2015 General Rate Case

Transcription

1 Application No.: Exhibit No.: SCE-0, Vol. Witnesses: E. Jennerson R. Ramos J. Smolk R. Swartz (U -E) 01 General Rate Case Financial, Legal, and Operational Services (FL&OS) Volume - Legal (Law, Claims, and Workers Compensation) Before the Public Utilities Commission of the State of California Rosemead, California November 01

2 SUMMARY Financial, Legal, and Operational Services (FL&OS) Volume Legal (Law, Claims, and Workers Compensation) is composed of the following four chapters: Chapter I Introduction Chapter II Law Chapter III Claims Chapter IV Workers Compensation Chapter I provides a brief overview of the volume. Chapter II discusses the request from Law, including the Corporate Governance Division, for $. million for Test Year 01 expenses, a decrease of $1. million over the 01 spending levels (in 01 dollars). The decrease is primarily the result of the savings from the implementation of the Corporate Operational and Service Excellence Initiative. Chapter III discusses the request from Claims for $. million for Test Year 01 expenses, an increase of $. million over the 01 spending levels (in 01 dollars). The increase is primarily the result of an average of historical claims reserve costs used in the expense forecast, which is more representative of future expenses. Test Year 01 costs are also reflective of $0. million in additional costs needed to retain physical evidence related to incidents under investigation by Commission staff. Chapter IV presents a request from the Workers Compensation Division for $1. million for Test Year 01 expenses, a decrease of $0. million over the 01 spending levels (in 01 dollars). The decrease is primarily the result of the savings from the implementation of the Corporate Operational and Service Excellence Initiative.

3 SCE-0: Financial, Legal, and Operational Services Volume Legal (Law, Claims, and Workers Compensation) Table Of Contents Section Page Witness I. INTRODUCTION...1 II. LAW... A. Summary of Test Year Request... E. Jennerson B. Overview of Law Department Services Provided... R. Swartz C. Corporate Operational and Service Excellence Initiative (OpX)... D. In-House Legal Resources (FERC Accounts 0, 1) Summary of Activities... a) Legal Practice Groups Relating to Transmission and Wholesale Markets; Real Properties, Local Governmental Affairs, and Licensing; Environmental and Licensing... b) Legal Practice Groups Relating to Commercial Litigation; Claims and General Litigation; Generation Policy and Resources... c) Legal Practice Groups Relating to Contracts and Intellectual Property; Base Rates and Grid Support; Corporate Governance, Executive Compensation, and Finance... d) Legal Practice Groups Relating to Labor and Employment; Customer and Tariff; Power Procurement; and Resource Policy and Planning... e) Support Staff... (1) Paralegals... () Administrative Personnel... () Corporate Governance Personnel... () Other Support Staff... -i-

4 SCE-0: Financial, Legal, and Operational Services Volume Legal (Law, Claims, and Workers Compensation) Table Of Contents (Continued) Section Page Witness. Comparison of In-House Attorney and Outside Counsel Expenses.... Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for In- House Legal Resources and Corporate Governance (FERC Accounts 0, 1)...1 E. Jennerson a) Recorded Costs...1 b) Staffing Forecast...1 c) Expense Forecast...1 E. Outside Counsel (FERC Accounts,, ) Summary of Activities...1 R. Swartz. Oversight and Monitoring of Outside Counsel Expenses...1. Efforts to Contain Outside Counsel Costs...1. The Average Outside Counsel Rates Paid by the Law Department Are Below the Market Rate Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for Outside Counsel (FERC Accounts,, )...1 F. Corporate Governance - Miscellaneous Expenses (FERC Accounts 0)...1 E. Jennerson R. Swartz 1. Summary of Activities...1. Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for Corporate Governance (FERC Account 0)...1 E. Jennerson. Director Compensation...0 R. Swartz III. CLAIMS... R. Ramos -ii-

5 SCE-0: Financial, Legal, and Operational Services Volume Legal (Law, Claims, and Workers Compensation) Table Of Contents (Continued) Section Page Witness A. Summary of Test Year Request... B. Overview of Claims Department Structure and Services Provided... C. Evidence Storage Facility... D. Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for Claims... R. Ramos/ E. Jennerson 1. FERC Accounts 0, 1, and (Administrative, Salaries, Non-Labor Costs, Property Insurance)... a) Recorded Expenses... b) Expense Forecast.... FERC Account (Injuries and Damages Claims Reserves)... a) Recorded Expenses... b) Expense Forecast... IV. WORKERS' COMPENSATION...0 J. Smolk A. Summary of Test Year Request...0 B. Overview SCE s Workers Compensation Program...0 C. Legislative and SCE Program Developments Affecting Workers Compensation Costs Benefit Increases.... Cost Containment Programs... D. Workers Compensation Staff (FERC Account ) Summary of Activities... -iii-

6 SCE-0: Financial, Legal, and Operational Services Volume Legal (Law, Claims, and Workers Compensation) Table Of Contents (Continued) Section Page Witness. Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for Workers Compensation Staff (FERC Account )... J. Smolk/ E. Jennerson a) Analysis of Recorded Costs... b) Expense Forecast... E. Injuries and Damages Reserve Expenses (FERC Account ) Summary.... Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for Reserves (FERC Account )...0 J. Smolk/ E. Jennerson a) Recorded Data...0 b) Expense Forecast...1 Appendix A Witness Qualifications... -iv-

