2018 GRC Workshop - Depreciation November 3, 2016 Presented by: - - PowerPoint PPT Presentation

SLIDE 1

2018 GRC Workshop - Depreciation

November 3, 2016

Presented by: Alan Varvis

SLIDE 2

Summary

SCE took a thoughtful approach to tempering its depreciation expense request, which will mitigate the rate impact on current customers. SCE performed a rigorous analysis in order to meet the Commission’s depreciation directives from the 2015 GRC. Topics for Today’s Discussion:

• Overview of Request

– Depreciation Expense Request By Function – Comparison with Prior Rate Cases – Basis For Moderating Request

• Introduction to Depreciation Principles

– Overview of Net Salvage

• 2015 GRC Decision Directives

– Overview and Approach – Per Unit Analysis – Cost Assignment (Install vs. Removal)

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Overview of Request: Depreciation Expense

• T&D Lives: Proposed retaining or

extending lives for 16 out of 18 accounts.

• T&D Net Salvage: SCE capped its

proposed increases in Net Salvage Rates to no more than 25% above the currently authorized values.

• Generation: Revised projected Hydro

license renewal terms.

Proposed Changes to 2018 Depreciation ($M) Transmission and Distribution $67 Change due to Life ($29) Change due to Net Salvage $96 Generation $18 Solar Photovoltaic $6 Hydro $11 All Other Generation $1 General & Intangible ($5) Total Change $81

• Depreciation study and anticipated plant growth result in forecast 2018 expense
• f $2,003 million

– $81 million of the total is from the moderated results of the detailed depreciation study.

• SCE took a thoughtful approach to moderating the detailed depreciation study

results.

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Current Depreciation Request Compared to Prior Rate Cases (Nominal $M)

$2,003

The bottom bars largely represent the impact of plant growth

$1,168 $1,518 $1,818 $1,922 2009 GRC 2012 GRC 2015 GRC 2018 GRC $75 $59 $101 $81 6.4% 3.9% 5.6% 4.2% Study Proposals relative to then-authorized rates Test-Year depreciation expense at then- authorized rates* Increase as percent of then-authorized rates

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SCE’s Moderated Request

• SCE’s depreciation proposals reflect a moderated request for the following

reasons:

– Gradualism: To reduce the rate impact on current customers, SCE’s proposal incorporates the principle of gradualism, invoked twice previously by the Commission in the depreciation context. – Forecasting: SCE’s estimate of future net salvage is based on the cost to retire assets today. In future rate cases, the CPUC’s prescribed Standard Practice U-4 affords the opportunity to refine estimates of future net salvage.

• SCE moderated the request by limiting proposed increases in net salvage

rates to no more than 25% above the currently authorized values.

Depreciation Expense (2018 $ Millions) $3,085 $2,003

• 1,082

Depreciation Study Results 2018 GRC Proposed Depreciation Expense Moderated

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Net Salvage Study Results

SCE-09, Vol. 3 p. 7 (Table I-2) FERC 2015 GRC Study 25% Above SCE's NSR Acct Description Authorized Results Authorized Proposals A B C D E=C*1.25 G=Lesser of D or E Transmission Plant 352 Structures and Improvements 35% 35% 44% 35% 353 Station Equipment 15% 10% 19% 10% 354* Towers and Fixtures 60% 185% 75% 75% 355* Poles and Fixtures 72% 499% 90% 90% 356* Overhead Conductors and Devices 80% 210% 100% 100% 357 Underground Conduit 0% 0% 0% 0% 358 Underground Conductor and Devices 15% 25% 19% 19% 359 Roads and Trails 0% 0% 0% 0% Distribution Plant 361 Structures and Improvements 25% 30% 31% 30% 362 Station Equipment 25% 50% 31% 31% 364* Poles, Towers and Fixtures 210% 488% 263% 263% 365* Overhead Conductors and Devices 115% 538% 144% 144% 366* Underground Conduit 30% 401% 38% 38% 367* Underground Conductor and Devices 60% 261% 75% 75% 368* Line Transformers 20% 47% 25% 25% 369* Services 100% 387% 125% 125% 370 Meters 5% 0% 6% 0% 373 Streetlights 30% 100% 38% 38%

*Used a per-unit analysis to arrive at proposed net salvage rates

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Introduction to Depreciation Principles

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Introduction to Depreciation Principles

• Depreciation expense allocates the original cost of the asset and the

future cost to retire that asset over its useful life.

