SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☑||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For the quarterly period ended ||September 30, 2020|
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For the transition period from to|
|Exact Name of Registrant|
as specified in its charter
|State or Other Jurisdiction of|
Incorporation or Organization
|1-2313||SOUTHERN CALIFORNIA EDISON COMPANY||California||95-1240335|
|EDISON INTERNATIONAL||SOUTHERN CALIFORNIA EDISON COMPANY|
|2244 Walnut Grove Avenue||2244 Walnut Grove Avenue|
|(P.O. Box 976)||(P.O. Box 800)|
|(Address of principal executive offices)||(Address of principal executive offices)|
|(626) ||302-2222||(626) ||302-1212|
|(Registrant's telephone number, including area code)||(Registrant's telephone number, including area code)|
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Stock, no par value||EIX||NYSE ||LLC|
Southern California Edison Company: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Edison International Yes þ No o Southern California Edison Company Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Edison International Yes þ No o Southern California Edison Company Yes þ No ¨
|Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-12 of the Exchange Act.|
|Edison International||Large Accelerated Filer ||Accelerated Filer ||Non-accelerated Filer ||Smaller Reporting Company ||Emerging growth company |
|Southern California Edison Company||Large Accelerated Filer ||Accelerated Filer ||Non-accelerated Filer ||Smaller Reporting Company ||Emerging growth company |
|If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.|
Edison International ☐ Southern California Edison Company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Edison International Yes ☐ No þ Southern California Edison Company Yes☐ No þ
|Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:|
Common Stock outstanding as of October 20, 2020:
|Edison International||378,513,912 Shares|
|Southern California Edison Company||434,888,104 Shares|
TABLE OF CONTENTS
This is a combined Form 10-Q separately filed by Edison International and Southern California Edison Company. Information contained herein relating to an individual company is filed by such company on its own behalf.
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
|2017/2018 Wildfire/Mudslide Events|
the Thomas Fire, the Koenigstein Fire, the Montecito Mudslides and the Woolsey Fire, collectively
|2019 Form 10-K||Edison International's and SCE's combined Annual Report on Form 10-K for the year ended December 31, 2019|
|AB 1054||California Assembly Bill 1054, executed by the governor of California on July 12, 2019|
|AB 1054 Excluded Capital Expenditures|
approximately $1.6 billion in wildfire risk mitigation capital expenditures that SCE will exclude from the equity portion of SCE's rate base as required under AB 1054
|AB 1054 Liability Cap|
a cap on the aggregate requirement to reimburse the Wildfire Insurance Fund over a trailing three calendar year period which applies if certain conditions are met and is equal to 20% of the equity portion of the utility's transmission and distribution rate base in the year of the applicable prudency determination
|ARO(s)||asset retirement obligation(s)|
|Bcf||billion cubic feet|
Base Revenue Requirement Balancing Account
|CAISO||California Independent System Operator|
California Department of Forestry and Fire Protection
Community Choice Aggregators which are cities, counties, and certain other public agencies with the authority to generate and/or purchase electricity for their local residents and businesses
|Cost of Capital Compliance Period||January 1, 2020 to December 31, 2022, the current compliance period for SCE's CPUC authorized capital structure|
|COVID-19||Coronavirus disease 2019|
|CPUC||California Public Utilities Commission|
|CSRP ||Customer Service Re-platform, a SCE project to implement a new customer service system|
|DERs||distributed energy resources|
|Edison Energy||Edison Energy, LLC, a wholly-owned subsidiary of Edison Energy Group that is engaged in the competitive business of providing energy services to commercial and industrial customers|
|Edison Energy Group||Edison Energy Group, Inc., a wholly-owned subsidiary of Edison International, is a holding company for subsidiaries engaged in competitive businesses|
|EME||Edison Mission Energy|
|Electric Service Provider||an entity that offers electric power and ancillary services to retail customers, other than electrical corporations (like SCE) and CCAs|
|ERRA||Energy Resource Recovery Account|
|FERC||Federal Energy Regulatory Commission|
|FERC 2018 Settlement Period|
January 1, 2018 through November 11, 2019
|FERC 2019 Settlement Period||November 12, 2019 through at least December 31, 2021|
Fire Hazard Prevention Memorandum Account
|Fitch||Fitch Ratings, Inc.|
|GAAP||generally accepted accounting principles|
|GRC||general rate case|
|GS&RP||Grid Safety and Resiliency Program|
|Joint Proxy Statement|
Edison International's and SCE's definitive Proxy Statement filed with the SEC in connection with Edison International's and SCE's Annual Shareholders' Meeting held on April 23, 2020
a wind-driven fire that originated near Koenigstein Road in the City of Santa Paula in Ventura County, California, on December 4, 2017
unit of electrical potential equal to 1000 volts
|MD&A||Management's Discussion and Analysis of Financial Condition and Results|
|Montecito Mudslides||the mudslides and flooding in Montecito, Santa Barbara County, California, that occurred in |
|Moody's||Moody's Investors Service, Inc.|
|NEM||net energy metering|
|NERC||North American Electric Reliability Corporation|
|NRC||Nuclear Regulatory Commission|
|PABA||Portfolio Allocation Balancing Account|
|Palo Verde||nuclear electric generating facility located near Phoenix, Arizona in which SCE holds a 15.8% ownership interest|
|PBOP(s)||postretirement benefits other than pension(s)|
|PCIA||Power Charge Indifference Adjustment|
|PG&E||Pacific Gas & Electric Company|
|ROE||return on common equity|
|RPS||Renewables portfolio standard|
|S&P||Standard & Poor's Financial Services LLC|
|San Onofre||retired nuclear generating facility located in south San Clemente, California in which SCE holds a 78.21% ownership interest|
|SCE||Southern California Edison Company, a wholly-owned subsidiary of Edison International|
|SDG&E||San Diego Gas & Electric|
|SEC||U.S. Securities and Exchange Commission|
|SED||Safety and Enforcement Division of the CPUC|
|September 2020 Subrogation Settlement|
a settlement entered into in September 2020 among Edison International, SCE and the Settling Subrogation Plaintiffs
|Settling Subrogation Plaintiffs|
the plaintiffs party to the September 2020 Subrogation Settlement, representing all the insurance subrogation plaintiffs in the Thomas Fire, Koenigstein Fire and Montecito Mudslides litigation
|SoCalGas||Southern California Gas Company|
|SoCore Energy||SoCore Energy LLC, a former subsidiary of Edison Energy Group that was sold in |
Tax Accounting Memorandum Account
Tax Cuts and Jobs Act signed into law on December 22, 2017
a wind-driven fire that originated in the Anlauf Canyon area of Ventura County, California, on December 4, 2017
|US EPA||U.S. Environmental Protection Agency|
|VCFD||The Ventura County Fire Department|
|WEMA||Wildfire Expense Memorandum Account|
|WMP||a wildfire mitigation plan required to be filed at least once every three years under AB 1054 to describe a utility's plans to construct, operate, and maintain electrical lines and equipment that will help minimize the risk of catastrophic wildfires caused by such electrical lines and equipment|
|Wildfire Insurance Fund||The insurance fund established under AB 1054|
|Woolsey Fire||a wind-driven fire that originated in Ventura County in November 2018|
|WSD||Wildfire Safety Division of the CPUC|
This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect Edison International's and SCE's current expectations and projections about future events based on Edison International's and SCE's knowledge of present facts and circumstances and assumptions about future events and include any statements that do not directly relate to a historical or current fact. Other information distributed by Edison International and SCE that is incorporated in this report, or that refers to or incorporates this report, may also contain forward-looking statements. In this report and elsewhere, the words "expects," "believes," "anticipates," "estimates," "projects," "intends," "plans," "probable," "may," "will," "could," "would," "should," and variations of such words and similar expressions, or discussions of strategy or plans, are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ from those currently expected, or that otherwise could impact Edison International and SCE, include, but are not limited to the:
•ability of SCE to recover its costs through regulated rates, including costs related to uninsured wildfire-related and mudslide-related liabilities, costs incurred to mitigate the risk of utility equipment causing future wildfires, costs incurred to implement SCE's new customer service system and costs incurred as a result of the COVID-19 pandemic;
•ability of SCE to implement its WMP, including effectively implementing Public Safety Power Shutoffs when appropriate;
•ability to obtain sufficient insurance at a reasonable cost, including insurance relating to SCE's nuclear facilities and wildfire-related claims, and to recover the costs of such insurance or, in the event liabilities exceed insured amounts, the ability to recover uninsured losses from customers or other parties;
•risks associated with AB 1054 effectively mitigating the significant risk faced by California investor-owned utilities related to liability for damages arising from catastrophic wildfires where utility facilities are alleged to be a substantial cause, including SCE's ability to maintain a valid safety certification, SCE's ability to recover uninsured wildfire-related costs from the Wildfire Insurance Fund, the longevity of the Wildfire Insurance Fund, and the CPUC's interpretation of and actions under AB 1054, including their interpretation of the new prudency standard established under AB 1054;