7 SCE-0: Financial, Legal, and Operational Services Volume Legal (Law, Claims, and Workers Compensation) List Of Figures Figure Page Figure II-1 Law Department (Including Corporate Governance) Recorded and Adjusted 00-01/Forecast FERC Accts. 0/1////0 (Constant 01 $000)... Figure II- In-House Legal Resources(FERC Accts 0/1) Vs. Outside Counsel Costs (FERC Accts //) Recorded And Adjusted 00-01/Forecast (Constant 01 $000)... Figure II- Law Department (In-House Legal Resources and Corporate Governance) Recorded And Adjusted 00-01/Forecast FERC Accts. 0/1 (Constant 01 $000)...1 Figure II- Rates Compared To Real Rate Report...1 Figure II- Law Department (Outside Counsel) Recorded And Adjusted 00-01/Forecast FERC Accts. // (Constant 01 $000)...1 Figure II- Corporate Governance - Miscellaneous Recorded And Adjusted 00-01/Forecast FERC Acct. 0 (Constant 01 $000)...1 Figure III- Claims (Including Claims Reserves) Recorded And Adjusted 00-01/Forecast FERC Accts. 0/1// (Constant 01 $000)... Figure III- Administrative and General Claims Recorded And Adjusted 00-01/Forecast FERC Accts. 0/1/ (Constant 01 $000)... Figure III- Injuries And Damages Claims Reserves Recorded And Adjusted 00-01/Forecast FERC Acct (Constant 01 $000)... Figure IV- Workers Compensation (Including Workers Compensation Reserves) Recorded And Adjusted 00-01/Forecast FERC Acct (Constant 01 $000)...0 Figure IV- Workers Compensation Recorded And Adjusted 00-01/Forecast FERC Acct (Staff) (Constant 01 $000)... Figure IV-1 Injuries And Damages (Workers Compensation Reserves) Recorded And Adjusted 00-01/Forecast FERC Acct (Constant 01 $000)...0 -v-

8 SCE-0: Financial, Legal, and Operational Services Volume Legal (Law, Claims, and Workers Compensation) List Of Tables Table Page Table I-1 SCE s Legal Operating Unit...1 Table I- Summary of Costs for Legal Operating Unit Recorded and Adjusted 00-01/Forecast (Constant 01 $000)...1 Table II- Director Compensation: Table II- Comparison of Annualized Director Compensation... Table IV- Workers Compensation Medical Bill Audit Savings... -vi-

9 I. INTRODUCTION This exhibit presents Southern California Edison Company s (SCE) Test Year 01 estimates for Administrative & General (A&G) expenses associated with the Legal Operating Unit. Expenses incurred within the Legal Operating Unit are recorded to the Federal Energy Regulatory Commission s (FERC s) Uniform System of Accounts shown next to each department in Table I-1 below. Table I-1 SCE s Legal Operating Unit SCE Department FERC Account(s) 1. Law 0, 1,,,, 0. Claims 0, 1,,. Workers' Compensation The following Table I- summarizes the recorded costs for years and the forecast for for these departments. Table I- Summary of Costs for Legal Operating Unit Recorded and Adjusted 00-01/Forecast (Constant 01 $000) 1

10 II. LAW A. Summary of Test Year Request For Test Year 01, SCE s Law Department (including Corporate Governance) forecasts A&G expenses of $. million. Figure II-1 below shows the recorded costs for the years 00-01, plus forecast costs for the years Figure II-1 Law Department (Including Corporate Governance) Recorded and Adjusted 00-01/Forecast FERC Accts. 0/1////0 (Constant 01 $000) B. Overview of Law Department Services Provided SCE s Law Department continues to serve SCE s operations primarily by: Advising SCE s management on compliance with applicable laws and regulations, such as regulatory, environmental, and labor requirements;

11 Providing legal advice on contracts and other transactions SCE enters into in order to provide electrical service; and Representing SCE before courts and regulatory agencies on matters related to SCE s provision of electric service and associated business activities. SCE relies on both in-house and outside counsel to provide legal services. Section C below describes the Corporate Operational and Service Excellence Initiative and its implementation in the Law Department. Section D describes in-house activities, which are associated with expenses recorded in FERC Accounts 0 and 1 relating to SCE s in-house attorneys, associated legal staff, and Corporate Governance support staff. Section E describes SCE s use of outside counsel, which is associated with expenses recorded in FERC Accounts,, and. Section F describes the Corporate Governance functions and associated expenses recorded in FERC Account 0 that relate to the Annual Shareholder Meeting, Securities and Exchange Commission (SEC) corporate filings, and non-employee Directors fees and expenses. To provide continued cost-effective legal services, SCE s Law Department controls overall legal expenses largely by: Handling legal matters in-house versus retaining outside counsel as appropriate. 1 Leveraging legal staff (e.g., paralegals and legal administrative assistants) by maintaining an appropriate ratio of support staff to attorneys. Selecting cost-effective outside counsel when needed and closely managing the work of outside counsel. The Law Department closely monitors outside counsel costs to verify that SCE is receiving requisite value from the services being rendered. SCE also considers all reasonable means of avoiding lengthy litigation through Alternative Dispute Resolution, as appropriate. In addition, in-house attorneys receive mandatory continuing legal education and other programs offered both within SCE and through outside programs. The Law Department s Training Committee typically offers enough continuing legal education programs throughout the year so that in-house attorneys may meet the California Bar s continuing legal education requirement without the Company incurring the expense of 1 See Section D infra. Id. See Section E infra.