• SCE uses the Straight Line Method and Remaining Life Technique

prescribed by the CPUC in its Standard Practice U-4

Depreciation = Plant − Future Net Salvage − Accumulated Depreciation Remaining Service Life

• Factors Affecting Depreciation

– Net Salvage: salvage less removal (including decommissioning) – Accumulated Depreciation: past recorded depreciation – Remaining Life: Average Service Life less Average Age of Assets

• Depreciation rates are developed for over 50 different plant accounts

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Components of SCE’s Depreciation Analysis

• Net Salvage Analysis

– Performed Per-Unit Analysis on select T&D accounts

• Analyzed units of property to create subpopulations for each FERC prime account.
• Considered function, type of equipment, characteristics marked by similar forces of

retirement.

– Used traditional method (CPUC Standard Practice U-4) for remaining accounts, consistent with prior rate cases.

• Service Life Analysis & Estimation

– Performed actuarial service life analysis for the first time.

• Performed life analysis for each subpopulation.

– Utilized aged transactions from 2002-2015. – Prior rate cases utilized the Simulated Plant Record (SPR) approach.

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What is Net Salvage and Why is it Important?

• The goal of depreciation is to allocate capital costs (including future net salvage) over the

assets’ useful lives.

• Generally, cost of removal exceeds gross salvage, which leads to negative net salvage rates

and higher depreciation expense.

• Net Salvage is a vital part of utility cost recovery and has been a point of contention in prior

rate cases because: – Net salvage rates represent an estimate of future costs to remove when assets retire; – Negative net salvage rates increase depreciation expense; – T&D net salvage rates are increasingly negative; and – There are timing differences between when utilities recover the estimated cost of removal in rates today and when the future expenses will be incurred.

+ Gross Salvage Consideration received for the scrap or reuse value of a retired asset

• Cost of Removal The cost incurred to remove and dispose of an asset

= Net Salvage

The net cost to retire an asset

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2015 GRC Decision Directives

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2015 GRC Decision Directives

The Commission directed SCE to provide more detail in support of its net salvage proposals for at least five of its largest accounts, as measured by proposed annual depreciation expense. At a minimum, the detail shall include:

• 1. A quantitative discussion of historical and future COR [Cost of Removal] on a per

unit basis for the large (greater than 15% as measured by the portion of plant balance) asset classes in the account. This should identify and explain the key factors in changing or maintaining the per-unit COR.

• 2. Quantitative discussion of historical and future retirement mix; identify and explain

the key factors in changing or maintaining this mix.

• 3. Quantitative discussion of asset life and original cost of assets being retired, in

relation to the COR, on both a historical and prospective basis. This discussion should be integrated with and/or cross-reference the proposal for life characteristics.

• 4. An account-specific discussion of the process for allocating costs to COR.

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SCE Addressed the 2015 GRC Decision Directives

Compliance Directive from 2015 GRC Per-Unit Analysis (Required by 2015 GRC Decision) Traditional Approach (As Established in Standard Practice U-4) 1. Perform a per-unit COR analysis Separate account into sub-populations (e.g., account 365 conductor vs. account 365 switches) and calculate a per-unit

• COR. Math: Historical cost to retire assets

divided by quantities of property units being retired within each subpopulation. Calculate COR at the account level of detail (e.g., account 365). Math: Historical cost to retire assets divided by original cost of assets retiring. 2. Discuss Whether Retirement Mix Will Change Or Stay The Same Apply the per-unit cost estimate results to surviving plant balance assuming that the future retirement mix will be consistent with the current plant balance. Assumes that the future retirement mix will mimic SCE's recorded experience. 3. Integrate Salvage Analysis with Life Analysis Utilize original cost of current plant-in- service and results of the life analysis to estimate timing and cost of future retirements. Assume that the future average age of retirements, and the inflation embedded in the cost of removal, will both mimic recorded activity. 4. Discuss COR Allocation Provide account-specific discussion for the process for assigning costs to cost of removal (versus install).