•decisions and other actions by the CPUC, the FERC, the NRC and other governmental authorities, including decisions and actions related to nationwide or statewide crisis, determinations of authorized rates of return or return on equity, the recoverability of wildfire-related and mudslide-related costs, issuance of SCE's wildfire safety certification, wildfire mitigation efforts, and delays in executive, regulatory and legislative actions;
•ability of Edison International or SCE to borrow funds and access bank and capital markets on reasonable terms;
•risks associated with the decommissioning of San Onofre, including those related to worker and public safety, public opposition, permitting, governmental approvals, on-site storage of spent nuclear fuel, delays, contractual disputes, and cost overruns;
•pandemics, such as COVID-19, and other events that cause regional, statewide, national or global disruption, which could impact, among other things, Edison International's and SCE's business, operations, cash flows, liquidity and/or financial results and cause Edison International and SCE to incur unanticipated costs;
•extreme weather-related incidents and other natural disasters (including earthquakes and events caused, or exacerbated, by climate change, such as wildfires and extreme heat waves), which could cause, among other things, public safety issues, property damage, operational issues (such as rotating outages) and unanticipated costs;
•physical security of Edison International's and SCE's critical assets and personnel and the cybersecurity of Edison International's and SCE's critical information technology systems for grid control, and business, employee and customer data;
•risks associated with cost allocation resulting in higher rates for utility bundled service customers because of possible customer bypass or departure for other electricity providers such as CCAs and Electric Service Providers;
•risks inherent in SCE's transmission and distribution infrastructure investment program, including those related to project site identification, public opposition, environmental mitigation, construction, permitting, power curtailment costs (payments due under power contracts in the event there is insufficient transmission to enable acceptance of power delivery), changes in the CAISO's transmission plans, and governmental approvals;
•risks associated with the operation of transmission and distribution assets and power generating facilities, including worker and public safety issues, the risk of utility assets causing or contributing to wildfires, failure, availability, efficiency, and output of equipment and facilities, and availability and cost of spare parts;
•actions by credit rating agencies to downgrade Edison International or SCE's credit ratings or to place those ratings on negative watch or outlook;
•changes in tax laws and regulations, at both the state and federal levels, or changes in the application of those laws, that could affect recorded deferred tax assets and liabilities and effective tax rate;
•changes in future taxable income, or changes in tax law, that would limit Edison International's and SCE's realization of expected net operating loss and tax credit carryover benefits prior to expiration;
•changes in the fair value of investments and other assets;
•changes in interest rates and rates of inflation, including escalation rates (which may be adjusted by public utility regulators);
•governmental, statutory, regulatory, or administrative changes or initiatives affecting the electricity industry, including the market structure rules applicable to each market adopted by the NERC, CAISO, Western Electricity Council, and similar regulatory bodies in adjoining regions, and changes in the United States' and California's environmental priorities that lessen the importance the state places on GHG reduction;
•availability and creditworthiness of counterparties and the resulting effects on liquidity in the power and fuel markets and/or the ability of counterparties to pay amounts owed in excess of collateral provided in support of their obligations;
•cost and availability of labor, equipment and materials;
•potential for penalties or disallowance for non-compliance with applicable laws and regulations; and
•cost of fuel for generating facilities and related transportation, which could be impacted by, among other things, disruption of natural gas storage facilities, to the extent not recovered through regulated rate cost escalation provisions or balancing accounts.
Additional information about risks and uncertainties, including more detail about the factors described in this report, is contained throughout this report and in the 2019 Form 10-K, including the "Risk Factors" section. Readers are urged to read this entire report, including information incorporated by reference, as well as the 2019 Form 10-K, and carefully consider the risks, uncertainties, and other factors that affect Edison International's and SCE's businesses. Forward-looking statements speak only as of the date they are made and neither Edison International nor SCE are obligated to publicly update or revise forward-looking statements. Readers should review future reports filed by Edison International and SCE with the SEC.
Edison International and SCE post or provide direct links to (i) certain SCE and other parties' regulatory filings and documents with the CPUC and the FERC and certain agency rulings and notices in open proceedings in a section titled "SCE Regulatory Highlights," (ii) certain documents and information related to Southern California wildfires which may be of interest to investors in a section titled "Southern California Wildfires," and (iii) presentations, documents and other information that may be of interest to investors in a section titled "Events and Presentations" at www.edisoninvestor.com in order to publicly disseminate such information. The information contained on, or connected to, the Edison investor website is not incorporated by reference into this report.
The MD&A for the nine months ended September 30, 2020 discusses material changes in the consolidated financial condition, results of operations and other developments of Edison International and SCE since December 31, 2019 and as compared to the nine months ended September 30, 2019. This discussion presumes that the reader has read or has access to Edison International's and SCE's MD&A for the calendar year 2019 (the "2019 MD&A"), which was included in the 2019 Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Highlights of Operating Results
Edison International is the parent holding company of SCE and Edison Energy Group. SCE is an investor-owned public utility primarily engaged in the business of supplying and delivering electricity to customers in an approximately 50,000 square mile area of southern California. Edison Energy Group is a holding company for Edison Energy which is engaged in the competitive business of providing energy services to commercial and industrial customers. Edison Energy's business activities are currently not material to report as a separate business segment. Except when otherwise stated, references to each of Edison International, SCE, or Edison Energy Group mean each such company with its subsidiaries on a consolidated basis. References to Edison International refer to the consolidated group of Edison International and its subsidiaries. References to Edison International Parent and Other refer to Edison International Parent and its competitive subsidiaries. Unless otherwise described, all the information contained in this report relates to both filers.
|Three months ended September 30,||Nine months ended September 30,|
|Net (loss) income attributable to Edison International|| || || || || |
|SCE||$||(264)||$||503 ||$||(767)||$||336 ||$||1,215 ||$||(879)|
|Edison International Parent and Other||(24)||(32)||8 ||(123)||(74)||(49)|
|Edison International||(288)||471 ||(759)||213 ||1,141 ||(928)|
|Less: Non-core items|
|2017/2018 Wildfire/Mudslide Events claims and expenses, net of recoveries||(880)||— ||(880)||(889)||— ||(889)|
|Wildfire Insurance Fund expense||(61)||(48)||(13)||(181)||(48)||(133)|
|Disallowed historical capital expenditures in SCE's 2018 GRC decision||— ||— ||— ||— ||(123)||123 |
|Sale of San Onofre nuclear fuel||21 ||— ||21 ||58 ||3 ||55 |
|Re-measurement of tax assets and liabilities||— ||— ||— ||18 ||69 ||(51)|
|Edison International Parent and Other|
|— ||— ||— ||(25)||— ||(25)|
|Re-measurement of tax liabilities||— ||— ||— ||(3)||— ||(3)|
|Total non-core items||(920)||(48)||(872)||(1,022)||(99)||(923)|
|Core earnings (losses)|
|SCE||656 ||551 ||105 ||1,330 ||1,314 ||16 |
|Edison International Parent and Other||(24)||(32)||8 ||(95)||(74)||(21)|
|Edison International||$||632 ||$||519 ||$||113 ||$||1,235 ||$||1,240 ||$||(5)|
Edison International's earnings are prepared in accordance with GAAP. Management uses core earnings (losses) internally for financial planning and for analysis of performance. Core earnings (losses) are also used when communicating with investors and analysts regarding Edison International's earnings results to facilitate comparisons of the company's performance from period to period. Core earnings (losses) are a non-GAAP financial measure and may not be comparable to those of other companies. Core earnings (losses) are defined as earnings attributable to Edison International shareholders less non-core items. Non-core items include income or loss from discontinued operations and income or loss from significant discrete items that management does not consider representative of ongoing earnings, such as write downs, asset impairments and other income and expense related to changes in law, outcomes in tax, regulatory or legal proceedings, and exit activities, including sale of certain assets and other activities that are no longer continuing.
