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Good afternoon and welcome to the Edison International Second Quarter 2018 Financial Teleconference. My name is Princess and I will be your operator today. Today's call is being recorded. I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference.
Thank you, Princess, and welcome, everyone. Our speakers today are, President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also here are other members of the management team.
Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation.
During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up.
I will now turn the call over to Pedro.
Well, thanks a lot, Sam, and good afternoon, everyone. Second quarter core earnings were $0.85 per share, roughly flat to the same period last year. Please remember this comparison is not particularly meaningful, because SCE has not received a decision in its 2018 General Rate Case. Maria will provide more detail in her remarks.
Today, I will touch on several policy and growth topics, but let me begin with comments on wildfires. We continue to support the communities affected by the wildfires and mudslides by ensuring customers affected by these disasters are receiving support, including bill forgiveness, extended payment arrangements and help with temporary power. We are committed to helping our customers recover and rebuild from these events.
In order to help, we have set up a dedicated web page for customers impacted by these events, are providing specially trained resources in our contact center and are assisting customers through in-person meetings at local assistance centers. A number of external agencies have been investigating the potential origins and causes of the Thomas Fire and smaller fires that were in our service territory. As we do in all wildfire matters, SCE is also conducting its own review. The investigations continue and we currently cannot predict when they will be completed.
In the meantime, Southern California Edison has spent extensive time reviewing and strengthening our wildfire mitigation and prevention efforts in preparation for the new normal. Our focus has been on five major areas. First, vegetation management. We have increased the vegetation patrols in the most severe high-risk areas and we are evaluating opportunities to perform more expansive tree trimming and tree removal. As a reminder, high fire risk areas identified in the CPUC's fire risk maps account for approximately a quarter of our service territory.
Second, hardening our system. We are increasing the use of fire-resistant poles, insulated conductor and non-expulsion fuses in select high fire risk areas. Third, operational practices. During Red Flag Warning conditions, we continue to restrict certain types of work and our standard procedure is to not automatically reenergize circuits in high fire risk areas after interruptions until lines are physically inspected. Also, we have refined our protocols for the de-energization of lines when critically necessary to prevent fires and protect public safety, and continue to discuss these with potentially impacted communities.
Fourth, partnerships. Wildfire response planning occurs with fire agencies, local emergency operation centers and community groups throughout the service territory.
Finally, we maintain a 24-hour situational awareness center and around-the-clock incident management teams when conditions merit. In certain areas, we are also installing additional weather stations to improve our awareness of local conditions and high-definition cameras to provide early warning of fires both internally and to local fire agencies.
We continue to make progress on wildfire policy issues as well. We are engaged with state leaders, including the governor's office, legislative leaders and stakeholders across the State on the solutions we believe are needed.
As we have discussed before, we are focused on four key principles, including a wildfire management plan to guide system investments and new operating protocols, which will create more transparency and clarity with regards to prudency; reform of inverse condemnation to transition from strict liability regardless of fault to a reasonableness standard; reform of the current cost recovery structure at the CPUC to incorporate the concept that liability must be proportionate to the utility's contribution to a fire; and recognition of the continued importance of financially healthy utilities to meet California's ambitious climate change policies.
We continue to be encouraged by the dialog that we and other California utilities are having with members of the legislature. This includes the amended Senate Bill 901, which has moved to a Legislative Conference Committee and can be further amended to continue the State's progress toward reaching the goals that the governor and legislative leadership set forth in March.
The goals noted five key areas, from updating liability rules and regulations for utilities, to enhancing prevention and mitigation efforts surrounding these events. While SB 901 is the focus of the Committee, other bills can be considered to address the goals as well.
As of early July, a number of wildfire bills passed legislative Committees. At this stage in the legislative process, the individual bills matter less than the substance and we are fully engaged with the legislature on these issues with a goal of achieving reforms that provide more transparency and additional efforts to mitigate catastrophic events and mechanisms that fairly allocate responsibility among the multiple causes, which contribute to wildfires.
It is important to note that we do believe utilities should still be held responsible in proportion to our actions, if there was serious misconduct. I want to reiterate from last quarter that implementation of solutions through a legislative process will take time, and bill language can change during that process either through existing bills or through new legislative vehicles as they come up. We are hopeful a solution can be achieved this legislative session, but there are no guarantees.