12 outside training programs. Attorneys, however, may request to participate in outside training courses specifically tailored to their areas of practice if the Training Committee has not provided a similar program. SCE s in-house legal training enhances the skill-set and expertise of the Law Department s attorneys and, consequently, increases the value of the legal services provided to SCE. C. Corporate Operational and Service Excellence Initiative (OpX) The Law Department is engaged in SCE s Corporate Operational and Service Excellence Initiative (OpX) launched in 01. The objective of the OpX initiative is to provide increased efficiencies through the centralization of common functions, particularly in the technology and finance area. As part of the OpX initiative, the Law Department, along with other operating units within SCE, identified several avenues to operate more efficiently and, thereby, reduce costs. The Law Department s OpX efforts during 01 and 01 included the following: (1) the centralization of certain financialrelated tasks from the Law Department to Financial & Operational Services; () the consolidation of various management responsibilities; and () staff reductions. The Law Department s commitment to the OpX initiative led to the elimination of four management positions and nine staff positions, all of which occurred through normal attrition, a severance program, or a reduction-in-force. D. In-House Legal Resources (FERC Accounts 0, 1) 1. Summary of Activities SCE s Law Department relies primarily on in-house resources for the majority of SCE s legal matters. The in-house resources consist of attorneys and staff (paralegals, case administration, miscellaneous legal administrative, and corporate governance support). The utilization of in-house counsel is advantageous for a number of reasons. First, our in-house attorneys have developed an extensive knowledge of SCE s policies and operations, and maintain a close and effective working relationship with other SCE organizations. This knowledge base allows the attorneys to provide assistance on a wide-range of assignments required for SCE s business operations. Also, the Company s business representatives have more direct access to the Law Department s attorneys than would typically be the case with outside counsel, which promotes timely legal advice and aids the Law Department in avoiding expensive and time-consuming litigation. Furthermore, SCE s in-house attorneys provide cost-effective legal services to the Company. SCE s See workpaper entitled Operational Excellence Savings for additional information concerning OpX adjustments affecting the Law Department.

13 attorneys handle numerous matters simultaneously, especially when in the litigation sections, whereas hiring outside counsel to handle each matter would be costly to the Company. The Law Department is led by a Senior Vice President and General Counsel, and supported by four Assistant/Associate General Counsels responsible for various practice areas (including regulatory, litigation, labor, and transactions, among others). In-house attorneys are generally assigned to one of four practice groups (see sections (a)-(d) below), enabling them to develop considerable expertise in fields that are of particular importance to SCE. In-house attorneys, however, are also encouraged to work on projects in different practice areas to broaden their understanding of other legal issues affecting SCE. For example, some of the attorneys whose normal assignments involve litigation or transactions are occasionally assigned to regulatory projects. a) Legal Practice Groups Relating to Transmission and Wholesale Markets; Real Properties, Local Governmental Affairs, and Licensing; Environmental and Licensing As of year-end 01, approximately 1 percent of the attorneys in the Law Department were assigned to the following practice areas: (1) Transmission and Wholesale Market; () Licensing and Environmental Law; and () Real Properties, Local Governmental Affairs, & Licensing. The Transmission and Wholesale Markets Section handles a variety of matters before the CPUC, FERC, the California Independent System Operator (CAISO), and appellate courts. This Section handles issues related to the transmission of electricity and its sale in wholesale markets. Additionally, this Section is responsible for the implementation of, and continuing compliance with, the FERC Standards of Conduct. Before the CPUC, this Section may be involved in matters affecting transmission-related investigations and rulemakings, and related policies. The Transmission and Wholesale Market Section also handles legal issues relating to interconnection requests by the developers of various generation projects. The Real Properties, Local Government Affairs, and Licensing Section provides legal support for negotiation and management of SCE s real property assets, and advises SCE on the acquisition and interpretation of property rights for a variety of projects, such as easements for See workpaper entitled Law Department Attorney Section Responsibilities for a comprehensive and more complete description of the areas of law handled by these sections.