Edison International's third quarter 2020 earnings decreased $759 million from the third quarter of 2019, resulting from a decrease in SCE's earnings of $767 million and a decrease in Edison International Parent and Other's losses of $8 million. SCE's lower earnings consisted of $872 million of higher non-core losses and $105 million of higher core earnings. Edison International's earnings for the nine months ended September 30, 2020 decreased $928 million from the nine months ended September 30, 2019, resulting from a decrease in SCE's earnings of $879 million and an increase in Edison International Parent and Other's losses of $49 million. SCE's lower earnings consisted of $895 million of higher non-core losses and $16 million of higher core earnings.
The increase in SCE's core earnings in both periods was primarily due to higher CPUC-related revenue due to the escalation mechanism as set forth in the 2018 GRC decision and lower expenses from regulatory deferrals related to wildfire mitigation activities, partially offset by higher operation and maintenance expenses, including customer uncollectibles resulting from the COVID-19 pandemic and SCE's response to it. In the nine month period, SCE's higher core earnings were also partially offset by the adoption of the 2018 GRC decision in the second quarter of 2019.
Edison International Parent and Other's decrease in losses for the three months ended September 30, 2020 was primarily due to increased tax benefits. Edison International Parent and Other's increased net loss for the nine months ended September 30, 2020 was due to higher core losses of $21 million and higher non-core losses of $28 million. Edison International's increase in core losses for the nine months ended September 30, 2020 was primarily due to higher interest expense, partially offset by increased tax benefits.
Consolidated non-core items for the nine months ended September 30, 2020 and 2019 primarily included:
•A charge of $1.2 billion ($889 million after-tax) in 2020 for 2017/2018 Wildfire/Mudslide Events claims and expenses, net of expected recoveries from FERC customers.
•Charges of $252 million ($181 million after-tax) recorded in 2020 and $67 million ($48 million after-tax) recorded in 2019 from the amortization of SCE's contributions to the Wildfire Insurance Fund. See "Notes to Consolidated Financial Statements—Note 12. Commitments and Contingencies" for further information.
•Gains of $80 million ($58 million after-tax) recorded in 2020 and $4 million ($3 million after-tax) recorded in 2019 for SCE's sale of San Onofre nuclear fuel.
•A goodwill impairment charge of $34 million ($25 million after-tax) recorded in 2020 for Edison International Parent and Other related to Edison Energy stemming from the economic impact of COVID-19.
•An income tax benefit of $18 million and income tax expense of $3 million recorded in 2020 for SCE and Edison International Parent and Other, respectively, due to re-measurement of uncertain tax positions related to the 2010 – 2012 California state tax filings currently under audit.
•An impairment charge of $170 million ($123 million after-tax) recorded in 2019 for SCE related to disallowed historical capital expenditures in SCE's 2018 GRC decision.
•Income tax benefits of $69 million recorded in 2019 for SCE related to changes in the allocation of deferred tax
re-measurement between customers and shareholders as a result of a CPUC resolution issued in February 2019 to provide guidance on the implementation of Tax Reform. The resolution determined that customers are only entitled to excess deferred taxes which were included when setting rates and other deferred tax re-measurement belongs to shareholders.
See "Results of Operations" for discussion of SCE and Edison International Parent and Other results of operations.
Southern California Wildfires and Mudslides
Multiple factors have contributed to increased wildfire activity, and faster progression of and increased damage from wildfires across SCE's service territory and throughout California in 2020 and the past several years. These include the buildup of dry vegetation in areas severely impacted by years of historic drought, lack of adequate clearing of hazardous fuels by responsible parties, higher temperatures, lower humidity, increased incidence of dry lightning, and strong Santa Ana winds. At the same time that wildfire risk has been increasing in Southern California, residential and commercial development has occurred and is occurring in some of the highest-risk areas. Such factors can increase the likelihood and extent of wildfires. SCE has determined that approximately 27% of its service territory is in areas identified as high fire risk.
California has experienced unprecedented weather conditions in 2020 and SCE's service territory remains susceptible to additional wildfire activity during the remainder of 2020 and beyond. The worsening weather and fuel conditions across
California increase the likelihood of significant damage from wildfires, including those where SCE's equipment may be alleged to be associated with the fire's ignition. In response to worsening conditions and increased wildfire activity over the past several years, SCE has developed and is implementing its 2020 – 2022 WMP to reduce the risk of SCE equipment contributing to the ignition of wildfires.
Over the past several years, wildfires have impacted portions of SCE's service territory, with wildfires in December 2017 and November 2018 causing loss of life, substantial damage to both residential and business properties, and service outages for SCE customers. Several wildfires have originated in Southern California subsequent to 2018, however, Edison International and SCE expect that any losses incurred in connection with these fires will be covered by insurance, subject to self-insured retentions and co-insurance, and expect that any such losses after insurance recoveries will not be material.
2017/2018 Wildfire/Mudslide Events
The investigating government agencies, the VCFD and CAL FIRE, have determined that the largest of the 2017 fires originated on December 4, 2017, in the Anlauf Canyon area of Ventura County (the investigating agencies refer to this fire as the "Thomas Fire"), followed shortly thereafter by the Koenigstein Fire. While SCE continues to review the progression of these two fires, the December 4, 2017 fires eventually burned substantial acreage in both Ventura and Santa Barbara Counties. The largest of the November 2018 fires, known as the Woolsey Fire, originated in Ventura County and burned acreage in both Ventura and Los Angeles Counties.
In March 2019, the VCFD and CAL FIRE jointly issued separate reports finding that the Thomas Fire and the Koenigstein Fire were each caused by SCE equipment. At this time, based on available information, SCE has not determined whether its equipment caused the Thomas Fire. Based on publicly available radar data showing a smoke plume in the Anlauf Canyon area emerging in advance of the start time of the Thomas Fire indicated in the Thomas Fire report, SCE believes that the Thomas Fire started at least 12 minutes prior to any issue involving SCE's system and at least 15 minutes prior to the start time indicated in the report. SCE has previously disclosed that SCE believed its equipment was associated with the ignition of the Koenigstein Fire. SCE is continuing to assess the progression of the Thomas and Koenigstein Fires and the extent of damages that may be attributable to each fire.
SCE has received a non-final redacted draft of a report from the VCFD subject to a protective order in the litigation related to the Woolsey fire and, other than the information disclosed in this Form 10-Q, is not authorized to release the report or its contents to the public at this time. The draft report states that the VCFD investigation team determined that electrical equipment owned and operated by SCE was the cause of the Woolsey Fire. Based on information received at hearings in the Woolsey Fire litigation, SCE anticipates that the VCFD will release its final report regarding the Woolsey Fire in the fourth quarter of 2020. Absent additional evidence, SCE believes that it is likely that its equipment was associated with the ignition of the Woolsey Fire.
Multiple lawsuits related to the Thomas and Koenigstein Fires and the Woolsey Fire have been initiated against SCE and Edison International. Some of the Thomas and Koenigstein Fires lawsuits claim that SCE and Edison International have responsibility for the damages caused by the Montecito Mudslides based on a theory alleging that SCE has responsibility for the Thomas and/or Koenigstein Fires and that the Thomas and/or Koenigstein Fires proximately caused the Montecito Mudslides.