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SCE Performed a Rigorous Analysis to Comply with the 2015 GRC Directives

• Classified ~700 different units of property into ~90

subpopulations.

• Combined millions of asset records with millions of cost of

removal records to calculate per unit COR.

• Reconciled 14 years of additions, retirements, transfers,

adjustments, and balances to FERC Form 1.

• Required SCE’s outside consultant to customize depreciation

model to comply with directives.

• Reviewed over 70,000 work orders from 2015 to conduct a COR

assignment study.

• Approximately 2,500 resource hours spent on developing the

study results.

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Per-Unit Analysis: Comparison to Traditional Approach

• The Per-Unit Analysis addresses Directives 1-3

Figure II-7 Future Net Net Salvage Incurred Per-Unit Salvage Rate Plant Cost Retired Net Salvage Future Per-Unit Surviving Net Salvage Net Salvage Quantity 1 Future Net Salvage Rate

• 1. Multiplying by surviving quantity produces forward-looking estimates of net salvage (in more complex examples, the timing of removal

and level of inflation will change the per unit net salvage value).

• 2. Using the surviving plant balance is representative of the future retirement mix.

Surviving Plant 2 = x = Future Net Salvage Traditional Analysis = = Per-Unit Analysis Plant Quantity Retired Net Salvage Incurred

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Per-Unit Analysis: Calculating Per-Unit Net Salvage

• First, the net salvage cost per unit is calculated by summing the

recorded history—in both dollars used to remove assets, and quantities of assets removed—to arrive at a per-unit net salvage value by sub-population:

Figure II-4 Per-Unit Net Salvage Overhead Underground Transformer Transformer Fuseholder Others Per-Unit ($79,500,742) ($78,642,058) ($44,409,667) ($19,071,340) Net Salvage 141,838 53,904 275,472 19,862 = ($561) ($1,459) ($161) ($960) = = Net Salvage ($) Quantity Retired

Example using Account 368 – Distribution Line Transformers

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Per-Unit Analysis: Projecting Future Net Salvage

• Next, multiplying the per-unit net salvage from the previous slide

by the year-end 2015 surviving quantities, results in a no inflation estimate of the future net salvage.

Figure II-5 Overhead Underground Transformer Transformer Fuseholder Others ($561) ($1,459) ($161) ($960) x x x x 456,611 259,299 1,400,640 62,788 ($920,320,858) = ($255,932,428) ($378,298,499) ($225,801,375) ($60,288,556) = + + + Future Net Salvage Future Net Salvage = Per-Unit NS x Per-Unit Surviving Quantity

Example using Account 368 – Distribution Line Transformers

From Previous Slide Surviving Quantity

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Per-Unit Analysis:

• Lastly, the future net salvage is divided by the cost of the assets

currently serving customers (the denominator, or surviving plant balance) to arrive at an estimated future net salvage rate.

Figure II-6 Future Net Future Net Salvage Salvage Rate ($920,320,858) $3,450,870,284 = Surviving Plant

• 26.7%

=

From Previous Slide

Example using Account 368 – Distribution Line Transformers

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• Traditional Net Salvage analysis relies on historical experience

compared to a Per-Unit analysis’ focus on the future

Example using Account 368 – Distribution Line Transformers

Per-Unit Analysis: Comparison to Traditional Approach

Future Net Net Salvage Incurred Future Net Future Net Salvage Salvage Rate Plant Cost Retired Salvage Rate Surviving Plant ($221,623,808) ($920,320,858) $324,095,153 $3,450,870,284 =

• 68.4%
• 26.7%

= = Traditional Analysis Per-Unit Analysis =

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Cost of Removal Allocation

• Fourth Directive: Account-specific discussion of the process for

assigning costs between installation and removal.

