2018 General Rate Case

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1 Application No.: A.1-0- Exhibit No.: SCE-0, Vol. Witnesses: S. Kempsey (U -E) 01 General Rate Case PUBLIC VERSION Administrative & General (A&G) Volume - Property & Liability Insurance Before the Public Utilities Commission of the State of California Rosemead, California September 1, 01

SUMMARY SCE requests a Test Year 01 Operation & Maintenance (O&M) expense of $. million (Constant 01$) for property & liability insurance. This request includes $1.

2 SUMMARY SCE requests a Test Year 01 Operation & Maintenance (O&M) expense of $. million (Constant 01$) for property & liability insurance. This request includes $1.00 million for property insurance and $. million for liability insurance. SCE s request is based on the estimated Test Year premiums provided by our primary insurance broker, Marsh USA Inc. (Marsh), to reflect expected insurance market trends as well as SCE s specific loss history. Property & Liability O&M Expenses 01 Forecast (Constant 01$ Million)

3 Administrative & General (A&G) Volume - Property & Liability Insurance Table Of Contents Section Page Witness I. Property and Liability Insurance Expense...1 S. Kempsey A. B. C. D. Summary of Test Year Request...1 Introduction... Comparison of 01 Authorized to 01 Recorded... Property Insurance Expense (FERC Account ) Activity Description... a) b) c) Non-Nuclear Property Insurance... Blanket Crime Insurance... Nuclear Property Insurance.... Analysis of Recorded Data, Estimating Methodology, and Forecast for Property Insurance Expense (FERC Account )... E. Liability Insurance Expense (FERC Account ) Activity Description... a) b) c) d) e) f) g) h) General Liability Insurance... Supplemental Wildfire Insurance... Fiduciary Liability Insurance... D&O Liability Insurance... Workers Compensation... Miscellaneous Liability Insurance and Surety Bonds... Nuclear Liability Insurance... Cyber Liability Insurance...1 -i-

4 Administrative & General (A&G) Volume - Property & Liability Insurance Table Of Contents (Continued) Section Page Witness. Analysis of Recorded Data, Estimating Methodology, and Forecast for Liability Insurance Expense (FERC Account )...1 -ii-

5 I. Property and Liability Insurance Expense A. Summary of Test Year Request For Test Year 01, SCE forecasts $. million in A&G expense for property and liability insurance. As discussed in greater detail in this chapter, SCE s recorded expense is not an appropriate basis on which to forecast Test Year expenses. Rather, SCE s 01 estimate is based on expected insurance market conditions. SCE s primary insurance broker, Marsh USA Inc. (Marsh), has estimated Test Year premiums reflecting expected insurance market trends as well as SCE s specific loss history. This testimony addresses the insurance expense SCE has incurred from 0 through 01 for both property and liability insurance, and the estimated insurance expense for 01 through 01, as shown in Figure I-1 below. Figure I-1 Summary of Property and Liability Insurance Expense Recorded and Adjusted 0-01/ Forecast (Constant 01 $000),000 0,000 0,000 0,000 0,000 0, Labor Non Labor Other Labor Non-Labor Other, 0,01 0,,1,,,, Total, 0,01 0,,1,,,, 1

6 1 1 1 B. Introduction SCE maintains property insurance coverage to limit large, unexpected losses to its productive assets, such as transmission and distribution facilities and equipment, power plants, office buildings and general facilities caused by perils such as fire, earthquake, flood, accidental mechanical breakdown, and terrorism. SCE purchases blanket crime insurance for losses due to theft, robbery, and computer and wire fraud. SCE also purchases liability insurance coverage to limit the losses arising from third-party liability claims and lawsuits. The costs of this insurance coverage are recorded in two FERC accounts. The expense for property and blanket crime insurance is recorded in FERC Account. The expense for general liability, supplemental wildfire insurance, fiduciary liability, directors and officers (D&O) liability, workers compensation, nuclear liability insurance, and cyber liability insurance is recorded in FERC Account. 1 Below, Table I-1 identifies the insurance limits and deductibles that SCE maintains, as well as the policy expiration dates. Premiums for insurance coverage are influenced by SCE s overall loss history, the commercial availability of desired coverage, and the current and anticipated market conditions of the insurance industry. 1 Claims and claims reserves expenses, including those for workers compensation, also are recorded in FERC Accounts and, but are discussed in SCE-0, Vol..