In the third quarter of 2020, SCE entered into the September 2020 Subrogation Settlement with the Settling Subrogation Plaintiffs to resolve those parties' collective claims arising from the Thomas Fire, Koenigstein Fire or Montecito Mudslides. Under the terms of the September 2020 Subrogation Settlement, SCE paid the Settling Subrogation Plaintiffs an aggregate of $1.2 billion in October 2020 and also agreed to pay $0.555 for each dollar in claims to be paid by the Settling Subrogation Plaintiffs to their policy holders before July 15, 2023, up to an agreed upon cap. In the second and third quarters of 2020, SCE entered into settlements with several hundred of the several thousand individual plaintiffs in the 2017/2018 Wildfire/Mudslide Events litigation under which it agreed to pay an aggregate of approximately $73 million to those individual plaintiffs. Other claims and potential claims related to the 2017/2018 Wildfire/Mudslide Events remain. SCE continues to explore reasonable settlement opportunities with other plaintiffs in the outstanding 2017/2018 Wildfire/Mudslide Events litigation.
Final determinations of liability for the 2017/2018 Wildfire/Mudslide Events, including determinations of whether SCE was negligent, would only be made during lengthy and complex litigation processes. Even when investigations are still pending or liability is disputed, an assessment of likely outcomes, including through future settlement of disputed claims, may require estimated losses to be accrued under accounting standards. Based on information available to SCE and consideration of the risks associated with litigation, Edison International and SCE expect to incur a material loss in connection with the remaining alleged and potential claims related to the 2017/2018 Wildfire/Mudslide Events.
At June 30, 2020, Edison International and SCE were unable to determine a best estimate of expected losses within a reasonably estimated range and therefore Edison International's and SCE's balance sheets included estimated losses, established at the lower end of the reasonably estimated range of expected losses, of $4.5 billion for the 2017/2018 Wildfire/Mudslide Events. In light of recent developments, including the 2020 Subrogation Settlement and increased settlement activity with individual plaintiffs in the 2017/2018 Wildfire/Mudslide Events litigation, management established a best estimate of expected potential losses for alleged and potential claims related to the 2017/2018 Wildfire/Mudslide Events litigation in the third quarter of 2020. As a result, Edison International and SCE recorded a charge of $1.3 billion as of September 30, 2020 related to the 2017/2018 Wildfire/Mudslide Events, against which SCE recorded expected recoveries through FERC electric rates of $84 million. The resulting net charge to earnings was $1.2 billion ($874 million after-tax).
As of September 30, 2020, Edison International and SCE had estimated liabilities of $5.8 billion reflected on their consolidated balance sheets related to the 2017/2018 Wildfire/Mudslide Events, consisting of $1.2 billion of fixed payments to be made under executed settlements and $4.6 billion in estimated losses for remaining alleged and potential claims. As of the same date, Edison International and SCE also had assets for remaining expected recoveries from insurance of $1.6 billion, consisting of $0.8 billion reflected as a short-term asset and $0.8 billion reflected in other long-term assets, and through FERC electric rates of $125 million on their consolidated balance sheets related to the 2017/2018 Wildfire/Mudslide Events. The estimated losses for the 2017/2018 Wildfire/Mudslide Events do not include an estimate of any potential fines or penalties that could be levied against SCE in connection with the 2017/2018 Wildfire/Mudslide Events. Edison International and SCE are currently unable to reasonably estimate the magnitude of any such fines or penalties, or the associated timing if they were to be imposed. Estimated losses for the 2017/2018 Wildfire/Mudslide Events litigation are based on a number of assumptions and are subject to change as additional information becomes available. Actual losses incurred may be higher or lower than estimated based on several factors, including: the uncertainty as to the legal and factual determinations to be made during litigation, including uncertainty as to the contributing causes of the 2017/2018 Wildfire/Mudslide Events, the complexities associated with fires that merge, whether inverse condemnation will be held applicable to SCE with respect to damages caused by the Montecito Mudslides, the preliminary nature of the litigation processes, the uncertainty in estimating damages that may be alleged, and the uncertainty as to how these factors impact future settlements.
Edison International and SCE will seek to offset any actual losses realized in connection with the 2017/2018 Wildfire/Mudslide Events in excess of available insurance through electric rates. SCE believes that, in light of the CPUC's decision in a cost recovery proceeding involving SDG&E arising from several 2007 wildfires in SDG&E's service area, there is substantial uncertainty regarding how the CPUC will interpret and apply its prudency standard to an investor-owned utility in future wildfire cost-recovery proceedings for fires ignited prior to July 12, 2019. Accordingly, while the CPUC has not made a determination regarding SCE's prudency relative to any of the 2017/2018 Wildfire/Mudslide Events, SCE is unable to conclude, at this time, that uninsured CPUC-jurisdictional wildfire-related costs are probable of recovery through electric rates.
Edison International and SCE continue to pursue regulatory and legal strategies, and anticipate pursuing legislative strategies in the longer term, to address the application of a strict liability standard to wildfire-related property damages without the guaranteed ability to recover resulting costs in electric rates.
Current Wildfire Insurance Coverage
SCE has $1.0 billion of wildfire-specific insurance coverage for events that may occur during the period July 1, 2020 through June 30, 2021, subject to up to $80 million of co-insurance and $50 million of self-insured retention, which results in net coverage of approximately $870 million. Various coverage limitations within the policies that make up SCE's wildfire insurance coverage could result in additional material self-insured costs, for instance in the event of multiple wildfire occurrences during a policy period or with a single wildfire with damages in excess of the policy limits. SCE believes that its insurance coverage for the July 1, 2020 through June 30, 2021 period meets its obligation to maintain reasonable insurance coverage under AB 1054.
2019 Wildfire Legislation
In July 2019, AB 1054 was signed by the governor of California and became effective immediately. The summary of the wildfire legislation in this report is based on SCE's interpretation of the legislation and is qualified in its entirety by, and should be read together with, AB 1054 and companion Assembly Bill 111.
Wildfire Insurance Fund
AB 1054 provided for the Wildfire Insurance Fund to reimburse a utility for payment of third-party damage claims arising from certain wildfires that exceed, in aggregate in a calendar year, the greater of $1.0 billion or the insurance coverage required to be maintained under AB 1054. The Wildfire Insurance Fund was established in September 2019 and is available
for claims related to wildfires ignited after July 12, 2019 that are determined by the responsible government investigatory agency to have been caused by a utility.
SCE and SDG&E collectively made their initial contributions totaling approximately $2.7 billion to the Wildfire Insurance Fund in September 2019. Upon its emergence from bankruptcy, on July 1, 2020, PG&E made its initial contribution of approximately $4.8 billion to the Wildfire Insurance Fund. PG&E, SCE and SDG&E are also collectively expected to make aggregate contributions of approximately $3.0 billion to the Wildfire Insurance Fund through annual contributions to the fund over a 10-year period, of which they have made their initial annual contributions totaling approximately $300 million. In addition to PG&E's, SCE's and SDG&E's contributions to the Wildfire Insurance Fund, PG&E, SCE and SDG&E are expected to collect $6.1 billion, $6.1 billion and $1.3 billion, respectively, from their customers over a 15-year period through a dedicated rate component. The amount collected from customers may be directly contributed to the Wildfire Insurance Fund or used to support the issuance of up to $10.5 billion in bonds by the California Department of Water Resources, the proceeds of which would be contributed to the fund. In addition to funding contributions to the Wildfire Insurance Fund, the amount collected from utility customers will pay for, among other things, any interest and financing costs related to any bonds that are issued by the California Department of Water Resources to support the contributions to the Wildfire Insurance Fund.
