After posting better-than-expected earnings for the fourth quarter of 2017 and the year as a whole, Edison International executives have little time to dwell on last year's accomplishments. Instead, their full attention is on the potentially severe legal and financial fallout related to the devastating wildfires that hit subsidiary Southern California Edison Co.'s service territory in December.
The "fundamental risks" of wildfires in California, which suffered its deadliest fire season in state history in 2017, "are top of mind at all levels of our company," Edison International CEO Pedro Pizarro told analysts on a Feb. 22 conference call. "This is a statewide crisis that needs a statewide solution," he said, noting that the utility is in discussions with Gov. Jerry Brown's office, state lawmakers and others on potential solutions to prevent wildfires and fairly allocate costs in their aftermath.
In addition to developing "effective policies" to manage vegetation, the state must create special zoning regulations, building codes and infrastructure for areas at high risk of fire, Pizarro said, adding that about a quarter of SoCalEd's service territory is in such high-risk areas. Among the measures Edison International is exploring are moving sensitive parts of its distribution grid underground and installing steel poles instead of wooden ones. Along with evaluating safety impacts, the state must consider "reliability and cost tradeoffs," the CEO said.
Calling for "thoughtful policies around how financial risks are allocated" after catastrophes occur, Pizarro criticized the state's application of "inverse condemnation," a court-backed principle under which utilities are held liable for damages and fees related to wildfires caused by their equipment even if they adhere to mandated safety rules. "This means that the utility can do everything right in the operation and maintenance of its equipment, but still be on the hook for these costs," he said.
The California Public Utilities Commission's November 2017 rejection of Sempra Energy subsidiary San Diego Gas & Electric Co.'s request to recover $379 million in wildfire litigation costs exposed a flaw in the legal assumption that utilities can "socialize wildfire costs among their customers in rates," Pizarro cautioned. In addition to requesting a rehearing of that decision, Edison International is fighting inverse condemnation in court, in cases involving fires in its and other utilities' service territories, and is appealing to lawmakers for a sweeping reform of the principle.
One state senator this year introduced a bill to clarify that utilities should not be allowed to charge their customers for any fines, penalties or uninsured expenses "borne through negligent utility practices." Asked about the bill on the call, Pizarro said Edison International was seeking "more comprehensive solutions."
Tax reform hits profits
Despite its strong earnings performance in 2017, federal tax reforms hit Edison International with a $433 million expense in the fourth quarter due to "the re-measurement of deferred taxes," CFO Maria Rigatti said. Subsidiary SoCalEd, meanwhile, absorbed a $448 million after-tax charge associated with a revised settlement over the closure of its San Onofre Nuclear Generating Station.
The utility did not record any liability related to the December wildfires, Rigatti added, because state fire officials and regulators are still in the early stages of their investigations into the causes of the wildfires. It did, however, secure $300 million of wildfire insurance for 2018 and in December requested that regulators approve recovery of the associated roughly $121 million premium through rates. "Although we believe we have a strong case for recovery, until the CPUC addresses our request, you should assume an additional 29 cent per share drag on earnings in 2018," she said.
The utility does not plan to issue a forecast for its 2018 earnings until the CPUC makes a final decision on its 2018 general rate case.