On the judicial pathway, the Round Fire hearing associated with the motion for legal determination of inverse condemnation has been removed from the calendar and will not be rescheduled, because the plaintiffs' claims have been resolved through a settlement. Additionally, we are aware of the many lawsuits filed related to the Thomas Fire and Montecito mudslides naming SCE and, in some cases, EIX as a defendant. The cases have been coordinated in the LA Superior Court.
The litigation process, which is in preliminary stages, will likely take a number of years to be resolved because of the complexity of the matters and the time needed to complete the ongoing investigations and analysis. The Thomas Fire and Montecito mudslides litigation presents an additional opportunity to challenge inverse condemnation.
On the regulatory pathway, I want to briefly mention the recent denial of the Applications for Rehearing in San Diego Gas & Electric's Wildfire Expense Memorandum Account, or WEMA proceeding. While this doesn't have a significant effect on our current position in any of the three pathways, it does increase our sense of urgency to get legislation passed to reform cost recovery mechanisms. Conversely, we were supportive of the decision by the Commission to approve the alternate proposed decision in the PG&E WEMA which approved the Wildfire Memorandum Account as of the date of filing.
Building on this decision, we received a scoping memo for the SCE WEMA application in mid-July, which stated that evidentiary hearings are not needed, and a proposed decision would be issued within 90 days of the date of the ruling. In the meantime, SCE continues to support California's ambitious environmental policies. Multiple paths exist for California to meet its 2030 and ultimately 2050 climate goals with varying levels of difficulty and costs. However, all feasible paths must significantly reduce emissions from the transportation sector.
As a reminder, last fall, SCE explored several of these scenarios to better understand feasibility, costs, and trajectory to reach California's goals. We found the most feasible pathway to reach the state's 2030 goals to be an electric grid supplied by 80% carbon-free energy made reliable by up to 10 gigawatts of energy storage, which will support more than 7 million electric vehicles in California roads and nearly one-third of space and water heaters powered by electricity. I will highlight several regulatory proceedings that begin to enable some of this transition, specifically related to electric vehicles.
At the end of May, the Commission issued a final decision on our January 2017 Transportation Electrification filing. The decision approved a five-year $356 million program, of which $242 million is capital spend supporting funding for medium and heavy-duty vehicle charging infrastructure.
For light-duty electric vehicle charging infrastructure, we filed our Charge Ready Phase 2 application at the end of June, which requests $760 million of total costs, including approximately $560 million in capital spend for infrastructure to support 48,000 new EV charging ports and increased marketing, education and outreach.
The application continues the implementation of our Transportation Electrification pathway and expands on the Light-Duty Infrastructure Pilot that was launched in late May 2016. These programs as well as earlier actions taken by the CPUC and other agencies continue to demonstrate California is at the forefront of electrification efforts by investing more than any other state in this area.
Moving to our 2018 General Rate Case, we are looking forward to a proposed decision from the administrative law judges following the recent oral arguments. We cannot speculate on the timing for a proposed decision and subsequent commission decision but we do remain optimistic about getting a final decision before year-end.
Regarding SONGS, just a few hours ago, the Commission adopted the proposed decision from the ALJ, which generally adopts the settlement as drafted except for the disapproval of a provision providing $12.5 million of greenhouse gas reduction research funding. The settling parties now have to convene and determine if the group or a significant subset of them will accept the changes. A notice must be filed with the Commission within 10 days of the decision. We look forward to achieving a final resolution of the SONGS cost recovery matter.
While we are focused on resolving wildfire-related issues, we continue to push forward on key regulatory proceedings that we believe are necessary to meet California's 2030 climate goals. This will require strong, financially healthy utilities, so we remain optimistic that a durable solution to the wildfire issues will be achieved.
As we work towards, that our company will also remain focused on improving our safety culture and broader operational excellence and on delivering strong solutions to be a key enabler of our state's long-term policy vision.
With that, I'll turn it over to Maria for her financial report.