7 Table I-1 Summary of Insurance Limits and Deductibles Insurance Coverage Limit (a) Deductible (a) Expiration ($) ($) A. Account : Property Insurance 1. Non Nuclear Property Insurance 0,000,000,000,000 /01/1. Blanket Crime Insurance 0,000,000 1,000,000 0/01/1. Nuclear Property Insurance (b),0,000,000,00,000 0/01/1 B. Account : Liability Insurance 1. i. Non Wildfire Insurance (c),000,000,000,000 0/01/1 ii. Wildfire Insurance (c),000,000,000,000 0/01/1. Fiduciary Liability Insurance 0,000,000 1,000,000 0/1/1. Directors and Officers Liability Insurance 0,000,000,000,000 0/1/1. Workers' Compensation Insurance (CA) statutory 1,000,000 /01/1 Workers' Compensation Insurance (NV) statutory /01/1. Miscellaneous Liability Insurance & Bonds various various various. Nuclear Liability Insurance (b),000,000 1/1/1. Cyber Liability Insurance 0,000,000,000,000 0/01/1 (a) Certain policy provisions may cause the limit and deductible to vary. (b) Nuclear property and liability insurance costs are paid primarily through the nuclear decommissioning trust fund, but certain costs that are not eligible for recovery through the trust fund are included here. (c) Some of the limits are shared between non wildfire and wildfire liability insurance. 1 1 Most of SCE s insurance coverage is procured by Edison International (EIX) on behalf of itself and its subsidiaries. The premiums are then allocated among EIX and its subsidiaries. Fiduciary liability and blanket crime insurance premiums are allocated based on the number of employees. D&O liability insurance premiums, general liability insurance premiums, and cyber liability insurance premiums are allocated using the multi-factor allocation formula. Workers compensation insurance in Nevada is allocated based on payroll in Nevada. Non-nuclear property insurance, nuclear property and liability insurance, and workers compensation insurance in California only cover SCE assets or SCE employees, and therefore, no allocation to EIX or EIX s other subsidiaries is necessary. C. Comparison of 01 Authorized to 01 Recorded D.1--01, Ordering Paragraph, directed SCE to compare 01 authorized to recorded O&M expenses. As shown in Figure I- below, for 01 SCE estimated $. million (constant 01$) for this category, and the Commission authorized $. million. In 01, SCE recorded $. million in

8 Property & Liability O&M expense, approximately $. million, or.%, less than authorized. The difference was primarily due to the uncertainty inherent in forecasting insurance market conditions several years in advance. Figure I- Comparison of 01 Authorized to Recorded O&M Expense Property & Liability Insurance- FERC and (Constant 01 $000s) D. Property Insurance Expense (FERC Account ) 1. Activity Description SCE purchases the following types of property insurance: (1) non-nuclear property insurance coverage for transmission and distribution facilities and equipment, power plants, office buildings, and general facilities; () blanket crime insurance for losses due to theft, robbery, and computer and wire fraud; and () nuclear property insurance. Each type of insurance is discussed in the following sections. Lines, towers, poles, dams, and hydro waterways are not included.

9 a) Non-Nuclear Property Insurance Property insurance protects SCE property against potential physical loss or damage caused by natural disasters such as fire, earthquake, flood, or accidental mechanical breakdown, and acts of terrorism. SCE s insurance limit is $0 million per occurrence, with a sub-limit of $00 million for California earthquake exposure. Insurance is purchased to protect SCE from catastrophic events that, while unlikely, could have devastating consequences. For example, while the probability that SCE would suffer severe earthquake damage in any given year is low, should an earthquake occur, the resulting property damage could be significant. SCE s property insurance is similar to the insurance most homeowners purchase for their homes. Most homeowners insure their residences to protect against fire and other perils, but are unlikely to ever lose their homes to one of these perils. b) Blanket Crime Insurance SCE purchases blanket crime insurance coverage to protect its assets from losses due to crimes such as theft, robbery, and computer and wire fraud (whether committed by an employee or non-employee). Title I of the Employee Retirement Income Security Act (ERISA) requires certain benefit plans to be bonded. SCE s crime insurance fulfills this ERISA requirement. The Commission has found that blanket crime insurance coverage is prudent because it covers the remote possibility of severe losses from such crimes as wire transfer fraud. The need for blanket crime insurance has become even more important due to the increased use of computers and technology. SCE s blanket crime insurance coverage has a limit of $0 million per occurrence, with a $1 million deductible. Although SCE has a system of internal controls to reduce the potential of large losses associated with criminal acts, it is not possible to prevent all losses arising out of criminal activity. To date, SCE has not been subject to significant losses, and thus its annual premiums are reasonable in light of the large potential losses it could suffer. See generally In re So. Cal Edison Co., D.1-1-0, (mimeo), pp -, CPUC d, 0-1 ().