14 transmission and distribution lines, the construction of new substations, and the leasing of rights-of-way for secondary uses (such as plant nurseries and trailer-truck parking). This Section also provides legal support for the negotiation and interpretation of municipal franchises and other local government ordinances, such as those relating to utility users and business license taxes. The Environmental and Licensing Section advises SCE on legal issues related to licensing, the environment, and safety. For example, this Section evaluates environmental assessment documents prepared for each transmission or distribution project. The Environmental and Licensing Section also provides guidance on environmental and safety compliance, and enforcement matters related to SCE s operations. Additionally, this Section handles applications for licensing/re-licensing of hydroelectric facilities. b) Legal Practice Groups Relating to Commercial Litigation; Claims and General Litigation; Generation Policy and Resources As of year-end 01, approximately percent of the attorneys in the Law Department were assigned to the following practice areas: (1) Commercial Litigation; () Claims and General Litigation; and () Generation Policy & Resources. The Commercial Litigation Section is primarily responsible for representing SCE in disputes arising out of contracts and other commercial arrangements. This Section also has primary responsibility for handling business-related civil claims such as claims under the Unfair Business Practices Act. In addition, this Section provides pre-litigation advice to SCE operating units including Power Procurement and Customer Service. The Commercial Litigation Section s attorneys also have primary responsibility for representing SCE or managing outside counsel in cases where the foregoing types of disputes have proceeded to litigation. The Claims and General Litigation Section is primarily responsible for the prosecution and defense of various types of civil actions, such as eminent domain proceedings, customer bankruptcy matters, and cases seeking damages for personal injury, wrongful death, and property damage. In addition to handling their own matters, this Section s attorneys also closely manage outside counsel in the foregoing types of cases, and often provide pre-litigation advice to SCE s operating units. See workpaper entitled Law Department Attorney Section Responsibilities for a comprehensive and more complete description of the areas of law handled by these sections.

15 The Generation Policy and Resources Section provides support for ratemaking, regulatory policy, and contract issues for SCE s own solar, natural gas, coal, and nuclear generation facilities. This Section provides support for regulatory policy and contract issues concerning fuel use for gas-fired, coal-fired, and nuclear generation facilities. It also handles various matters related to the San Onofre Nuclear Generating Station (SONGS). Finally, the Generation Policy and Resources Section represents SCE in matters before the CPUC, FERC, and NRC. c) Legal Practice Groups Relating to Contracts and Intellectual Property; Base Rates and Grid Support; Corporate Governance, Executive Compensation, and Finance As of year-end 01, approximately 1 percent of the attorneys in the Law Department were assigned to the following practice areas: (1) Contracts and Intellectual Property; () Base Rates and Grid Support; and () Corporate Governance, Executive Compensation, and Finance. The Contracts and Intellectual Property Section provides substantial legal advice and transactional support in connection with negotiating and drafting a wide range of contracts and other commercial documents for the procurement of materials and services necessary to operate and maintain SCE s facilities and infrastructure. This Section also provides legal advice and support to SCE operating units in connection with the development, ownership, and protection of intellectual property such as patents and copyrights. The Base Rates and Grid Support Section gives legal advice and support for a variety of ratemaking and quasi-legislative proceedings before the CPUC, including the general rate case proceeding, cost of capital applications, and various CPUC rulemakings and investigations relating to SCE s electric distribution system. The Section also handles water and gas rate proceedings before the CPUC for SCE's Santa Catalina Island operations and also provides legal counsel and support on telecommunications regulation. The Corporate Governance, Executive Compensation, and Finance Section provides legal support to Edison International (EIX) and SCE on corporate governance and finance matters, such as corporate disclosures and other federal and state securities law requirements, including See workpaper entitled Law Department Attorney Section Responsibilities for a comprehensive and more complete description of the areas of law handled by these sections.

16 Securities and Exchange Commission reports, FERC interlocking director and officer filings, and unclaimed property reporting. This Section also provides legal advice and support related to the Board of Directors and shareholders meetings. Additionally, this Section provides executive compensation support. d) Legal Practice Groups Relating to Labor and Employment; Customer and Tariff; Power Procurement; and Resource Policy and Planning As of year-end 01, approximately percent of the attorneys in the Law Department were assigned to the following practice areas: (1) Labor and Employment; () Customer and Tariff; () Power Procurement; and () Resource Policy and Planning. The Labor and Employment Section provides legal support to SCE s business representatives on matters related to human resources, manages employee-related litigation, and advises on SCE s employee benefit plans. This Section handles litigation in both state and federal courts, defends SCE against unfair labor practice charges before the National Labor Relations Board, and represents SCE in labor arbitrations under SCE s collective bargaining agreements. In addition, this Section provides legal advice to SCE s Human Resources Operating Unit on numerous issues ranging from labor negotiations to employee benefits and programs. The Customer and Tariff Section provides legal support to various SCE operating units including Regulatory Policy and Affairs, Customer Service, and Transmission and Distribution. Customer and Tariff attorneys advise on various issues including metering and billing, tariff interpretation and municipalization, and cost responsibility surcharges, and line and service surcharges. Additionally, this Section is responsible for legal issues associated with SCE s energy efficiency and low income customer programs. The Power Procurement Section provides transactional legal support and advice related to SCE s procurement of electric power, natural gas products, and related financial hedge products. For example, this Section provides advice regarding the structuring and implementation of Requests for Offers (RFOs), including the drafting of pro forma procurement contracts and nondisclosure agreements. The Power Procurement Section also handles the drafting of agreements related See workpaper entitled Law Department Attorney Section Responsibilities for a comprehensive and more complete description of the areas of law handled by these sections.