Thank you, Pedro. Good afternoon, everyone. My comments today will cover our second quarter 2018 results compared to the same period a year ago, and other financial updates for EIX and SCE. As we have communicated to you before, until we receive a decision on the 2018 General Rate Case, we will continue to recognize revenues from CPUC activities, largely based on 2017 authorized base revenue requirements, with the reserve taken for known items including the cost of capital decision and tax reform.
Also consistent with last quarter, we are providing our SCE key drivers analysis at the prior combined statutory tax rate of approximately 41% for both 2018 and 2017 for comparability purposes. Therefore, the effective tax reform will largely be isolated so we can focus on the underlying financial and operational drivers and business. Let's begin with a look at our core earnings driver. Please turn to page 2.
For the second quarter 2018, Edison International reporting core earnings of $0.85 per share, roughly flat to the same period last year. From the table on the right-hand side, you will see that SCE had a negative $0.03 EPS variance year-over-year. SCE revenue increased $0.07 over prior year. CPUC revenues were up $0.05 mainly due to the absence of a refund to customers booked in 2017 as well as balancing account activity, which is partially offset by our cost of capital reserve.
Additionally, FERC contributed $0.02 of higher revenue as a result of higher expenses. Our core EPS in the second quarter was negatively impacted by $0.10 of higher total expenses year-over-year. The largest driver was an $0.08 impact from higher operation and maintenance costs, primarily related to higher wildfire insurance premium. The $0.08 include the quarterly impact of the $121 million premium we discussed last quarter, as well as additional insurance associated with obtaining new policies to fill out our coverage.
We have requested approval from the CPUC for regulatory mechanism to track and recover wildfire insurance premiums in excess of the amounts that are ultimately approved in our 2018 GRC decision. We are currently evaluating the regulatory accounting for incremental wildfire insurance cost.
As a first step, based on the outcome of the PG&E WEMA, we expect that we will be allowed to track our own incremental wildfire cost, including wildfire insurance premiums beginning at our April 3 application date, and these will ultimately be subject to a reasonableness review. Based on the information presently available, we expect to defer $0.30 per share of wildfire insurance costs during the third and fourth quarter. The incremental wildfire insurance costs for the full year of 2018 are expected to be $0.38 per share before considering the regulatory deferral. I will give a further update on the insurance market in a minute.
Moving to net financing costs, we saw a $0.04 increase over the same period last year, mainly related to higher interest expense, primarily related to higher debt balances to fund rate base growth. The key EPS drivers table for SCE on the right-hand side of slide shows other smaller contributing items.
For the quarter, EIX Parent and Other had positive $0.03 per share core earnings variance mainly due to the absence of the SoCore Energy goodwill impairment taken in the second quarter of 2017. EIX Parent had a negative impact of $0.01, as lower corporate expenses were offset by the absence of an IRS tax settlement achieved in 2017.
Please turn to page 3. I don't plan to review the year-to-date financial results in detail, but the earnings analysis is consistent with the second quarter results. As I've said previously, comparisons pending a 2018 GRC decision are not meaningful. We expect to record a true-up in the quarter we receive a proposed decision.
I will next speak to our capital expenditure and rate base forecasts on pages 4 and 5.
Our SCE capital expenditures and rate base forecast have remained unchanged from last quarter. As a reminder, while 2019 and 2020 CPUC jurisdictional capital expenditures remain at the GRC request level, our 2018 capital expenditures align with our work execution plan for this year.
There are two items to note related to our capital spending plan and we have provided information on the slide to outline the impacts of some recent regulatory activity. In the quarter, we received a final decision approving a $356 million medium- and heavy-duty transportation electrification program, as Pedro noted. Given the expected timing and size of the capital program, we expect cumulative capital spending to increase approximately $115 million by the end of 2020 and the associated rate base would increase $78 million.
At the same time, we are awaiting a Commission vote on the proposed decision and alternate proposed decision on the Alberhill System Project. Both these decisions deny the Certificate of Public Convenience and Necessity based on the conclusion of the ALJ and the assigned Commissioner that the project is not needed.
We continue to believe the project is needed to serve forecasted local area demand and to increase reliability and operating flexibility and have filed comments on the proposed and alternate proposed decision.
If the project is ultimately cancelled, SCE's cumulative capital spending through 2020 will be reduced by approximately $85 million and the associated rate base will decrease $100 million in 2020. The rate base reduction includes amounts that SCE has already incurred and may not be recoverable as the project is cancelled.