SCE made an initial contribution of approximately $2.4 billion to the Wildfire Insurance Fund in September 2019 and has committed to make ten annual contributions of approximately $95 million per year to the fund, by no later than January 1 of each year. SCE made its first annual contribution to the Wildfire Insurance Fund in December 2019. Edison International supported SCE's initial contribution to the Wildfire Insurance Fund by raising $1.2 billion from the issuance of Edison International equity. SCE raised the remaining $1.2 billion from the issuance of long-term debt. SCE's contributions to the Wildfire Insurance Fund will not be recoverable through electric rates and will be excluded from the measurement of SCE's CPUC-jurisdictional authorized capital structure. SCE will also not be entitled to cost recovery for any borrowing costs incurred in connection with its contributions to the Wildfire Insurance Fund.
Participating investor-owned utilities will be reimbursed from the Wildfire Insurance Fund for eligible claims, subject to the fund administrator's review. SCE will reimburse the fund for any withdrawn amounts if SCE receives payment of such amounts under an indemnification agreement or from an insurance provider or other third-party. SCE will also be required to reimburse the fund for withdrawn amounts that the CPUC disallows subject, in some instances, to the AB 1054 Liability Cap. A utility will not be eligible for the AB 1054 Liability Cap if it does not maintain a valid safety certification or its actions or inactions that resulted in the wildfire are found to constitute conscious or willful disregard of the rights and safety of others. Based on SCE's 2020 rate base and using the equity portion of SCE's CPUC authorized capital structure of 52%, SCE's requirement to reimburse the Wildfire Insurance Fund for eligible claims disallowed in 2020 would be capped at approximately $3.0 billion. SCE will not be allowed to recover borrowing costs incurred to reimburse the fund for amounts that the CPUC disallows. The Wildfire Insurance Fund and, consequently, the AB 1054 Liability Cap will terminate when the administrator determines that the fund has been exhausted.
AB 1054 Prudency Standard
As a result of the establishment of the Wildfire Insurance Fund, AB 1054 created a new standard that the CPUC must apply when assessing the prudency of a utility in connection with a request for recovery of wildfire costs for wildfires ignited after July 12, 2019. Under AB 1054, the CPUC is required to find a utility to be prudent if the utility's conduct related to the ignition was consistent with actions that a reasonable utility would have undertaken under similar circumstances, at the relevant point in time, and based on the information available at that time. Utilities with a valid safety certification will be presumed to have acted prudently related to a wildfire ignition unless a party in the cost recovery proceeding creates serious doubt as to the reasonableness of the utility's conduct, at which time, the burden shifts back to the utility to prove its conduct was reasonable. If a utility does not have a valid safety certification, it will have the burden to prove, based on a preponderance of evidence, that its conduct was prudent. The new prudency standard will survive the termination of the Wildfire Insurance Fund.
Utilities participating in the Wildfire Insurance Fund are not required to reimburse the fund for amounts withdrawn from the fund that the CPUC finds were prudently incurred and can recover such prudently incurred wildfire costs through electric rates if the fund has been exhausted.
Safety Certification and Wildfire Mitigation Plan
Under AB 1054, SCE can obtain an annual safety certification upon the submission of certain required safety information, including an approved wildfire mitigation plan. On September 17, 2020, SCE obtained a safety certification that will be valid for 12 months. Notwithstanding its 12-month term, if SCE requests a new safety certification prior to the expiration of its
current safety certification, then its current safety certification will remain valid until the CPUC's WSD acts on SCE's request for a new safety certification.
In June 2020 the CPUC ratified the WSD's conditional approval of SCE's 2020 – 2022 WMP. The approval is conditioned on SCE providing requested information to the WSD, including additional descriptions of how SCE is implementing, and will implement, certain requirements imposed by the WSD. The WSD issued a draft resolution in October 2020 that, if adopted, will require SCE to update its 2020 – 2022 WMP by February 5, 2021.
Capital Expenditure Requirement
Under AB 1054, approximately $1.6 billion of spending by SCE on wildfire risk mitigation capital expenditures made after August 1, 2019 cannot be included in the equity portion of SCE's rate base. SCE can apply for irrevocable orders from the CPUC to finance these AB 1054 Excluded Capital Expenditures, including through the issuance of securitized bonds, and can recover any prudently incurred financing costs. In July 2020, SCE applied for an irrevocable order from the CPUC to finance $337 million, comprised of AB 1054 Excluded Capital Expenditures incurred in connection with GS&RP and prudently incurred financing costs, through the issuance of securitized bonds. The CPUC issued a proposed decision approving SCE's application in October 2020 and is expected to issue the irrevocable financing order in November 2020. As of September 30, 2020, SCE has spent $1.1 billion on AB 1054 Excluded Capital Expenditures. SCE expects to seek additional irrevocable orders from the CPUC to finance the remaining AB 1054 Excluded Capital Expenditures.
For further information, see in the 2019 Form 10-K "Notes to Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies—Initial and annual contributions to the wildfire insurance fund established pursuant to California Assembly Bill 1054" and in this report "Notes to Consolidated Financial Statements—Note 12. Commitments and Contingencies—Contingencies—Southern California Wildfires and Mudslides" and "Legal Proceedings."
Southern California began experiencing the impacts of the COVID-19 pandemic in the first quarter of 2020. The total impacts of the pandemic are still emerging and will vary depending on the severity of impacts on society and the economy of the US and California. As a result of the pandemic, SCE has experienced increased costs, but the pandemic has not had a pervasive impact on SCE's ability to operate its business. However, as the impacts of the pandemic continue to unfold, areas that may be impacted in the future include: SCE's ability to execute its planned work, including wildfire mitigation and capital projects and the liquidity, cash flows and results of operations of Edison International and SCE. Factors that may increase in severity or that may emerge to cause these impacts include lack of availability of company and contractor employees to perform their job functions, supply chain disruptions, stop-work orders and limitations on the ability to obtain permits for work from local governments, reduced electricity usage by commercial and industrial customers partially offset by increased electricity usage by residential customers, non-payment due to the economic impacts on the customers served by SCE and narrower access to, or increased costs of accessing, bank and capital markets.
Decoupling revenue mechanisms allow for differences in revenue resulting from actual and forecast volumetric electricity sales to be collected from or refunded to ratepayers and therefore insulate SCE's earnings from reductions in electricity usage.
In March 2020, the governor of California announced a statewide emergency as part of the state's response to address the COVID-19 pandemic. As a result SCE established memorandum accounts with CPUC approval, effective March 2020, to track incremental costs associated with the emergency for recovery, subject to CPUC reasonableness reviews.
As a direct result of the pandemic, as of September 30, 2020, SCE has recognized net costs of $166 million primarily related to increased estimates of customer uncollectibles, sequestering certain SCE employees at essential work locations and coordination of SCE's response to the emergency. As of September 30, 2020, SCE had recorded $107 million of those costs above amounts authorized for related activities in the 2018 GRC as CPUC regulatory assets and a further $6 million has been deferred for collection from FERC customers. For further information see "Notes to the Consolidated Financial Statements—Note 11. Regulatory Assets and Liabilities" and "Risk Factors." Legislation was passed in California in September 2020 allowing for securitization of revenue shortfalls associated with the economic effects of the COVID-19 pandemic, subject to approval of a financing order by the CPUC.
The pandemic has also affected the operations of Edison International and SCE with all employees who, in the companies' assessment, can work remotely and perform their job functions effectively, directed to do so. Some employees and contract workers continue to work at SCE facilities or in the field to maintain operations and perform critical work to protect public safety and reduce the risk of wildfires.
2021 General Rate Case
The 2021 GRC will consist of four separate tracks. Track 1 is similar to previous GRCs and addresses revenue requirements for the three-year period 2021-2023. Tracks 2 and 3 address the reasonableness of 2018-2019 and 2020 wildfire mitigation costs that were incremental to amounts authorized in the 2018 GRC, respectively. In January 2020, a CPUC decision introduced a third attrition year in current and future GRCs. As a result, track 4 will address the revenue requirement for 2024. SCE is scheduled to submit its testimony for track 4 in May 2022.
For more information on tracks 2 and 3 of the 2021 GRC, see "—Wildfire Mitigation and Wildfire Insurance Expenses—2021 General Rate Case Wildfire Mitigation Memorandum Account Balances."