17 to trading of power products such as broker agreements. In addition, this Section advises SCE on issues related to the administration of existing contracts. The Resource Policy and Planning Section provides legal support to SCE regarding recovery of its energy costs, SCE s resource planning activities, new generation contract approval, renewable portfolio standard regulatory review and compliance, and qualifying facilities regulation. For example, this Section assists in handling the Commission s long-term procurement plan proceeding (R.-0-00), which is an umbrella proceeding to integrate and refine the Commission s procurement policies. This Section assists SCE in various regulatory proceedings relating to State and/or CPUC initiatives pertaining to renewable resources programs, qualifying facilities contracts, and distributed generation. e) Support Staff SCE s Law Department has a staff of paralegals, administrative and operational personnel, and technical analysts, who support the Sections described above. (1) Paralegals Paralegals perform substantial legal work under the direction of attorneys. Tasks performed by paralegals include the following: (1) planning and managing certain, generally smaller, litigation matters; () researching factual issues; () conducting witness interviews; () drafting and analyzing documents; and () representing SCE at administrative hearings when permitted by the agency. Paralegals contribute to the Law Department s objectives by performing tasks that do not require the specialized education and training of attorneys, which enables attorneys to focus on more complex legal research, writing, analysis, and counseling. () Administrative Personnel Administrative and operational personnel perform various tasks including the following: (1) maintaining master case schedules and service lists for regulatory proceedings; () assisting with the submission of data request responses; () coordinating the filing and service of pleadings; () monitoring the CPUC s calendar; () posting documents to SCE.com; () processing and distributing incoming case documents; () producing legal and regulatory workpapers; () maintaining data requests and other case files; and () supporting attorneys at regulatory hearings by providing timely access to appropriate documents. They also support attorneys and paralegals as follows: coordinating correspondence between the attorneys/paralegals they assist on the one hand, and business

18 representatives, outside counsel, and opposing counsel on the other hand; maintaining and organizing case files; preparing filings; updating case calendars; and managing travel arrangements when needed. On average, SCE employs one legal administrative assistant for approximately every three-and-a-half attorneys/paralegals, including contract attorneys. The assignment of legal administrative assistants is based on the workload of the attorneys and paralegals in each section. For example, legal administrative assistants in less document-intensive sections may support four attorneys/paralegals, while others assigned to high-volume document sections, such as litigation, may support two attorneys/paralegals. () Corporate Governance Personnel Corporate Governance personnel support the attorneys within the Corporate Governance Section, including the Corporate Secretary and Chief Governance Officer, in complying with corporate and securities laws and certain other regulatory filing requirements. For example, corporate governance personnel assist with filing annual and periodic reports, proxy statements, securities registration statements, reports of executive and director stock transactions, listing applications, FERC interlocking director and officer reports, and annual state corporate filings. In addition to regulatory and administrative filings, the Corporate Governance personnel keep the minutes of meetings of the shareholders, the EIX and SCE Boards of Directors (the Boards) and Board committees. Moreover, the Corporate Governance personnel support the Boards and the Board committees actions. () Other Support Staff The Law Department s remaining staff includes electronic and file room personnel, process support personnel, and analysts. These employees provide support related to the following areas: file room; electronic file system; law library; invoice processing and reporting functions; variance analysis; purchase order support; supply order processing; in-house training and development; systems development and deployment; and other operational activities that enable the Law Department to provide legal services efficiently. The EIX and SCE Boards and Board committees usually hold joint meetings.

19 . Comparison of In-House Attorney and Outside Counsel Expenses As shown in Figure II- below, the number of attorneys in SCE s Law Department has increased from 1 in 00 to in 01, and is expected to remain at this level through Test Year 01. Figure II- In-House Legal Resources(FERC Accts 0/1) Vs. Outside Counsel Costs (FERC Accts //) Recorded And Adjusted 00-01/Forecast (Constant 01 $000)

20 . Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for In-House Legal Resources and Corporate Governance (FERC Accounts 0, 1) Figure II- Law Department (In-House Legal Resources and Corporate Governance) Recorded And Adjusted 00-01/Forecast FERC Accts. 0/1 (Constant 01 $000) 1 a) Recorded Costs SCE records the salaries and related expenses of the Law Department s attorneys and staff (including Corporate Governance support staff) to FERC Account 0 (Administrative and General Salaries) and FERC Account 1 (Office Supplies and Expenses), as shown in Figure II- above. Labor expenses remained relatively stable during 00-01, increasing annually at a compound average rate of 1.0 percent. Non-labor expenses increased annually at a compound average rate of. percent, which was mainly the result of higher expenses in the areas of graphic productions, office equipment, law library subscriptions, and software licensing fees. 1

21 b) Staffing Forecast For Test Year 01, SCE anticipates the staffing level of attorneys to remain at the 01 levels, while remaining staff will be reduced by 1 positions as a result of the OpX initiative. c) Expense Forecast The Law Department s Test Year 01 forecast for in-house legal services is $0. million, of which $. million is labor, and $. million is non-labor. The basis of the 01 labor and non-labor forecasts were 01 recorded expenses, adjusted for projected future-year reductions in personnel resulting from the OpX initiative. Overall, our 01 forecast is $1.1 million below 01 recorded levels. E. Outside Counsel (FERC Accounts,, ) 1. Summary of Activities The Law Department s outside counsel costs are recorded in FERC Accounts,, and. SCE retains outside counsel on an as-needed basis to handle certain matters requiring specific expertise, or when cases require additional resources. For example, SCE uses outside counsel to handle out-of-state bankruptcy proceedings and specialized employee benefits and labor issues.. Oversight and Monitoring of Outside Counsel Expenses The Law Department has established practices and protocols to ensure that outside counsel costs remain reasonable. First, retaining outside counsel on new matters requires the approval of an Assistant/Associate General Counsel or the General Counsel. Importantly, retaining a firm that SCE has not previously used requires the express approval of the General Counsel. Second, once a law firm has been retained, the Law Department follows a careful, detailed process to control outside counsel billings, which is specified in the Outside Counsel Guide (the Guide ) and provided to each retained firm. The Guide identifies SCE s prescribed billing procedures and related principles that outside counsel are expected to follow in performing legal services for the Company, and: Emphasizes the importance of the budgeting process as a tool for managing outside counsel costs from the point of engagement through the conclusion of the specific matter; Sets forth SCE s expectations that outside counsel work closely and communicate with the Law Department s attorneys; 1