Depending on the outcome of the Alberhill proceeding, these two decisions could largely offset each other during our forecast period. We expect to update our full forecast when we get a final decision on the 2018 GRC.
On page 6, you will see our financial assumptions for 2018. We have laid out a few key items on the page that you should consider as you model 2018 and beyond. Most of the information on this page has remained unchanged since last quarter. As a reminder, the information we provide on this slide reflects our new combined statutory tax rate of approximately 28%.
Further, we will provide 2018 earnings guidance only after we receive a final decision on the General Rate Case.
I would like to take a moment to update you on our insurance coverage. During the second quarter, our team continued to build our insurance tower for the upcoming policy period, which is generally June to June. We now have approximately $1 billion of wildfire-specific insurance coverage for the period June 1, 2018 through December 30, 2018; and approximately $940 billion for the period December 31, 2018 through May 31, 2019. SCE may obtain additional wildfire insurance for these periods in the future.
This coverage includes the $300 million policy we purchased at the end of last year, which will remain in place through December 2018, as well as the new policy placements that extends to June 2019. 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 General Rate Case.
SCE forecasted expenses of $92 million for liability insurance in its test year 2018, of which approximately 80% is related to wildfire insurance. Overall for 2018, premiums are approximately $237 million.
I want to provide a few additional comments on other financial topics. At SCE, our average common equity component of total capitalization was 49.5% as of June 30, including the charge from the revised SONGS settlement. Based on the adoption by the CPUC or the proposed decision earlier today and subject to the adoptions by settling parties or a significant subset of them, the revised settlement allows SCE to exclude the $448 million after tax charge from its equity capitalization ratio, which would bring our ratio to 49.9%. We continue to maintain a strong balance sheet at both the holding company and SCE as we work through the uncertainty around the wildfires cost recovery concern and a way to 2018 General Rate Case decision.
During the quarter, we increased our credit facilities at EIX and SCE to provide additional liquidity to meet our ongoing funding needs. Total facility size is now $4.5 billion and availability at quarter end was $4.1 billion net of commercial paper borrowing and letters of credit postings at SCE.
We also effectively accessed the capital markets for $650 million during the quarter to fund our rate base growth and free up operational liquidity during this period of managing through the legislative, legal, and regulatory solutions required to address the California wildfire issue, although spreads are higher than we have experienced prior to 2017 wildfires.
That concludes my remarks and I'll turn it back over to Sam.
Operator, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up so everyone in line has the opportunity to ask questions.
Thank you. Our first question is coming from Ali Agha from SunTrust. Ali, your line is now open.
Thank you. Good afternoon.
Hey, Ali.
Hi, Ali.
First question to Pedro. I was curious if – as you've gone through and your team has gone through the proposal that the governor put out to the Committee, what is EIX's views on that, and do you think that would address the issues as you laid them out?
Yeah. Ali, thanks for the question, and I think I would sum up our reaction, is, it's early days. We appreciate that there are discussions going on and that the governor's office put in a proposal, but we really view this as the beginning of there will be a very active discussion in Sacramento and particularly within the Conference Committee that's been established. The proposal addresses a number of key areas, there's probably additional things that I'm sure the Committee will work on.
So, while it's a short time period between now and August 28, it's also a long time period in terms of the – I think the nature and extent of discussions that we would expect to take place through the end of the session.
Okay. And my second question, Pedro, in your prepared remarks, you mentioned a number of investigations that are ongoing about the fire and the causes et cetera, including an internal one by SCE itself. And I just wanted to find out, as you've done your own internal investigation, have you found information that contradicts the statement you gave us back in December when you did a very preliminary investigation when the fire started, or is that statement still valid based on updated investigation by SCE?
Ali, I think you're referring – and let me just confirm this. I think very early on, there was an initial location of origin that CAL FIRE had published and we had said that we were not aware of utility equipment near that area, and I think that was factual.