Track 1 of 2021 GRC
In August 2019, SCE filed its 2021 GRC application for the three-year period 2021 – 2023 and submitted rebuttal to intervenors' testimony in June 2020. Following amendments and other revisions to the rebuttal testimony in August and September 2020, SCE has requested a revenue requirement of $7.6 billion, an approximately $1.3 billion increase over the 2020 revenue requirement authorized in the 2018 GRC as updated for post test-year ratemaking changes. The amended and revised rebuttal testimony proposed post test-year increases in 2022 and 2023 of $452 million and $524 million, respectively. SCE's request excludes the revenue requirement associated with the approximately $1.6 billion of AB 1054 Excluded Capital Expenditures.
In April and May 2020, intervenors to the 2021 GRC proceeding, including the CPUC Public Advocates Office ("Cal Advocates") and The Utility Reform Network ("TURN"), submitted testimony in response to SCE's August 2019 application as revised and amended. Cal Advocates proposed reductions to 2021 operation and maintenance spending of $423 million or 15% of the total, and reductions to 2021 capital spending of $445 million or 9% of the total. TURN proposed reductions to 2021 operation and maintenance spending of $556 million or 17% of the total, and reductions to 2021 capital spending of $714 million or 14% of the total. The reductions to capital expenditures proposed by both parties included significant proposed reductions to SCE's Wildfire Covered Conductor Program. If adopted, the proposals of Cal Advocates and TURN would result in a 2021 revenue requirement of approximately $6.9 billion and $6.7 billion, respectively.
SCE expects a final decision on the application for the 2021 test year in the first quarter of 2021. If the final decision is received after January 1, 2021, SCE will request the CPUC to approve establishment of a memorandum account making the authorized revenue requirement changes effective January 1, 2021. SCE cannot predict the revenue requirement the CPUC will ultimately authorize or forecast the timing of a final decision.
FERC Formula Rate
2019 FERC Formula Rate Settlement
In September 2020, the FERC approved a settlement of SCE's formula rates for the 2019 Formula Rate case ("2019 Formula Rate Settlement"). The settlement establishes SCE's FERC transmission revenue requirement for the 2019 FERC Settlement Period. SCE is permitted to request a new formula rate after December 31, 2021, the end of the 2019 FERC Settlement Period. The settlement provides for a total ROE of 10.30% inclusive of CAISO and transmission incentive adders. The settlement also provides that SCE's capital structure for purposes of its formula rate will reflect the higher of SCE's actual equity ratio or 47.50%. The transmission revenue requirement and rates that have been billed to customers prior to the implementation of the 2019 Formula Rate Settlement utilized a base ROE of 11.97%. SCE expects to refund the excess amounts billed to customers through the operation of the Formula Rate in 2021 and 2022. SCE had been recognizing revenue based on the expected outcome of this settlement and the impact of recording the settlement was not material.
In December 2019, the CPUC filed a protest with the FERC alleging that $419 million of costs associated with SCE's Tehachapi Transmission Project are imprudent and should be disallowed from SCE's FERC rate base because these costs exceeded the maximum reasonable costs identified by the CPUC when it granted the project's certificate of public convenience and necessity. As part of the 2019 Formula Rate Settlement, the CPUC withdrew its protest effective as of July 27, 2020.
2021 FERC Formula Rate Annual Update
In July 2020, SCE provided its preliminary 2021 annual transmission revenue requirement update to interested parties. The update reflects an increase in SCE's transmission revenue requirement of $123 million or 12.8% higher than amounts included in the 2020 annual rates. The increase is primarily due to growth in rate base and the effect of refunds from the annual FERC Formula Rate true-up mechanism on 2020 rates. SCE expects to file its 2021 annual update with the FERC by December 1, 2020 with the proposed rates effective January 1, 2021.
Phase I Decision in Residential Rates OIR
In June 2020, the CPUC issued a final decision on the first phase of the ongoing proceeding Order Instituting Rulemaking to Consider New Approaches to Disconnections and Reconnections to Improve Energy Access and Contain Costs ("Residential Rates OIR"). This decision applies only to SCE's residential customers and requires the creation of an arrearage management program to forgive a portion of certain low income customers' past arrears as long as they remain current on monthly billing, prohibits use of establishment of credit or reestablishment of service deposits, and caps SCE's disconnection rate. SCE's disconnection rate will be capped at 8% in 2020 and will reduce by 1% each year until 2024.
The decision requires SCE to establish a two-way balancing account to reflect the actual costs of disconnections in customer rates and to establish a memorandum account to track the costs of implementing the decision.
Wildfire Mitigation and Wildfire Insurance Expenses
In response to the increase in wildfire activity, and faster progression of and increased damage from wildfires across SCE's service territory and throughout California, SCE is currently incurring wildfire mitigation and wildfire insurance related spending at levels significantly exceeding amounts authorized in its 2018 GRC. Several regulatory mechanisms, including but not limited to the GS&RP balancing account, the FHPMA, the WMP memorandum account and the WEMA, exist to allow SCE to track and seek recovery of these incremental costs. In accordance with the accounting standards applicable to rate-regulated enterprises, SCE defers costs as regulatory assets that are probable of future recovery from customers. For certain wildfire mitigation and wildfire insurance expenses SCE performs its assessment of future recovery after its year to date spending exceeds the amounts authorized for the full calendar year under its current revenue requirement. As of September 30, 2020, SCE has recognized $797 million of regulatory assets related to incremental wildfire mitigation expenses, including depreciation expense from $1.4 billion of total incremental capital expenditures. As of September 30, 2020, SCE has $110 million of regulatory assets related to incremental wildfire insurance expenses in the WEMA. While SCE believes such costs are probable of future recovery, there is no assurance that SCE will collect all amounts currently deferred as regulatory assets. SCE has recorded a further $175 million of incremental wildfire mitigation expenses, including $10 million for the quarter ended September 30, 2020, that are subject to reasonableness reviews through the 2021 GRC proceeding. As discussed below, the CPUC has approved recovery of certain incremental wildfire mitigation and wildfire insurance expenses through SCE's GS&RP and WEMA proceedings. As of September 30, 2020, SCE has wildfire-related regulatory assets totaling $1,061 million including wildfire mitigation, wildfire insurance, and wildfire and drought restoration costs. Of this amount, $119 million has been approved. The remaining $942 million of wildfire-related regulatory assets will be reviewed through ongoing or future proceedings.
Grid Safety and Resiliency Program
In April 2020, the CPUC approved a settlement agreement between SCE and certain parties to SCE's GS&RP proceeding. Under the settlement, SCE is authorized to spend approximately $599 million ($476 million capital) between 2018 and 2020. Upon approval by the CPUC in July 2020, SCE established a balancing account to track the difference between actual GS&RP costs and amounts authorized. SCE included the authorized revenue requirement (other than for AB 1054 Excluded Capital Expenditures) in rates on October 1, 2020. If spending is less than authorized, SCE will refund those amounts to customers. If spending is in excess of authorized amounts, SCE will present those costs for reasonableness review in track 3 of the 2021 GRC. Additionally, SCE's recovery of tree removal costs is capped at a specific average authorized unit cost and a total volume of trees.
Through September 30, 2020, SCE has incurred $819 million of capital expenditures, of which $343 million will be subject to a reasonableness review, and $90 million of incremental operations and maintenance expenses, all of which is within the amount authorized in the settlement agreement.
In July 2020, SCE applied for an irrevocable order from the CPUC to finance $337 million, comprised of AB 1054 Excluded Capital Expenditures incurred in connection with GS&RP and prudently incurred financing costs, through the issuance of securitized bonds. The CPUC issued a proposed decision approving SCE's application in October 2020 and is expected to issue the irrevocable financing order in November 2020.