22 Describes SCE s policy for payment of expenses when an outside attorney s rate increases, or a new attorney is added to a matter; Outlines SCE s policy and billing requirements pertaining to the use of consultants and experts by outside counsel on SCE matters; Identifies the types of costs that SCE will reimburse; Places restrictions on reimbursements for travel costs, copying costs, and other disbursements; Encourages outside counsel to be cost-sensitive with respect to travel and to take advantage of opportunities to reduce travel-related expenses whenever possible; and States SCE s requirements for submission and payment of invoices. Third, the Law Department has an Outside Counsel Committee comprised of several in-house attorneys who review the department s policies as they relate to outside counsel, periodically update the Guide, annually review the performance of outside counsel through written evaluations, and serve as an interface between outside counsel and Law Department management. Finally, SCE strongly encourages and solicits the use of alternative billing methods by outside counsel so that the time and fees incurred on a matter are consistent with the Law Department s determination of the matter s size, significance, and desired result. These methods include discounted hourly/volume rates, blended hourly rates for associates and partners, phased budgeting, fixed fees, incentive billing, and modified contingency arrangements.. Efforts to Contain Outside Counsel Costs As of 01, the Law Department has continued certain outside cost containment measures and implemented some additional measures pertaining to the engagement of outside counsel. First, to the extent feasible, SCE continues to endeavor to retain Diverse Business Enterprise firms (DBE firms) to perform legal work, or provide legal support resources. Such firms generally have lower billing rates than larger firms. Recently, the Law Department has expanded the types of matters assigned to DBE firms. For example, in 01 the Law Department retained a DBE firm to defend SCE in a wage and hour class action potentially involving over 00 class members. 1

23 Next, the Law Department has designated seven outside firms as strategic partner firms to assist with specialized or core areas of the Company s legal needs. SCE s fee arrangements with these seven strategic partner firms specify discounts from the firms normal base rates. By leveraging these firms, the Law Department ensures that it is paying reasonable, below-market rates while still receiving quality legal services. Finally, beginning with services provided in 01, the Law Department modified its arrangement with its strategic partner firms to include the potential for a completely discretionary bonus that, unlike in prior years, will not be viewed as representing the disposition of a holdback from discounted rates. Under the new arrangement, a firm is only eligible for a bonus if it provides an extraordinary work product that exceeds SCE s already high expectation of excellence from its strategic partner firms. Since the Law Department s fee arrangements with the seven strategic partner firms only provide a discretionary bonus that will generally not compensate for the amount of the discount from standard rates, SCE believes it is paying below market rates for the bulk of its legal services provided by outside counsel. Importantly, matters with outside counsel fees in excess of $0,000 annually, are evaluated individually by the Outside Counsel Committee, and all completed evaluations and recommended bonuses, if any, are presented to the Company s General Counsel for final approval.. The Average Outside Counsel Rates Paid by the Law Department Are Below the Market Rate. Even prior to initiating new practices regarding bonuses for strategic partner firms, SCE s Law Department consistently paid rates at an average level lower than the legal market in Los Angeles. Figure II- below compares the average outside counsel rates paid by SCE s Law Department to the market rates for the Los Angeles area. 1 The data includes the rates for partners and associates at all firms (not only strategic partner firms) that provided legal services to the Law Department each year with the exception of outside counsel handling workers compensation matters. The rates stated in the chart incorporate the hourly blended rate, representing both partner and associate rates, and any bonus An eighth strategic partner firm was added in 01. Other factors reviewed in considering whether and to what extent to award a discretionary bonus include adherence to budgets and commitment to diversity. 1 The Real Rate Report is published by Corporate Executive Board and TyMetrix. 1

24 payments for the given year. The analysis demonstrates that the average of all rates paid by SCE (with bonuses included) is lower than the market rate for each year sampled. Figure II- Rates Compared To Real Rate Report 0 0 $0 $ $ $ Rate ($) $0.% Below Market $.% Below Market $.1% Below Market $.% Below Market (1st Qtr) Real Rate Report Edison 1. Real Rate Report rate is weighted average of partner and associate rates for Los Angeles rates adjusted to add back actual year-end bonuses paid to firms and to remove workers compensation. 01 1Q real rate report rate is estimated; Edison rate adjusted to add estimate of year-end bonuses and remove workers comp Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for Outside Counsel (FERC Accounts,, ) The Law Department records expenses associated with its outside counsel to FERC Account (Outside Services Employed), FERC Account (Injuries and Damages), and FERC Account (Regulatory Commission Expenses). Costs recorded to FERC Account include legal services paid to outside counsel and other litigation expenses associated with both Claims Injuries & Damages and Workers Compensation Claims. FERC Account is used to record outside counsel expenses related to regulatory matters (for both the CPUC and FERC). All other outside counsel expenses are recorded in FERC Account. Figure II- below shows SCE s recorded costs for outside counsel from 00 to 01 and our forecast for 01 to 01. 1