10 1 1 c) Nuclear Property Insurance Property insurance coverage for SCE s nuclear assets at San Onofre Nuclear Generating Station (SONGS) and Palo Verde Nuclear Generating Station (PVNGS) is purchased from Nuclear Electric Insurance Limited (NEIL). NEIL is a mutual insurance company owned by nuclear facility owner/operators. Property insurance expenses related to SONGS are generally recovered through the decommissioning trust, but a small portion of the expense (approximately $0,000 per year) is attributable to the SONGS switchyard, which is not being decommissioned. That portion of the expense is not recoverable through the decommissioning trust and is included in the General Rate Case filing. In addition, property insurance for PVNGS is procured by Arizona Public Service Company (APS) as the operator of the site, and SCE is billed for its share of the expense by APS. Should losses at any nuclear facility covered by NEIL exceed the accumulated funds for these insurance programs, SCE could be assessed retrospective premium adjustments of up to approximately $ million per year. Arizona Public Service Company (APS) purchases insurance for PVNGS on behalf of the participants. Refer to WP SCE-0, Vol., p.. EIX Q 01 -Q (July, 01) p. 1. Refer to WP SCE-0, Vol., p..

. Analysis of Recorded Data, Estimating Methodology, and Forecast for Property Insurance Expense (FERC Account ) Figure I- Property Insurance Expense Recorded and Adjusted 0-01/ Forecast 01-01 FERC

11 . Analysis of Recorded Data, Estimating Methodology, and Forecast for Property Insurance Expense (FERC Account ) Figure I- Property Insurance Expense Recorded and Adjusted 0-01/ Forecast FERC (Constant 01 $000) 1 Insurance expense charged to FERC Account increased from $1.01 million in 0 to $1.00 million in 01, as shown above in Figure I-. The increase is primarily due to pricing fluctuations over time in the property insurance market, as well as an increase in the replacement value of SCE s insured assets. The insurable value of SCE s assets grows over time due to two factors: (1) the utility s ongoing capital expenditure program results in additional physical assets that need to be insured, and () for any given physical asset, the replacement value tends to increase over time with inflation. SCE s insurable values have grown from approximately $1.1 billion in 0 to $1. billion in 01, a percent increase. This growth in insurable values results in higher insurance premiums. SCE s estimated property insurance expense of $1.00 million for Test Year 01 is based on an assessment of overall insurance market conditions, SCE s loss history, and SCE s property Refer to WP SCE-0, Vol., pp. 1-1.

12 values. The assessment of the overall insurance market condition and projected trends is based on Marsh s assessment of the market. E. Liability Insurance Expense (FERC Account ) 1. Activity Description SCE maintains several types of liability insurance, which are separately discussed below. SCE s general liability insurance provides coverage to limit exposure due to unpredictable losses that may occur as a result of lawsuits alleging third-party bodily injury, personal injury, or property damage. In addition, SCE purchases supplemental wildfire liability insurance to further protect itself from thirdparty lawsuits alleging property damage caused by SCE facilities. SCE also has fiduciary liability insurance to protect itself in connection with the administration of employee benefit plans. SCE purchases D&O liability insurance to protect its directors and officers in the event of lawsuits alleging errors in judgment in managing the Company. SCE purchases workers compensation insurance to protect it from exposure to costs incurred by employees who are injured on the job. SCE also continues to purchase nuclear liability insurance for SONGS, PVNGS, and a former repair facility located in Westminster. In 01, SCE began purchasing cyber liability insurance. a) General Liability Insurance General liability insurance protects the Company from losses that result from lawsuits or negotiated settlements with third parties alleging bodily injury, personal injury, or property damage for which the Company may be found liable. The wildfires in Southern California caused by utility facilities in 00 and 00 led to several years of turmoil in the wildfire liability insurance market. The market finally improved to some extent in 01, but a wildfire in Northern California caused by utility facilities late in 01 has sent the insurance market back into turmoil. That fire was particularly disturbing to the insurance market because Northern California had been perceived by the market as having relatively low wildfire risk. Prolonged drought conditions in California have increased the duration of the wildfire season and the risk of severe wildfire events. In addition to the large number of wildfires occurring in the state, insurers are also strongly opposed to the doctrine of inverse condemnation in California. Under that doctrine, a utility can be held strictly liable (including liability for a claimant s attorneys fees) for property damage caused by utility facilities, even if there was no Refer to WP SCE-0, Vol., p. for copy of Marsh letter to SCE.