As the fire grew, as we learned more, I think that became a much more complex fire. And so, while I think that statement stood on its own for that specific pinpoint that had been drawn by CAL FIRE initially, we are now looking at the totality of the fire. We, I think, said in our disclosures that we're aware there's more than one apparent point of origin. And so it's something that we continue to investigate. We know CAL FIRE and other agencies are investigating. And so we're not able to really comment on what may come out of the various investigations until those are concluded.
Thank you.
Thank you. And our next question comes from Julien Dumoulin-Smith. Julien, your line is now open.
Hi, Julien.
Hey, good afternoon. Can you hear me?
Yeah. Really well.
Excellent. Great. So I wanted to come back to this deferral piece of the equation and the WEMA and your expectation. So again, maybe just do the implied math here, so there's a $0.38 minus the $0.30 you expect to defer. There's about an $0.08 impact in 2018, if I'm hearing you correctly. How are you thinking about that carrying forward and annualizing into 2019 with any drag? And what I'm trying to get at there, if I can elaborate is, is there any incremental insurance that you anticipate that you'll be pursuing and would any of that not necessarily be covered under the WEMA, as best you initially interpret it, shall we say?
Hey, Julien. It's Maria. So let's think about – so we'll walk you through maybe the thought process we have around this. So as I mentioned earlier, the request that we made for our 2018 GRC in the year 2018 was about $92 million total liability insurance. About 80% approximately of that that is wildfire-related.
So the thought process we go through is we'll have a rate (27:18) asset and we'll defer the incremental costs based on an assessment of probability of recovery. So now we looked at two things. First, when can we – at what point in time can we really establish that we have a regulatory mechanism that will allow for that recovery. And we do have a number of those proceedings ongoing right now, both the Z-Factor as well as the WEMA case. And based on some of the recent decisions, we are thinking that we won't get a memo account based on what we know today, and that we do think that once that's established the costs that are tracked in that memo account would be probable of recovery.
Then we have to figure out what's incremental, because those memo accounts are really only for incremental costs. So, as I mentioned before, the $92 million, 80% of that is wildfire-related. We have a 2018, so calendar year expense for wildfire insurance of $237 million.
So, we looked at that and we looked at the incremental costs associated between those two numbers, as well as the timing of our application for the WEMA, and that's how we came up with the $0.38 of incremental cost, $0.30 of which is recoverable. And as we roll forward into next year, now we've only kind of covered in terms of 2019, June to June, we're only partway through covering 2019 at this point.
We're going to look at, obviously at some point, covering the rest of 2019, and SCE could actually look at incremental insurance even above what we currently have for the period in 2018. So – and as we do that and think about what else might be subject to the WEMA or tracking the WEMA, we would say that anything is incremental to what we've asked for in the GRC, and that falls into this period, post the application for sure, would be part of that WEMA account that we will then be tracking.
And that's not to say we will continue to pursue the Z-Factor mechanism that we filed last year and see if there's any other additional recovery that we could kind of be entitled to. So, that was our thought process.
Excellent. So – but – maybe to put you a little bit on the spot, it seems as if it's your expectation that you would expect to continue to raise the total amount of insurance that you have, right? We should expect that to come at some point here?
We're going to continue to look at it.
Okay.
I can't say right now in part because the market is very tight and things are very expensive to what extent we will obtain additional insurance. We'll look at every avenue. There is insurance, there's reinsurance, there's some other capital markets approaches that one could use. We'll look – we'll be evaluating all of that. I think a lot of it is determined by what's really available in the market as well.
Right. All right. I'll leave it there. Thank you very much.
Thanks, Julien.
Operator?
Our next question comes from Praful Mehta from Citigroup. Your line is now open.
Hi, Praful.
Thanks so much. Hi, guys. So, Pedro, just following up on your prepared remarks. You had color there saying legislation can take time. And so, you're qualifying a little bit, or I guess balancing expectations around timing of legislation getting done. But we do know that it's critical to try and get this done especially for your neighbors to get it done this year if possible.
So I'm just trying to understand how are you thinking about the timing and what are the pushes and pulls in your mind that could end up causing a problem on timing?
Yeah, that's a good question, Praful. Probably useful to just step back for a second and repeat a theme that I think was in my remark, and in frankly prior earnings call remarks. We think about this as a broad economy-wide problem needing an integrated solution across the really broad buckets of preventing and mitigating fires across the state with all the field we have and dead trees, about so much of our state's lands, hardening the state's infrastructure including utilities, and that includes how we think differently about our operations and then dealing with the financial consequences, the allocation of the risk.
