ROSEMEAD, Calif.--(BUSINESS WIRE)--Citing “dramatic, material changes” to its regulatory and financial conditions, Southern California Edison today filed a request with the Federal Energy Regulatory Commission (FERC) to include an adjustment for the company’s extraordinary wildfire risk in the authorized return on equity (ROE) for the portion of its business regulated by FERC.
The extraordinary risk stems from uncertainty about state policies for cost recovery and liability resulting from California’s devastating wildfires in recent years. The company’s overall request for an ROE of 17.12%, plus incentives consistent with past years, also reflects the challenges it faces to help implement the state’s clean energy policies. These include investments in new technologies and clean energy projects, which are helping the state meet its ambitious targets for reducing greenhouse gas emissions and combatting the climate change that exacerbates California’s catastrophic wildfires.
The company’s expanding risk profile related to wildfires has resulted in recent downgrades to its credit ratings, causing it to incur higher costs for capital investment. The increase in ROE is necessary for an investor-owned utility like SCE to be able to continue to attract capital from investors, who must consider the extra risk associated with an investment in the company.
If not for the adjustment associated with wildfire risk, the ROE being requested by SCE would be generally consistent with other utilities with above average risk. The company stated that once state policymakers have restored certainty and stability to how wildfire-related costs are addressed, the adjustment to ROE attributable to wildfire risk can be reduced or removed from rates.
“We do not believe a higher return on equity is a long-term solution to the urgent situation utilities in California are facing,” said Caroline Choi, senior vice president of Corporate Affairs for SCE and its parent company, Edison International. “However, this is what is needed in the near term in order to attract the capital required to provide safe, reliable electricity.”
The company estimated that the average residential customer would see an increase of about $2.20 per month on the FERC-regulated portion of their SCE bill if the request is approved. In addition to the wildfire risk, SCE also is dealing with uncertainty in the state regulatory arena as it awaits a California Public Utilities Commission (CPUC) decision on a General Rate Case it filed more than 2½ years ago. In addition, SCE later this month will be considering the same circumstances and risks when it files its triennial cost of capital request with the CPUC.
The proposed effective date of the new ROE is June 12, 2019.
FERC has jurisdiction over SCE transmission equipment that is under the operational control of the California Independent System Operator (CAISO) and must authorize all rates related to the use of these assets, which comprise about 20% of the company’s rate base. In the filing to request a revised formula rate from FERC, the company pointed out that its currently effective FERC rates were last requested in 2017 when conditions in California were significantly different, before the devastating Thomas and Woolsey fires had occurred and prior to a decision by the CPUC to deny San Diego Gas & Electric (SDG&E) cost recovery for 2007 wildfire liabilities.
With the ever-growing risks associated with potential wildfires and the inverse condemnation with strict liability approach applied to California utilities, SCE, as well as SDG&E, recently have experienced downgrades of their credit ratings by major credit rating agencies, leading to increased costs for obtaining capital. SCE has calculated that it needs a base ROE of 17.12% to continue to maintain and upgrade its transmission infrastructure in order to ensure reliability of Southern California’s power delivery grid while adequately covering the higher risks associated with operating the system.
In addition, SCE is seeking continuation of previously approved incentive adders, including: 0.5% as a member of CAISO; 0.75% for the Rancho Vista Transmission Substation Project; 1.25% for the Tehachapi Renewable Transmission Project; and 1% for the Devers-Colorado River Project.
The company stated in its filing that the requested ROE is reasonable compared to industries with similar risk profiles. In addition to wildfire risks, utility operations in California face higher risks than other states due to public policies associated with climate change, advanced technology requirements and mandates for renewable energy portfolio and battery storage.
The damage caused by recent wildfires in California is unprecedented. The request to increase ROE is considered by the company to be a short-term, unfortunate necessity to ensure that SCE remains able to attract investors until a more comprehensive solution is reached.
“We are encouraged by the urgency Governor Newsom and other policymakers have stated for dealing with this issue, but, in the meantime, we need to do all we can to address the risk of further ratings downgrades and their negative impact on our cost of capital,” said Choi.
About Southern California Edison
An Edison International (NYSE:EIX) company, Southern California Edison is one of the nation’s largest electric utilities, serving a population of approximately 15 million via 5 million customer accounts in a 50,000-square-mile service area within Central, Coastal and Southern California.
Safe Harbor Statement for Investors
Statements contained in this press release about the Thomas Fire, and other statements that do not directly relate to a historical or current fact, are forward-looking statements. In this press release, the words "believes," "continuing to," "predict," "plan," "may," "will," and variations of such words and similar expressions, or discussions of strategy, plans or actions, are intended to identify forward-looking statements. Such statements reflect our current expectations; however, such statements necessarily involve risks and uncertainties. Actual results could differ materially from current expectations. Important factors that could cause different results include the timing and outcome of the investigations and internal review of the Thomas Fire. Other important factors are discussed in Southern California Edison’s Form 10-K and other reports filed with the Securities and Exchange Commission, which are available on our website: edisoninvestor.com.
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