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Edison International faces 'new normal' of major wildfires, CEO says

With extreme fire danger again threatening Southern California Edison Co.'s scorched service territory, which suffered the largest blaze in state history in 2017, the utility is preparing for "the new normal," said Pedro Pizarro, CEO of parent company Edison International.

Speaking on a July 26 earnings call with investment analysts concerned about the potentially disastrous financial fallout from increasingly frequent major blazes in California, Pizarro detailed the key measures the utility is taking to respond to the heightened risk of devastating wildfires and their costs.

Among SoCalEd's top priorities is increased vegetation management "in the most severe high-risk areas," the CEO said, noting that such areas account for roughly a quarter of the company's service territory. The utility is also hardening its system with fire-resistant poles and insulated conductors and is exploring investments to place some powerlines underground.

During so-called Red Flag warnings for the most extreme conditions, which were in effect in SoCalEd's service area as Pizarro spoke, the utility will restrict work that could spark a blaze and refrain from immediately re-energizing powerlines affected by fires until they are physically inspected.

On the policy front, Pizarro called for "a wildfire plan to guide system investments and operating protocols," and reforms to the state's method of assigning liability and cost recovery for wildfires. In addition, California must recognize "the continued importance of financially healthy utilities to meet California's ambitious climate-change policies," the Edison International CEO said.

Pizarro's comments came a day after Gov. Jerry Brown proposed to limit utilities' liability due to wildfires caused by electrical equipment. "We are hopeful a solution can be achieved this legislative session, but there are no guarantees," the CEO said. The governor's proposal will be considered by lawmakers when they return from their summer recess in August.

Utilities, Pizarro said, "should still be held responsible in proportion to our actions, if there was serious misconduct."

Burned by wildfire insurance

As Edison International seeks favorable policy actions, it is taking a hit on wildfire insurance. Costs "primarily related to higher wildfire insurance premiums" shaved 8 cents per share off the company's core earnings, CFO Maria Rigatti said on the call. "We are currently evaluating the regulatory accounting for incremental wildfire insurance costs," she added.

The utility expects incremental wildfire insurance costs of 38 cents per share for 2018. For the insurance coverage period of June 1 to December 30, it has approximately $1 billion of wildfire insurance. But the price of additional wildfire insurance will be steep. "As we work to address our insurance needs we continue to see a tightening market in terms of both availability and price and the cost is significantly higher than we requested in our [2018] general rate case," Rigatti said.

Insurers "are having to basically rework their models because the fundamental assumptions [have changed]," Pizarro said, noting that the 2017 Thomas Fire, the largest in state history, burned nearly 282,000 acres in December, which is not historically a high fire-risk month. "And so it's a radical change in the underlying assumptions that... [adds] uncertainty and therefore, adds to pricing."

Despite the uncertainty, investors are not fleeing. Lifted largely by Gov. Brown's proposal, Edison International's stock gained $1.81 July 26 to close at $68.04 a share its highest mark since wildfires ravaged SoCalEd's service territory in December 2017.