There are a lot of elements inside of that, including the reform of inverse condemnation, thinking about moving to from a strict liability standard to a standard of reasonableness, ultimately ensuring that utility is absolutely are on the hook, to the extent that they have in pro forma as they should, but that they are liable to an extent proportional to their actions, right?
There are other pieces that the state will need to address around – in wildfire mitigation and prevention, wildfire management plans, how the PUC then looks at the prudency or utilities around those plans, a lot of pieces there.
If you look at some of the discussions, for example, yesterday in the hearing that the Conference Committee had or the discussions we would expect the Conference Committee to have over the weeks ahead between now and the end of August. They may be talking about – most or all of those areas ideally, we would like to see the state develop a final piece of legislation that has the package that addresses all of these pieces that are needed. We think that's feasible. However, we also recognize, it's challenging. And there are a lot of pieces and a lot of fact-gathering and thinking and drafting of language and debate I'm sure that will happen inside the confines of the Conference Committee.
And so, all along, we've just started to be realistic with our investors about, fact that, while it's seasonable and how we're all working very hard and I'll just ask that our coalition and – a lot of us that are stakeholders across the state, they may or may not be, that all of these pieces get done in this legislative session. We hope they are, but they may not. And so, hard to handicap at this point what pieces – what the success will be, maybe it's all if it. Maybe it's most of it. It's certainly possible there can be pieces that get handled outside the Conference Committee in parallel legislation with a broader senate assembly. It's certainly possible there are things that go beyond this scheduled legislative session.
So, I always try to do is acknowledge that possibility, Praful without trying to handicap or point to, gee, we think this element, there is a 90% probability and that other one has a 60% probability.
That is super helpful color, Pedro. Thank you for that. Just a quick follow-up on this AB 33 securitization. It clearly seems like a constructive way to meet any funding needs. But it was – looks like it was PG&E only at this point. Is that something that you would look to replicate if it were to go through, so it would apply to EIX as well?
Well, I think you're correct that the AB 33 is written – it's focused on PG&E. it clearly – we still don't know to what extent we may have liability for the 2017 events. I think I would just step back and say more broadly to the extent that there are events whether it's 2017, as it's the context of AB 33 or whether it was in terms of the framework for moving forward.
To the extent that there are events where customers end up having to bear part of the costs for one interesting feature of AB 33 is the ability to basically securitize and amortize that exposure over a longer time period. And so that in and of itself is an interesting tool that could be beneficial to customers to the extent that we all encounter new wildfires in the future as part of this new normal.
Great. Thanks so much, guys.
Welcome.
Thank you. And our next question comes from Stephen Byrd from Morgan Stanley. Stephen, your line is now open.
Hey, Stephen.
Hi, good afternoon. I wanted to just follow-up on insurance. I know you've given a lot of color around insurance but I wondered if you might be able to speak just to tell where you see that market going over time obviously the cost has been rising quite a bit.
I'm curious if what sort of feedback you get from the insurance community in terms of just not only where the price is now, but future availability trends in terms of the nature of the product or anything else just so we can try to extrapolate over time where that market's going and sort of how to think about the level you received? And also to the extent possible, any feedback from the CPUC in terms of sort of the amount of cost that is palatable given just how high these costs are going?
Sure. So, Stephen, I think one of the elements required in order to answer your question is sort of just how does the current work around reforming inverse and strict liability versus a reasonable standard, how does that all turn out. Because if it continues to be the case that the utilities are going to be what I'll say the insurance of last resort, or these incidents then people that we buy insurance from are going to be exposed to a fair amount of risk, and I don't think you would see necessarily a moderating of the insurance premium from that perspective.
Obviously, as wildfires continue to be more prevalent and to increase in intensity, the size of the losses could also grow and so people will be taking that into consideration.
To the extent that there are new tools that can be implemented that help to mitigate that risk, I think insurance companies will take all of that into consideration. But I don't think that a moderation of premiums is necessarily in the card until we have a lot of, I'll say, fixes on all those fronts.