2021 General Rate Case Wildfire Mitigation Memorandum Account Balances
In March 2020, SCE made its 2021 GRC track 2 filing with the CPUC. After updates included in SCE's September 2020 rebuttal testimony, SCE's track 2 request was $302 million of capital expenditures and $491 million of operation and maintenance expenses from 2018 and 2019 that were incremental to amounts authorized in SCE's 2018 GRC and not associated with SCE's GS&RP application. The GRC track 2 expenditures predominantly related to enhanced overhead inspections, an expanded vegetation management program and expert consultant contract labor costs supporting SCE's wildfire mitigation activities. The majority of these expenditures are recorded in the WMP memorandum account and the FHPMA. The capital revenue requirement recorded in memorandum accounts mainly represents depreciation expense, taxes, and return. After flow through tax effects and excluding the revenue requirement associated with AB 1054 Excluded Capital Expenditures, SCE's GRC track 2 filing rebuttal testimony resulted in a requested revenue requirement of $482 million.
In October 2020, SCE and all the parties to track 2 of the 2021 GRC proceeding (collectively, the "Track 2 Parties") reached a confidential settlement-in-principle regarding all issues in track 2. Once a definitive settlement is executed by the Track 2 Parties, the parties will file a motion with the CPUC seeking approval of the settlement. While SCE cannot predict the revenue requirement the CPUC will ultimately authorize or forecast the timing of a final decision, SCE does not expect the settlement-in-principle, if approved by the CPUC, to have a negative impact on SCE's results of operations.
Incremental wildfire mitigation costs from 2020, and all GS&RP costs above settled amounts, are to be reviewed in track 3 of the 2021 GRC proceeding, which will be filed in March 2021. The schedule for SCE's 2021 GRC includes a proposed decision on track 3 in the first quarter of 2022.
Wildfire Expense Memorandum Account
In September 2020, the CPUC approved SCE's WEMA application to recover $478 million in wildfire insurance premium costs to June 30, 2020 incurred in excess of premiums approved in the 2018 GRC and corresponding financing costs. The decision authorized SCE to collect a total revenue requirement of $505 million over a two-year period. SCE included the authorized revenue requirement in rates in October 2020 and the related costs previously deferred in WEMA were transferred to the BRBBA. As of September 30, 2020, the $110 million of regulatory assets in the WEMA is for wildfire insurance premium costs from July 1, 2020 to September 30, 2020.
Total capital expenditures (including accruals) were $3.7 billion and $3.3 billion for the first nine months of 2020 and 2019, respectively.
SCE forecasts capital expenditures within a range of $4.9 billion to $5.1 billion in 2020. The forecast has increased in the third quarter of 2020 as a result of telecommunications network and wildfire restoration expenditures not previously forecasted and may increase further as a result of the ongoing wildfire restoration work.
Reflected below is SCE's weighted average annual rate base forecast for 2020 – 2023 which has been updated since the 2019 Form 10-K to reflect SCE's 2021 GRC rebuttal testimony, the approval of SCE's Charge Ready 2 Program and the FERC approval to include Construction Work In Progress associated with the Riverside Transmission Reliability Project in transmission rate base.
The table below excludes AB 1054 Excluded Capital Expenditures and does not reflect rate base associated with non-GRC projects or programs that have not yet been approved by the CPUC, including CSRP. In addition, a third-party holds an option to invest up to $400 million in the West of Devers Transmission project at the estimated in-service date of 2021. The rate base in the table below is reduced to reflect this option.
Based on management judgment using historical precedent of previously authorized amounts and potential permitting delays and other operational considerations, a range case has been provided in the table below reflecting a 10% reduction on the total capital forecast for 2021 – 2023 and a 10% reduction on FERC capital spending and non-GRC programs for 2020.
Rate base for expected capital expenditures
|$||33.6 ||$||36.0 ||$||38.4 ||$||41.2 |
Rate base for expected capital expenditures (using range case described above)
|$||33.3 ||$||35.1 ||$||37.0 ||$||39.2 |
For further information regarding the capital program see "Liquidity and Capital Resources—SCE—Capital Investment Plan."
RESULTS OF OPERATIONS
SCE's results of operations are derived mainly through two sources:
•Earning activities – representing revenue authorized by the CPUC and FERC, which is intended to provide SCE a reasonable opportunity to recover its costs and earn a return on its net investment in generation, transmission and distribution assets. The annual revenue requirements are comprised of authorized operation and maintenance costs, depreciation, taxes and a return consistent with the capital structure. Also, included in earnings activities are revenue or penalties related to incentive mechanisms, other operating revenue, and regulatory charges or disallowances.
•Cost-recovery activities – representing CPUC- and FERC- authorized balancing accounts, which allow for recovery of specific project or program costs, subject to reasonableness review or compliance with upfront standards. Cost-recovery activities include rates which provide recovery, subject to reasonableness review of, among other things, fuel costs, purchased power costs, public purpose related-program costs (including energy efficiency and demand-side management programs) and certain operation and maintenance expenses. SCE earns no return on these activities.
Impact of 2018 GRC
In May 2019, the CPUC approved a decision in SCE's 2018 GRC. The revenue requirements in the 2018 GRC decision were retroactive to January 1, 2018. SCE recorded the prior period impact of the 2018 GRC decision in the second quarter of 2019 including an increase to earnings of $131 million from the application of the decision to revenue, depreciation expense and income tax expense, of which $65 million was attributable to 2018 and $66 million was attributable to first quarter of 2019 and an impairment of utility property, plant and equipment of $170 million ($123 million after-tax) related to disallowed historical capital expenditures.
The following table is a summary of SCE's results of operations for the periods indicated.
Three months ended September 30, 2020 versus September 30, 2019
|Three months ended September 30, 2020||Three months ended September 30, 2019|
|Operating revenue||$||2,126 ||$||2,509 ||$||4,635 ||$||1,832 ||$||1,900 ||$||3,732 |
|Purchased power and fuel||— ||1,817 ||1,817 ||— ||1,708 ||1,708 |
|Operation and maintenance||515 ||711 ||1,226 ||542 ||210 ||752 |
|Wildfire-related claims, net of insurance recoveries||1,297 ||— ||1,297 ||— ||— ||— |
|Wildfire Insurance Fund expense||85 ||— ||85 ||67 ||— ||67 |
|Depreciation and amortization||489 ||— ||489 ||459 ||— ||459 |
|Property and other taxes||113 ||— ||113 ||98 ||— ||98 |
|Impairment and other ||(28)||— ||(28)||— ||— ||— |
|Other operating income||— ||— ||— ||(1)||— ||(1)|
|Total operating expenses||2,471 ||2,528 ||4,999 ||1,165 ||1,918 ||3,083 |
|Operating (loss) income||(345)||(19)||(364)||667 ||(18)||649 |
|Other income||54 ||29 ||83 ||39 ||19 ||58 |
|(Loss) income before income taxes||(469)||— ||(469)||524 ||— ||524 |
|Income tax benefit||(251)||— ||(251)||(10)||— ||(10)|
|Net (loss) income||(218)||— ||(218)||534 ||— ||534 |
|Preferred and preference stock dividend requirements||46 ||— ||46 ||31 ||— ||31 |
|Net (loss) income available for common stock||$||(264)||$||— ||$||(264)||$||503 ||$||— ||$||503 |
|Net (loss) income available for common stock||$||(264)||$||503 |
|Less: Non-core expense||(920)||(48)|
|$||656 ||$||551 |
1 See use of non-GAAP financial measures in "Management Overview—Highlights of Operating Results."
Earning activities were primarily affected by the following:
•Higher operating revenue of $294 million primarily due to the following:
•An increase in CPUC-related revenue of $230 million primarily due to the 2018 GRC decision's escalation mechanism and higher operating costs subject to balancing account treatment as a result of the approval of the GS&RP balancing account.
•An increase in FERC-related revenue of $69 million primarily due to $84 million of expected recoveries from customers for the FERC portion of wildfire related claims (see "Management Overview—Southern California Wildfires and Mudslides—2017/2018 Wildfire/Mudslide Events"), partially offset by an increase in revenue in the third quarter 2019 due to the settlement of SCE's 2018 FERC Formula Rate proceeding in 2019.