25 Figure II- Law Department (Outside Counsel) Recorded And Adjusted 00-01/Forecast FERC Accts. // (Constant 01 $000) As shown in Figure II- above, outside counsel expenses increased from $1. million in 00 to $.0 million in 01. As indicated in the 01 GRC Testimony, the increase from 00 to 00 was due to additional activity in the following areas: (1) various wildfire matters; () administrative proceedings before the Nuclear Regulatory Commission ( NRC ) regarding SONGS licensing and investigations; () a comprehensive review of SCE s compliance related to Transmission and Wholesale Marketing activities; and () litigation involving a Nevada tax refund. The most prominent increase from 00 to 0 was due to an increase in expenses related to a dispute over termination of secondary land use agreements. The decrease in 0 resulted primarily from reduced activities involving the secondary land use dispute and the SONGS Performance Improvement matters. Outside counsel expenses showed a slight decrease in 01 compared to 0, due to a reduction in active matters from prior years because the matters had been resolved or were close to resolution. For Test Year 01, SCE forecasts $.0 million for outside counsel expenses. This forecast, which is based on 01 recorded expenses, is consistent with D.-1-0 and D.0-0-0, where the CPUC stated that if costs have shown a trend in a certain direction over three or more years or 1

26 have been relatively stable over a period of time, the last year recorded is an appropriate estimate. The recorded outside counsel expenses do show a downward linear trend from 0 through 01. Therefore, the 01 recorded expenses provide an appropriate estimate of outside counsel costs. Although the 01 forecast is based on 01 recorded expenses, outside counsel billing rates are expected to increase between 01 and 01. Historically, the compound annual increase in outside counsel rates from 00 through 01, a period heavily impacted by the 00 economic crisis, was relatively stable at a rate of 1.0 percent per year. SCE anticipates that the recent emergence of an economic recovery will encourage outside counsel to seek annual increases in their rates at levels exceeding those observed in recent periods, a trend observed by SCE in 01. Thus, the use of the Law Department s 01 recorded costs to forecast 01 expenses is conservative insofar as it does not adequately account for the anticipated increase of outside counsel rates in the coming years. F. Corporate Governance - Miscellaneous Expenses (FERC Accounts 0) 1. Summary of Activities Companies that are incorporated in California, such as SCE and EIX, SCE s parent company, are governed by the California Corporations Code, which requires that the business and affairs of the corporation be managed by or under the direction of a board of directors. 1 The EIX and SCE Boards review proposals and reports concerning the following: (1) major capital projects, such as those necessary to maintain the safety and reliability of SCE s transmission and distribution system; () attaining operational efficiencies; and () regulatory and legislative policies and activities on both the state and federal levels. 1 In 01, the Boards met ten times. The Board Committees met as follows: audit (five times), compensation and executive personnel (four times), finance, operations, and safety (four times), and nominating/corporate governance (four times). The Boards also held six executive sessions of the non-employee directors and two executive sessions of the independent directors.. Analysis of Recorded Data, Estimating Methodology, and Test Year 01 Forecast for Corporate Governance (FERC Account 0) Corporate Governance expenses recorded in FERC Account 0 (Miscellaneous General Expenses) include the following: (1) compensation paid to non-employee members of SCE s board of 1 Cal. Corp. Code Notice of 01 Joint EIX and SCE Annual Report. 1

27 directors; () expenses associated with the director and annual shareholder meetings; () expenses for contract services; () Stock Exchange Fees; () Financial Industry Regulatory Authority (FINRA) fees; () other proxy-solicitation fees; and () costs related to SEC filings, the production of director meeting material, and proxy statement printing and mailing. Annual expenses recorded in FERC Account 0 are represented in Figure II- below. The labor component of this account refers to the charges made by SCE employees for their time spent providing assistance with the various activities described above. All other expenses, including directors fees, are classified as non-labor. Figure II- Corporate Governance - Miscellaneous Recorded And Adjusted 00-01/Forecast FERC Acct. 0 (Constant 01 $000) Both labor and non-labor expenses decreased from The decrease in nonlabor expenses reflected reductions in Director Retirement Plan costs, Deferred Compensation, and Stock-Based Compensation. These decreases were partially offset by increases in director fees, Stock Exchange Fees, and proxy statement related expenses. The Corporate Governance Division s Test Year 01 forecast for Account 0 (Corporate Governance and Miscellaneous) is $. million. The division s forecast was calculated based on 01 recorded expenses, and is consistent with D.-1-0 and D.0-0-0, in which the 1

