Southern California Edison Seeks to Add Wildfire Risk Component in Cost of Capital Filing With California Public Utilities Commission
Southern California Edison today asked the California Public Utilities Commission (CPUC) to include a wildfire risk component in setting the company’s authorized cost of capital for utility operations for the three-year period starting in 2020.
In its application, SCE is seeking a return on common equity (“Base ROE”) of 10.6% for 2020, compared to its current Base ROE of 10.3%. This level of return reflects capital needs for safe, reliable day-to-day operations and investments the company is making to help achieve California’s ambitious clean energy goals.
In addition to the Base ROE, SCE is seeking an additional ROE of 6% to compensate investors for the higher risks associated with uncertain state policies for utility cost recovery and liability resulting from California’s devastating wildfires (“Wildfire Risk ROE”). SCE will seek to reduce or remove this Wildfire Risk ROE in the future if there is a material reduction in its wildfire risk due to regulatory or legislative reform.
Today’s state filing is consistent with an April 11 filing SCE made with the Federal Energy Regulatory Commission (FERC) asking that agency to include a wildfire risk adjustment in its authorized return on equity for the 20% of SCE’s rate base regulated by FERC.
At the time of the FERC filing and again today, the company emphasized that it does not view the inclusion of wildfire-related adjustments in these proceedings to be a long-term solution to the urgent situation utilities in California are facing, but a near-term necessity in order to attract the capital needed to provide safe, reliable electricity.
All investor-owned utilities in California are required to file an application with the CPUC every three years as part of the cost of capital proceeding. The CPUC process includes opportunities for public input; following a period of hearings and testimony, a final decision from the CPUC is anticipated by year’s end.
The CPUC is charged with setting the authorized cost of capital at a level that is adequate to attract investor capital to provide up-front funding for needed infrastructure and equipment. In practice, this level is determined by comparing market returns on investments for other companies with similar levels of risk; however, SCE recently has experienced downgrades of its credit ratings by major rating agencies as a result of the growing risk of wildfires and California’s current legal and regulatory framework. These downgrades have led to increased costs for obtaining capital.