13 negligence on the utility s part. All of these factors combined have made it very unattractive for insurers to offer wildfire liability insurance to utilities in California. As a result, some insurance companies are dropping out of the California wildfire insurance market, others are reducing the amount of wildfire insurance they are willing to sell in California, and still others are indicating they will drop out of California if there is another wildfire caused by utility facilities. Consequently, some of the wildfire insurance that SCE bought previously is becoming unavailable except at extremely high premiums. As insurance companies continue to reduce or eliminate their wildfire liability coverage, premiums have begun to increase sharply and available insurance is decreasing. This increase is reflected in SCE s forecast of premiums for 01. Of the $. million forecast for total liability insurance expense in the test year, $1.0 million is attributable to general liability insurance. SCE purchases as much wildfire liability insurance as is commercially available at a competitive price, and with other reasonable terms. SCE also purchases liability insurance to cover its non-wildfire exposures. Some of SCE s general liability insurance policies cover both wildfire and non-wildfire exposures, but the majority are dedicated to either wildfire or non-wildfire. Since wildfire coverage is more limited in availability and more expensive than non-wildfire coverage, SCE buys separate coverage so that non-wildfire claims will not use up the expensive wildfire insurance. b) Supplemental Wildfire Insurance 1 Any liability associated with claims incurred above the limits of insurance is not currently included or forecast in customer rates.

14 c) Fiduciary Liability Insurance Fiduciary liability insurance protects SCE against lawsuits that may arise over its administration of the employee benefit plans governed by ERISA. This insurance, which has an aggregate limit of $0 million, provides coverage for fiduciaries of the benefit plans. d) D&O Liability Insurance D&O liability insurance protects directors, officers, trustees, and senior officials of the Company against lawsuits alleging errors in judgment while managing the Company. The proliferation of D&O suits and the high cost of defending them have made the purchase of this coverage necessary and prudent. Because directors and officers can be held personally liable in lawsuits, SCE could not attract qualified directors, officers, and trustees if adequate protection for these individuals were not provided. Consequently, the purchase of this coverage is essential to the normal operations of virtually any large institution such as SCE. A 01 report from the consultant Advisen noted that in 01, the average securities class-action lawsuit settlement (including proposed and tentative settlements) was $1. million, up from $1. million in Advisen s report also noted that large settlements still abound. The largest settlement in 01 was for $. billion, with several other notable settlements, including one for $1. billion and another one for $ million. SCE s D&O liability insurance has an aggregate limit of $0 million. The premiums and liability limits are prudent in view of the possibility of lawsuits and SCE s need to attract qualified directors and officers, as discussed above. In SCE s 1 Test Year GRC decision, the Commission found that D&O insurance represented a normal and prudent business expense reasonable for ratemaking purposes. In the 1 GRC decision, the Commission ordered that only half of SCE s D&O insurance expense be paid by customers. Pursuant to that direction, SCE s D&O insurance expense is now shared on an equal basis between customers and shareholders, which has been taken into account in this testimony and SCE s Refer to WP SCE-0, Vol., pp. -. Id. 1 Refer to WP SCE-0, Vol., pp. -.