In terms of your second question on CPUC reaction, what they have seen thus far from us, is the filing we made at the end of last year where they could see $120 million premium for $300 million of coverage. They're considering our application there, the advice letter that we filed there. We've gotten some questions and back-and-forth. But I think they are seeing that and they also can see the incredible increase in cost for the customer. And that really is, at the end of the day, something that gets recovered in rates typically and so it's something that goes right to the bottom line for our customers.
And just to put it in perspective, we had saved quite a bit of O&M expense in this rate case versus our prior rate case, we passed it through to our customers, it was about $85 million and in one fell swoop, that $120 million premium last year wiped it out.
Maria, I would just add one more little bit of color for the first part of the question. We keep talking about the new normal, and we experience here events that I don't think we have really experienced not only as the utility, but as a state, and the same is true for the insurance companies.
One little bit of color there are folks who interact with the insurance companies, color they've received is that the insurance companies are having to basically rework their models because the fundamental assumptions, the way that the models are wired, they're realizing needs change. And when you see events like during the Thomas Fire, the fact that that was in December and on the coast around Santa Barbara, Ventura, we were experiencing humidity levels of 1% to 3% on a December day, that's not something that a lot of us who have lived in the state for a long time have seen before. And so, it's a radical change in the underlying assumptions that's driving then questions, I think, for the insurance companies about their models and just adds uncertainty and therefore adds to pricing.
That's very helpful. Thank you very much.
Thanks, Stephen.
Thank you. And our next question comes from Angie Storozynski from Macquarie. Angie, your line is now open.
Hi, Angie.
Hi, Angie.
How are you? Well, I have to ask a question about fires, because that's almost required. So how about – I mean, what if the legislative session ends and nothing happens? Can the governor issue any type of a, I don't know, directive that would help you carry you guys through the next fire season, if there is even such a thing as a fire season at this point?
Yeah. Angie, that's a tough one to answer. I think we're, to be honest with you, very focused on the next several weeks, getting us to the end of August end of the (40:37) legislative session. As I said earlier, we think it's feasible, very feasible to have progress here, and we're certainly hopeful of that. If that doesn't work out, then I don't want to speculate on what some of the options might be for the government at that point.
Okay. And an unrelated question, so about just your ongoing operations. What is going on as far as any types of adjustments to the costs that those CCA or communities that are trying to self-procure electricity needs to pay for the costs that you have incurred to procured renewables? I mean, it seems like there's more and more of those CCAs happening, and I mean, I'm wondering if the reason why they are multiplying is because there's some inefficiency in the costs that they need to incur. And so, I know that you guys have been trying to make changes to that cost that the CCAs would have to pay. And my question is if that would be retroactive to all of those communities that are, in a way, starting to self-procure and how that would actually impact the municipalities that are still staying on your system. Thanks.
That's a great question, Angie, and it has – doesn't have anything to do with wildfires, so for variety. So on CCA, we are seeing a growing number of cities and communities that are looking at the potential for Community Choice Aggregation. Just as a reminder, from an investor perspective, we should be neutral to that because this is covering the commodity procurement part of the business. That's a cost pass-through activity for us, so it doesn't have a direct impact on the potential earnings power for the company. However, there is an issue that we've been addressing and through the PUC process and it's really an issue of fairness of allocation of costs between customers.
The concern has been that the, what's called the PCIA, the Procurement Cost (sic) [Power Charge] Indifference Adjustment, which is essentially the exit fee that a community choice aggregator or the customers of a CCA have to pay in order to make the remaining bundled customers whole for the cost we've taken on for long-term procurement contracts, for renewables or for other resources, we said at the PUC that we have a concern that that current fee has been not sufficiently compensatory and needs reform. The three utilities filed a joint proposal with the PUC in a PUC docket that's open right now, and we're expecting a proposed decision, I believe, sometime throughout this summer.
In parallel with that, we've seen some constructive actions at the PUC, including, for example, I think around a couple of months ago, the PUC ensuring that CCAs have the same requirements for resource adequacy demonstrations, the year-ahead resource adequacy demonstration that utilities have. Again, that's part of ensuring that there's fair cost allocation across all customers. So some really constructive steps, but waiting to get the decision on the proposals for reforming the PCIA.