• The assignment of removal cost is important because it impacts

the estimate of future net salvage (Future Net Salvage = Gross Salvage – Cost of Removal)

• Process for Assigning Costs to Installation and Removal

1. Project-Specific Estimating Process (15% of COR)

• Utilizes job-specific scope to estimate
• Bulk-Power Transmission, Substation, and

Generation/Other 2. Design Manager (DM) Estimating Process (85% of COR)

• Utilizes template-based approach to manage high volume

work

• Distribution/Sub-Transmission

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Results of Cost Assignment Studies

• SCE’s Design Manager Process utilizes a Standard Rates Table to

assign costs to removal.

• Results from several studies indicate that SCE’s current method

does not over-assign costs to removal.

FERC Standard 2004 2006 2016 Account Description Rates Table Study Study Study Transmission Plant 354 Towers and Fixtures 355 Poles and Fixtures 27.2% 30.2% 31.4% Not Studied 356 Overhead Conductors & Devices 42.1% 56.1% 56.7% Not Studied Distribution Plant 364 Poles, Towers and Fixtures 36.6% 43.0% 39.4% 46.1% 365 Overhead Conductors & Devices 34.7% 38.6% 37.1% 35.6% 366 Underground Conduit 20.0% 42.3% 41.9% 41.7% 367 Underground Conductors & Devices 34.7% 32.1% 33.7% 35.7% 368 Line Transformers 27.3% 47.4% 48.8% 41.6% 369 Services 35.5% 44.2% 44.5% 33.8% Weighted Average* 33.0% 38.8% 38.3% 37.5% *Weighted by 2009-2015 Recorded Net Salvage Not Applicable - Non-Mass Plant

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Appendix

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Depreciation Expense Request Relative to Prior Rate Case Requests

• SCE’s Proposed 2018 GRC Depreciation Expense Increase Results from:

– Increases in Forecast Plant Balances: Growth in capital expenditures closing to plant results in increases to depreciation expense. Here, the result is an increase of $266 million

• ver 2015 recorded expense.

– Changes in Depreciation Parameters: SCE’s proposed depreciation parameters result in an increase in 2018 expense of $81 million.

General Rate Case Line item 2018 2015 2012 2009 1. Recorded Base Year Depr. Expense $1,656 $1,298 $1,061 $873 2. Increase due to Plant Growth $266 $520 $457 $295 3. Test Year Expense at Authorized Rates $1,922 $1,818 $1,518 $1,168 4. Increase due to Depreciation Proposals $81 $101 $59 $75 5. Total Proposed Depr. Expense $2,003 $1,919 $1,577 $1,243 6. Change due to Proposals (4 ÷ 3) 4.2% 5.6% 3.9% 6.4%

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T estimony T able I-12 Depreciation Expense Proposal

% Change Depreciation from 2015 Line Expense Recorded No. Item (Nominal $M) (Line 1) 1. Recorded 2015 Depreciation Expense at Authorized Depreciation Rates (from 2015 GRC) $1,656 2. Change due to 2016-2018 Plant Growth at Authorized Depreciation Rates $266 16.1% 3a. Change due to proposed Depreciation Rates applied to Year-End 2015 Recorded Plant $71 4.3% 3b. Change due to Proposed Depreciation Rates applied to 2018 Forecast Plant $10 0.6% 3. Total Change due to Depreciation Study (Sum of 3a and 3b) $81 4.9% 4. Proposed Test Year 2018 Depreciation Expense (Sum of Lines 1,2, and 3) $2,003 21.0%

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T&D Depreciation Study Results

