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