By Hudson Sangree

Southern California Edison’s request for a huge transmission rate adjustment based on potential wildfire liability got a tepid reception from FERC on Tuesday (ER19–1553).

The commission tentatively accepted the increase, per its customary procedure, but postponed any change for the maximum five months and set it for an evidentiary hearing, while encouraging the utility and protesters to settle. Protesters in the case include the California Public Utilities Commission, whose recommendations FERC largely followed.

FERC said its preliminary analysis indicated SCE’s proposed 2019 transmission revenue requirement could be unjust and unreasonable — and may provide the utility “substantially excessive revenues.”

SCE is seeking a whopping 17.62% return on equity, which includes the 11.12% base ROE the utility requested last year plus a 50 basis point incentive adder for CAISO participation, along with an additional 600 basis point cushion to account for the costs of wildfire liability. If approved, the new rate would boost SCE’s annual transmission revenues by nearly $290 million.

SCE said in its April 11 filing its proposal was based on “dramatic material changes to SCE’s regulatory and financial conditions that have occurred” since the utility filed its currently effective formula rate in October 2017.

Those changes include massive and deadly wildfires in SCE’s service area and the potential for multi-billion-dollar costs based on California’s strict liability standard for utility-sparked fires, known as inverse condemnation. (PG&E, which intervened in the case, faces similar circumstances and filed for bankruptcy in January due to wildfire liability.)

“Beginning in December 2017, several wind-driven wildfires impacted portions of SCE’s service territory and caused substantial damage to both residential and business properties and service outages for some of SCE’s customers,” SCE wrote. “California has unique inverse condemnation laws. These laws provide that an electric utility will be held strictly liable for property damages and legal fees if its facilities are the substantial cause of a fire regardless of fault and even if the utility was fully compliant with all applicable rules and regulations and acted reasonably.”

“As a result of these laws and recent fires, SCE is exposed to significant potential wildfire damage claims,” the utility said. “In 2017, the California Public Utilities Commission (‘CPUC’) issued a decision holding that it could preclude a utility from recovering these court-assigned costs if it finds the utility was not prudent, even if the source of the alleged imprudent conduct was not directly the cause of the fire.”

FERC, which has oversight of SCE as a transmission owner, and the CPUC, which regulates the utility’s distribution system, have different standards for cost recovery, SCE pointed out. The difference could be a costly one.

‘Atypical’ Risk

State investigators determined SCE equipment started the 282,000-acre Thomas Fire in December 2017 that killed two people and led to mudslides that killed 21 more in Ventura and Santa Barbara counties. The California Department of Forestry and Fire Protection (Cal Fire) has listed the official cause as “line slap,” whereby electrical conductors contact each other or adjacent components. (See Edison Takes Partial Blame for Wildfire in Earnings Call.)

The Woolsey Fire in November 2018 killed three residents, destroyed 1,500 structures and burned 97,000 acres in Los Angeles and Ventura Counties. Its cause remains under investigation, though lawsuits have blamed SCE. The fire began near an SCE substation where a nearby circuit experienced problems shortly before the fire started, the Los Angeles Times reported.

In its filing with FERC, SCE argued its conventional base ROE does not reflect “extraordinary wildfire liability risks.” The utility submitted testimony concluding an ROE allowance of 600 basis points added to its base ROE would match the size and insurance cost of the wildfire problem.

“SoCal Edison states that authorizing such an amount on top of the base ROE would provide additional investor returns needed to account for the severe wildfire risk SoCal Edison faces,” FERC wrote.

In its protest to FERC, the CPUC called SCE’s proposed increase “extraordinary” and noted SCE’s request “touches upon similar issues in proceedings pending before the CPUC.”

“SCE’s filing would result in a retail revenue requirement of $1.328 billion, compared to the current revenue requirement of $1.038 billion,” the CPUC wrote. “SCE’s proposed rate increase is primarily tied to a proposed return on common equity (‘ROE’) of 18.4%, an unprecedented proposal which would create a windfall to SCE investors, at an unacceptable cost to SCE’s captive customers, in violation of the Federal Power Act. This proposed formula will result in unjust and unreasonable rates in 2019 and beyond and should be rejected.”

The CPUC said it calculated the higher rate based on an ROE of 17.12%, a 50 basis point incentive adder for membership in the CAISO and project-specific adders ranging from 75-125 basis points.

“The enormous increase in the rate of return request is due primarily to a 600 basis point adder ascribed to the legal issue in California of ‘inverse condemnation’ and the wildfire liability risk it imposes on California utilities,” the California regulator said. “The CPUC does not object to SCE raising this issue, but it does object to the magnitude of the proposed risk premiums, which stems from SCE’s departure from accepted cost of capital methods used to develop that estimate.”

“The wildfire liability issues in California, including state law on inverse condemnation, are complex and do create atypical utility risk,” the CPUC wrote. “It may be the case that a reasonable treatment of this risk as part of rate of return should be considered. That said, the proposed 600 basis point adder is unreasonably large, violates the upper end of the zone of reasonableness (for an electric utility proxy group, which is FERC practice) and is not consistent with the available financial metrics for SCE and its parent Edison International.”

The CPUC said SCE had overstated its risk. Though its credit rating fell due to fire liability, it remains in investment-grade territory, and its stock price has been relatively stable, the CPUC contended. “The presently observed risk indicators for SCE are not as dire as portrayed by company witnesses,” it said.

‘Utility Imprudence’

Protesters Public Citizen and The Utility Reform Network, both nonprofit public interest groups, advanced similar arguments.

“SCE misrepresents the liability regime in California, and the utility is not at risk for wildfire liability absent a finding that it was imprudent in managing its system [under the prudent manager standard],” they said. “FERC should not condone utility imprudence by insuring the company against its own negligence. Moreover, SCE has raised these very same issues in its recently filed cost of capital proceeding at the California Public Utilities Commission.”

“Since any alleged financial risk due to wildfires depends on California-specific factors and policies, and any such risk is caused primarily by ignitions on the distribution system, this commission should refuse to rule on such issues or authorize increases in ROEs for transmission investments and instead should allow the California PUC to evaluate these claims,” the groups argued.

FERC said it hopes the parties will settle prior to a hearing.

“While we are setting this matter for a trial-type evidentiary hearing, we encourage the parties to make every effort to settle their dispute before hearing procedures are commenced,” FERC wrote. “To aid the parties in their settlement efforts, we will hold the hearing in abeyance and direct that a settlement judge be appointed.”