Southern California Edison Files Request with Federal Regulator to Increase Return on Equity Due to Unique Wildfire Risk
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.