•Lower operation and maintenance costs of $27 million primarily due to the following:
•Decreased expenses of $148 million due to increased regulatory deferrals related to wildfire mitigation activities, including inspections, preventive maintenance, and vegetation management costs. Although higher wildfire-mitigation
costs were incurred in 2020, a higher proportion of these costs were deferred to wildfire mitigation memorandum accounts.
•Increased expenses of $93 million subject to balancing account treatment primarily due to the approval of the GS&RP balancing account.
•Increased expenses of $28 million primarily due to employee benefit expenses of $7 million, customer uncollectibles expense of $7 million as a result of the COVID-19 pandemic, and higher support function expenses.
•Charge of $1.3 billion recorded in 2020 for wildfire-related claims related to the 2017/2018 Wildfire/Mudslide Events (see "Notes to Consolidated Financial Statements—Note 12. Commitments and Contingencies—Contingencies—Southern California Wildfires and Mudslides).
•Higher Wildfire Insurance Fund expense of $18 million for amortization of contributions to the Wildfire Insurance Fund for insurance protection. See "Management Overview—Southern California Wildfires and Mudslides" for further information.
•Higher depreciation and amortization expense of $30 million primarily due to increased plant balances in 2020.
•Higher property and other taxes of $15 million primarily due to higher property assessed values in 2020.
•Lower impairment and other of $28 million due to a gain related to the sale of San Onofre nuclear fuel in 2020. Under the terms of the January 2018 settlement of the San Onofre Order Instituting Investigation proceeding, the gain on sale of the nuclear fuel will not be returned to customers.
•Higher other income of $15 million primarily due to higher AFUDC equity income and higher insurance benefits.
•Higher income tax benefit of $241 million primarily due to the impact of lower pre-tax income from the charge for wildfire-related claims related to the 2017/2018 Wildfire/Mudslide Events.
•Higher preferred and preference stock dividends of $15 million primarily due to a loss on redemption of preferred securities in 2020.
Cost-recovery activities were primarily affected by the following:
•Higher purchased power and fuel costs of $109 million primarily due to higher energy purchase volume and higher power price, partially offset by higher congestion revenue rights credits.
•Higher operation and maintenance costs of $501 million driven by the authorization to recover 2018 through June 2020 wildfire insurance costs above GRC authorized that had been deferred as regulatory assets increasing expenses. See "Management Overview—Wildfire Mitigation and Wildfire Insurance Expenses—Wildfire Expense Memorandum Account" for further information.
•Higher interest expense of $9 million primarily driven by the authorization to recover financing costs associated with incremental 2018 through June 2020 wildfire insurance expenses.
•Higher other income of $10 million primarily driven by higher net periodic benefit income related to the non-service cost components for SCE's other post-retirement benefit plans. See "Notes to Consolidated Financial Statements—Note 9. Compensation and Benefit Plans" for further information.
Nine months ended September 30, 2020 versus September 30, 2019
|Nine months ended September 30, 2020||Nine months ended September 30, 2019|
|Operating revenue||$||5,642 ||$||4,753 ||$||10,395 ||$||4,919 ||$||4,429 ||$||9,348 |
|Purchased power and fuel||2 ||3,811 ||3,813 ||— ||3,848 ||3,848 |
|Operation and maintenance||1,801 ||1,019 ||2,820 ||1,555 ||637 ||2,192 |
|Wildfire-related claims, net of insurance recoveries||1,303 ||— ||1,303 ||— ||— ||— |
|Wildfire Insurance Fund expense||252 ||— ||252 ||67 ||— ||67 |
|Depreciation and amortization||1,461 ||— ||1,461 ||1,259 ||— ||1,259 |
|Property and other taxes||326 ||— ||326 ||300 ||— ||300 |
|Impairment and other ||(80)||— ||(80)||166 ||— ||166 |
|Other operating income||— ||— ||— ||(4)||— ||(4)|
|Total operating expenses||5,065 ||4,830 ||9,895 ||3,343 ||4,485 ||7,828 |
|Operating income||577 ||(77)||500 ||1,576 ||(56)||1,520 |
|Other income||130 ||87 ||217 ||95 ||57 ||152 |
|Income before income taxes||142 ||— ||142 ||1,123 ||— ||1,123 |
|Income tax benefit||(300)||— ||(300)||(183)||— ||(183)|
|Net income||442 ||— ||442 ||1,306 ||— ||1,306 |
|Preferred and preference stock dividend requirements||106 ||— ||106 ||91 ||— ||91 |
|Net income available for common stock||$||336 ||$||— ||$||336 ||$||1,215 ||$||— ||$||1,215 |
|Net income available for common stock||$||336 ||$||1,215 |
|Less: Non-core expense||(994)||(99)|
|$||1,330 ||$||1,314 |
1 See use of non-GAAP financial measures in "Management Overview—Highlights of Operating Results."
Earning activities were primarily affected by the following:
•Higher operating revenue of $723 million primarily due to the following:
•An increase in CPUC-related revenue of $590 million primarily due to the 2018 GRC's decision escalation mechanism and the reduction to revenue in the second quarter of 2019 due to recording the 2018 impacts of the 2018 GRC decision and higher operating costs subject to balancing account treatment primarily as a result of the approval of the GS&RP balancing account.
•An increase in FERC-related revenue of $127 million primarily due to the $84 million of expected recoveries from customers for the FERC portion of wildfire-related claims (see "Management Overview—Southern California Wildfires and Mudslides—2017/2018 Wildfire/Mudslide Events") and higher operating costs subject to balancing account treatment, partially offset by an increase in revenue in the third quarter 2019 due to the settlement of SCE's 2018 FERC Formula Rate proceeding in 2019.
•Higher operation and maintenance costs of $246 million primarily due to:
•Increased expenses of $128 million subject to balancing account treatment primarily as a result of the approval of GS&RP balancing account.
•Increased expenses related to COVID-19 of $49 million, consisting of $16 million in labor and other expenses resulting from SCE’s response to the COVID-19 pandemic and $33 million of customer uncollectibles expense.
•Higher employee benefit expenses of $36 million resulting primarily from the payout of 2019 short-term incentive compensation and other employee benefit programs.
•The $25 million reduction to expenses primarily from the 2018 impact of adopting the 2018 GRC decision's change in capitalization rates, recorded in the second quarter of 2019.
•Higher wildfire insurance expenses of $23 million primarily due to the authorization to recover certain 2018 wildfire insurance expenses reducing expenses in 2019.
•Increased other expenses of $64 million including environmental remediation, legal costs and worker's compensation costs.
•Decreased expenses of $79 million due to increased regulatory deferrals related to wildfire-mitigation costs including inspections, preventive maintenance and vegetation management costs. Although higher wildfire-mitigation costs were incurred in 2020, a higher proportion of these costs were deferred to wildfire mitigation memorandum accounts.
•Charge of $1.3 billion recorded in 2020 for wildfire-related claims related to the 2017/2018 Wildfire/Mudslide Events (see "Notes to Consolidated Financial Statements—Note 12. Commitments and Contingencies—Contingencies—Southern California Wildfires and Mudslides).
•Higher Wildfire Insurance Fund expense of $185 million for amortization of contributions to the Wildfire Insurance Fund for insurance protection. See "Management Overview—Southern California Wildfires and Mudslides" for further information.
•Higher depreciation and amortization expense of $202 million primarily due to the 2018 impact of a change in depreciation rates and disallowed historical capital expenditures from adoption of the 2018 GRC decision, recorded in the second quarter of 2019, and increased plant balances in 2020.
•Higher property and other taxes of $26 million primarily due to higher property assessed values in 2020.
•Lower impairment and other of $246 million primarily due to an impairment of $170 million related to the disallowed historical capital expenditures as a result of 2018 GRC decision in 2019, discussed above, and a gain of $76 million related to the sale of San Onofre nuclear fuel in 2020. As noted above, the gain on the sale of nuclear fuel will not be returned to customers.