Great. Thank you.
Thanks for the question, Angie.
Thank you. And our next question comes from Jonathan Arnold from Deutsche Bank. Jonathan, your line is now open.
Hi. Good afternoon, guys.
Hi.
I just wanted to double-check on the – as we think about the way you're treating this incremental insurance cost. Are you assuming that all of the incremental cost is effectively recoverable in the math you walked us through, Maria? Do we adjust out the 20% that is not to do with wildfires, potentially, or is it just the timing, like the April date that drives the number (45:04)?
So I think, Jonathan, how you should think about it is, this is wildfire-related.
Yeah.
So other insurance, we hope to play it in the normal course, so it's not – that's not the same situation. And what we think is, we have $0.38 cents of incremental wildfire-related cost vis-à-vis what we requested in our GRC.
Okay.
In the third and fourth quarter, we'll be deferring, based on what we know today, obviously, we'll continue with that, but based on what we know today, we'll be deferring $0.30.
And the difference between $0.38 and $0.30 is the sort of three and a bit months.
Yeah. It would be incremental cost above what we requested that we don't think are recoverable because of timing of various mechanisms, et cetera, and that would be flowing through.
Okay. But aside from the April date and the fact that that wipes out the early parts of the year, your assumption is any incremental wildfire insurance costs you're incurring should be recoverable through the WEMA and you're deferring it for that reason.
That's correct. And we'll – as I said, we'll make an assessment every quarter, but that's our current thinking, yeah.
Okay. That was kind of my question. And then, maybe my follow-up, I may have just missed this, but was there some mention, Pedro, of a possibility? Is there a precedent where the governor could possibly call a special session, or how could that happen if maybe August 28th turns out to not be long enough?
So as you can imagine, we're focused on this session and hopeful and working hard to make – hopefully, legislature will make a good progress there. I don't think there's been a lot of talk around other mechanisms, given the focus on the Conference Committee process and the proposal that the governor put in. In theory, special sessions can be called after the regular session of the legislature. But again, our focus right now is on supporting the current Conference Committee effort.
Okay.
Thanks, Jonathan.
Thank you.
Thank you. And our next question comes from Lasan Johong from Auvila Research Consulting. Lasan, your line is now open.
Yes. Thank you. Instead of asking a follow-up, I'm just going to ask two questions. First of all, probably, there's a heat wave going on in California – Southern California right now. I'm just wondering how the grid is performing, A, and related to that, if the renewables are doing what they're supposed to do, or it's being strained.
And second question is, how is the CPUC, the utilities and interveners thinking about undergrounding cables at high risk wildfire areas? It seems to me that's the proper (47:47) long-term solution. Thank you.
Well, on the first question around the heat wave, I think the broad answer is that the system has been managing that reasonably well. But let me turn it to Ron Nichols, President of SCE.
Our system is holding up well. In fact, our teams have been reporting on that regularly. We're obviously putting a lot more people out in the field to make sure we're able to respond to it, but our grid is holding up well, the resources are there. We're just encountering some pricing issues as we look at the market, but supplies have been there. We haven't had any reliability concerns today.
And on the second question on the CPUC, undergrounding, I think that is a topic that has been coming up a lot, particularly in discussions around grid resiliency and the like. The Commission has – we've identified it obviously as an alternative, but it's very expensive. The Commission is looking at, is comparing that to other alternatives, for example, insulated conductors as opposed to undergrounding. So, it's really something that's still being assessed by the Commission, and frankly, by the utilities as well.
Right. As you can imagine, we have a large effort, and I think that's part of what I mentioned under the broad umbrella of the operational considerations that we are looking at right now to look at alternatives for how we help address the risk in those areas.
But insulating a cable doesn't prevent it from being cut by a falling tree?
Yes, because they'd still be above ground, so they could still be damaged by things that are going around and the like, but they do provide an additional layer of security and prevention because of the insulation.
Understood. Thank you.
Thanks very much.
Thank you. And that was the last question. I will now turn the call back to Mr. Sam Ramraj.
Thank you for joining us today and please call us if you have any follow-up questions. This concludes the call and you may now disconnect.
Thank you, and again, that concludes today's conference. Thank you all for your participation. You may disconnect at this time.