28 CPUC stated that if costs have shown a trend in a certain direction over three or more years or have been relatively stable over a period of time, the last year recorded is an appropriate estimate.. Director Compensation Table II- below is copied from page 1 of the April 01 Notice of Annual Meeting and Joint Proxy Statement issued jointly by EIX and SCE, and states the compensation paid to nonemployee members of the Boards in 01, including stock-based compensation. 1 Table II- Director Compensation: 01 1 SCE acknowledges that its requests for recovery of supplemental benefits and stockbased compensation for non-employee directors have been denied in previous rate cases. Notwithstanding the Commission s prior conclusions on this issue, SCE maintains that supplemental benefits and stock-based compensation for non-employee directors are typical and recurring costs of business operations in California and, for that reason, again seeks recovery for such portion of payment of director compensation. 1 See Edison International and Southern California Edison Company Notice of 01 Annual Meeting and Joint Proxy Statement (Apr., 01) (the Joint Proxy Statement ) at page 1 for additional information concerning this table. The Joint Proxy Statement is available at 0

29 The California Corporations Code requires SCE s business affairs to be overseen by a board of directors. 1 Compensation provided to members of the Boards therefore is required for SCE to function as a corporation, and is a normal cost of business. Moreover, the Board s oversight of SCE s operations benefits the ratepayers. As noted above, the Board reviews, among other things, proposals and reports on major capital projects, including those necessary to maintain the safety and reliability of SCE s transmission and distribution system. In completing these duties, the Boards aim to increase operational efficiencies at SCE to reduce costs, while ensuring the reliable and safe production of energy to SCE s ratepayers. Accordingly, SCE s payment of director compensation serves the Company s overall mission of providing electrical services to its ratepayers, and recovery for such expenses is appropriate. In 01, the directors, other than Dr. Rosser, were granted the following annual equity awards upon re-election to the board: (1),0 shares of EIX common stock or deferred stock units; and () zero EIX non-qualified stock options. 1 The Commission previously approved the recovery of stock options in rates, provided that the total compensation levels for directors are reasonable. For example, in its Southern California Gas Company (SoCal) 1 GRC decision, the Commission stated: SoCal offers high level employees stock options as part of their compensation plans. ORA recommends that the Commission disallow expenses associated with stock options for executives, which ORA believes raises SoCal s long-term incentive levels to 1% above market levels. ORA observes that SCE s and PG&E s stock options programs are funded entirely by shareholders and that the incentives are rewards for financial accomplishments which do not benefit ratepayers. SoCal responds that ORA has improperly isolated a single element of SoCal s total compensation package. SoCal observes that ORA does not dispute that total compensation at SoCal is not above market levels. Isolating stock options expenses would therefore reduce the package of total compensation further. We concur with SoCal that as long as its total compensation levels are appropriate we will not dictate how SoCal distributes compensation among various types of employment benefits. 1 1 Cal. Corp. Code In 01, the compensation changed to: (1) upon initial election to the Board, an award of EIX deferred stock units with an aggregate grant date value of $1,000 on the date of their election; and () upon re-election to the Board, an award of EIX Common Stock or deferred stock units, to be specified in advance by the Director, with an aggregate grant-date value of $1,000. See Joint Proxy Statement at p In re. So. Cal. Gas Co., D.-0-0 (mimeo), p., 1 Cal. PUC LEXIS 1, 1 P.U.R. th. See also D.0-- 0, pp. 1-1, where the Commission allowed dividend equivalent rights (DER) as part of Golden State Water Company s (GSWC) total direct compensation for its executives and ruled that the value of DERs within GSWC s total (Continued) 1

30 1 1 1 Similar to the use of stock options as part of the total compensation package provided by Southern California Gas Company, the total compensation paid to SCE s Board, including the equity awards, is reasonable. Accordingly, SCE s share of the equity awards paid to non-employee directors is warranted pursuant to D Moreover, as demonstrated in analyses conducted by Frederic W. Cook & Co. (Cook), the total compensation level of SCE s Board is reasonable. 1 Cook prepared annual comparisons of the directors total compensation with the following groups: (1) the 0 other utilities listed in the Philadelphia Utility Sector Index (0-utility index); and () companies listed in the Standard & Poor s (S&P) 00 index. To facilitate an apples-to-apples comparison, Cook created a hypothetical director who is a board and committee member, and calculated per-meeting cash compensation as if all companies held the same number of board and committee meetings. Cook calculated equity compensation by annualizing the value to include initial and ongoing grants of options and full-value shares. (Thus, the amounts in the table below are not the actual amounts paid.) Table II- below contains the total and median compensation and rank for the utility and S&P 00 groups for 0 and Table II- Comparison of Annualized Director Compensation 0 01 SCE/EIX Total Annualized Director Compensation $1,000 $0,000 SCE/EIX Rank Among Philadelphia Utility Index Tied For th Tied For th Philadelphia Utility Index Median Total Annualized Director Compensation $,000 $0,000 S&P Median Total Annualized Director Compensation $1,0 $, Using either of the two measures, the 0-utility index measure or the S&P 00 companies measure, SCE s total director compensation is reasonable. SCE s director compensation ranked roughly in the middle of the 0-utility index in 0 and 01. For the 0-utility index, SCE s Continued from the previous page direct compensation for executives is not unreasonable, does not constitute an extra burden on ratepayers, and should be allowed in rates. 1 Frederic W. Cook & Co. is the independent compensation consultant for SCE s compensation and executive personnel committee. See presentations by Frederic W. Cook & Co. entitled Non-Employee Directors Compensation: Discussion Outline, presented to the EIX board in 01 and 01. These materials are available for inspection at SCE s headquarters. 0 Id.