FERC Net Salvage Rates Curves and Lives Depreciation Rates Account Description

Auth. Prop. Change Auth. Prop. Change Auth. Prop. Change

A B C D E=D-C F G H=G-F I J K=J-I

Transmission 352 Structures and Improvements

• 35%
• 35%

S 3.0 55 L 1.0 55 2.53% 2.40%

• 0.13%

353 Station Equipment

• 15%
• 10%

5%

R 0.5 45 L 0.5 40

• 5

2.66% 2.84% 0.18%

354 Towers and Fixtures

• 60%
• 75%
• 15%

R 5.0 65 R 5.0 65 2.30% 2.73% 0.43%

355 Poles and Fixtures

• 72%
• 90%
• 18%

R 0.5 50 SC 65

15

3.43% 2.84%

• 0.59%

356 Overhead Conductors & Devices

• 80%
• 100%
• 20%

R 3.0 61 R 3.0 61 2.63% 3.24% 0.61%

357 Underground Conduit 0%

0% R 3.0 55 R 3.0 55 1.73% 1.73% 0.00%

358 Underground Conductors & Devices

• 15%
• 19%
• 4%

R 2.5 40 S 1.0 45

5

2.65% 2.41%

• 0.24%

359 Roads and Trails

0% 0% SQ 60 R 5.0 60 1.52% 1.65% 0.13%

Distribution 361 Structures and Improvements

• 25%
• 30%
• 5%

R 2.5 42 L 0.5 50

8

3.04% 2.39%

• 0.65%

362 Station Equipment

• 25%
• 31%
• 6%

R 1.5 45 L 0.5 65

20

3.13% 2.01%

• 1.12%

364 Poles, Towers and Fixtures

• 210%
• 263%
• 53%

L 0.5 47 R 1.0 55

8

7.04% 7.09% 0.05%

365 Overhead Conductors & Devices

• 115%
• 144%
• 29%

R 0.5 45 R 0.5 55

10

4.87% 4.49%

• 0.38%

366 Underground Conduit

• 30%
• 38%
• 8%

R 3.0 59 R 3.0 59 2.22% 2.27% 0.05%

367 Underground Conductors & Devices

• 60%
• 75%
• 15%

R 0.5 45 R 1.5 43

• 2

2.98% 3.94% 0.96%

368 Line Transformers

• 20%
• 25%
• 5%

R 1.0 33 S 1.5 33 3.93% 4.57% 0.64%

369 Services

• 100%
• 125%
• 25%

R 1.5 45 R 1.5 45 4.34% 5.04% 0.70%

370 Meters

• 5%

0%

5%

R 3.0 20 R 3.0 20 5.30% 5.61% 0.31%

373 Street Lighting & Signal Systems

• 30%
• 38%
• 8%

L 0.5 40 L 1.0 48

8

3.10% 3.00%

• 0.10%

General Buildings 390

Structures & Improvements

• 10%
• 10%

0%

R 3.0 38 R 0.5 45

7

2.74% 2.08%

• 0.66%

Used a Per-Unit Analysis to analyze Net Salvage

Moderated as discussed in Chapter 1, Section C Proposed Retention of Currently Authorized Lives 25

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Cost of Removal Allocation

• Provide account-specific discussion for the process for assigning

costs to cost of removal (versus install).

SCE-09, Vol. 3 p.24 (Table II-9) CPR Account Description 364.330 Distribution Wood Pole 62% 29% 91% Allocation + + between CPR 373.390 Streetlight fixture 5% 4% 9% Accounts = = Total 67% 33% 100% Allocation between Install and Removal for replacement project Percent of Sum of Standard Rates Values Install Removal Total + = + = + =

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2018 GRC Post-T est Year Ratemaking

November 3, 2016

Presented by: Paul Hunt

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Agenda

• Why is post-test year ratemaking needed?
• What does it cover?
• History of post-test year adjustments in SCE’s GRCs
• Features of SCE’s proposed mechanism

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Why is Post-T est Year Ratemaking Needed?

• SCE’s GRC is litigated only once every three years
• SCE’s base rate revenues are decoupled from sales (do

not vary with sales)

– Any variation in recorded revenues from authorized revenues is tracked for recovery from (if actual below authorized) or refund to (if actual above authorized) customers – Revenues that result from customer growth or increased usage per customer are returned to customers; not available to offset increased O&M and capital-related costs – Differences are tracked in the Base Revenue Requirement Balancing Account (BRRBA)

• Necessary to provide increases in revenue requirement

to offset cost increases; provide SCE with reasonable

• pportunity to earn its authorized return on equity
• Allow for real increases in capital additions to maintain

safe and reliable service

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What does Post-T est Year Ratemaking cover?