15 forecast. 1 Therefore, the Test Year forecast includes only the 0 percent customer share of D&O insurance costs. e) Workers Compensation Workers compensation insurance provides four types of benefits (medical care, death, disability, and rehabilitation) for employee job-related injuries or diseases. Each state requires that benefits be paid to injured employees with the amount and term set by the state based upon the extent and type of injury. To serve as proof these benefits will and can be paid by employers, insurance or state-approved self-insurance must be arranged. Requirements for self-insurance are set by each state and require the employer to provide financial security in an amount determined by the state. SCE self-insures its workers compensation exposure for its employees in California, as discussed in Exhibit SCE-0, Vol.. However, SCE also purchases excess workers compensation insurance to cover large claims for SCE s California employees. 1 The policy for SCE s non-nuclear workers has a deductible of $1 million and statutory limits. SCE also employs workers in Nevada operating the Eldorado Substation. SCE purchases workers compensation insurance to cover this exposure. The Nevada workers compensation policy has a zero deductible and statutory limits. Workers compensation insurance is necessary and prudent because of the high cost of benefits and the potential financial exposure from a single incident with multiple injuries. f) Miscellaneous Liability Insurance and Surety Bonds SCE incurs expense for a variety of small insurance policies and surety bonds. For example, SCE has an aviation liability insurance policy, which covers bodily injury and property damage to third parties caused by SCE aircraft. g) Nuclear Liability Insurance Nuclear liability insurance covers losses involving radiological injuries and damages to third parties involving SCE s facilities at SONGS or PVNGS, or at a former SCE repair 1 D.-01-, (mineo), pp. -, CPUC d 1, 1 (1). 1 The insurance is structured as a reimbursement agreement whereby SCE pays all claims and then submits eligible claims to the insurer for reimbursement.

16 facility located in Westminster. Nuclear liability insurance expenses related to SONGS are generally recovered through the decommissioning trust, but a small portion of the expense (approximately $,000 per year) 1 is attributable to the Westminster facility, which is not recoverable through the decommissioning trust. That portion of the expense is included in this General Rate Case filing. Liability insurance for the PVNGS is procured by APS as the operator of the site, and SCE is billed for its share of the expense by APS. h) Cyber Liability Insurance SCE purchased cyber liability insurance in 01. In recent years, several companies have reported that personal information relating to customers or employees has been compromised resulting in notification and monitoring expenses. SCE s cyber liability insurance covers the liability that could result from such a compromise, as well as coverage for the extra expenses (such as restoring affected servers) associated with a cyber-attack on SCE s systems. SCE purchases $0 million of cyber liability insurance with a $ million deductible.. Analysis of Recorded Data, Estimating Methodology, and Forecast for Liability Insurance Expense (FERC Account ) The insurance expense charged to FERC Account increased from $1. million in 0 to $1. million in 01, as shown below in Figure I-. 1 Most of the increase was due to an increase in the cost of wildfire liability insurance. 1 Refer to WP SCE-0, Vol., p.. 1 Refer to WP SCE-0, Vol., pp

17 Figure I- Liability Insurance Expense Recorded and Adjusted 0-01/ Forecast FERC Acct. (Constant 01 $000) 1 As described more fully in the General Liability Insurance section, several factors have driven the large increase in the cost of wildfire liability insurance. The main factors include the doctrine of inverse condemnation, the large wildfire claims that have occurred in California over the last decade, and the prolonged drought. In addition, population growth in wildland fire-prone areas has increased the exposure of insurance companies when a fire does occur. All of these factors have led insurance companies to increase premiums sharply and reduce available insurance limits. 1 As with the property insurance premiums, Marsh has estimated Test Year premiums for liability insurance. The Test Year expenses are expected to be $. million, 1 a 0 percent increase over the 01 recorded amount of $1. million. Most of this increase is due to the expected increase in the cost for general liability insurance, as discussed above. Insurance premiums have long been accorded 1 Refer to SCE-0, Vol., p.. 1

18 cost recovery in rates as a necessary cost of doing business. The financial risk posed by wildfire liability underscores the need for SCE to maintain its insurance program. 1

19 Appendix A Declaration of David Heller

2018 General Rate Case

2018 General Rate Case Application No.: A.1-0- Exhibit No.: SCE-0, Vol. 0 Witnesses: R. Ramos J. Smolk R. Swartz S. Tran A (U -E) 01 General Rate Case ERRATA Administrative & General (A&G) Volume 0 Legal (Law, Claims, and Workers