– Operation and maintenance (O&M) expense increases due to price and wage increases

• Labor – account for collective bargaining agreements and non-

represented pay raises

• Nonlabor – account for price increases in the goods and services

associated with running a utility

– Capital-related cost increases

• Based on SCE’s capital budget or
• Based on reasonable increases in capital additions from test-year levels

(i.e., price increases in capital goods)

• Updated for any changes in SCE’s authorized cost of capital

– Major exogenous changes in SCE’s costs – However, O&M changes from customer growth in 2019 and 2020 are assumed to be offset by SCE productivity improvements

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What does Post-T est Year Ratemaking cover? Continued

• Changes in SCE’s cost of capital (“financial attrition”)

are determined in separate cost of capital applications;

• nly the resulting revenue requirement change is

handled here

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Details of SCE’s Proposed Mechanism

• O&M escalation

– Based on latest IHS Global Insight escalation rates – Union wage increases and target wage increases granted before the Phase 1 decision will be incorporated – No trueup of 2019 O&M expense from updates to the 2019 escalation factor – Benefit escalation rates are discussed at SCE-09, pp. 119-120

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Details of SCE’s Proposed Mechanism Continued

• Capital-Related Cost Increases

– Preferred recovery: capital expenditures based on SCE’s budget-based forecast; gives best detailed guidance

• Associated revenue requirement increases are subject to

refund if capital spending budgets are not fully implemented – Alternate proposal: escalate test year capital additions by projected capital escalation rates

• Approach is acceptable, provided that the capital

escalation rates allow for real increases in capital additions, beyond increases from pure escalation in capital good prices

• SCE proposes 5% escalation per year, roughly double pure

price escalation

• Specific adjustment for Customer Service Re-Platform

project

• Major exogenous changes in SCE’s costs

– Continuation of existing Z-factor mechanism

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Projected T est Year Levels

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Back Up

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SCE Post-T est Year Mechanisms Since 2003 GRC

Applicable Period O&M Escalation Capital Related Costs Z-Factors 2004-2005 (2003 test year)

• GRC escalation methodology
• Industry specific indexes
• Union increases incorporated

if known by GRC decision Budgeted capital additions $10 million deductible with certain exceptions 2007-2008 (2006 test year) Similar to 2003 test year Specified escalation rate

• n capital

additions Unchanged 2010-2011 (2009 test year)

• No specific O&M mechanism
• Specified escalation rate (on

revenue requirement) Specified escalation rate (on revenue req.) Unchanged 2013-2014 (2012 test year) Similar to 2003 test year Specified escalation rate

• n capital

additions Unchanged 2016-2017 (2015 test year) Similar to 2003 test year Specified escalation rate

• n capital

additions Unchanged

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SCE Post-T est Year Mechanisms Since 2003 GRC

Applicable Period GRC Decision O&M Escalation Capital-Related Costs Z-Factors 2004-2005 (2003 test year) D.04-07-022 GRC escalation methodology; SCE- and industry-specific indexes; union increases incorporated if known by GRC decision Budgeted capital additions Criteria specified in D.94-06-011; $10 million deductible with certain exceptions 2007-2008 (2006 test year) D.06-05-016 GRC escalation methodology; SCE- and industry-specific indexes; union increases incorporated if known by GRC decision Test year capital additions escalated at specified capital escalation rates Unchanged 2010-2011 (2009 test year) D.09-03-025 No specific O&M mechanism; GRC revenue requirement escalated at specified rate No specific capital-related mechanism; GRC revenue requirement escalated at specified rate Unchanged 2013-2014 (2012 test year) D.12-11-051 GRC escalation methodology; SCE- and industry-specific indexes; union increases incorporated if known by GRC decision Test year capital additions escalated at specified capital escalation rates (generally same as 2007-2008 methodology) Unchanged 2016-2017 (2015 test year) D.15-11-021 GRC escalation methodology; SCE- and industry-specific indexes; union increases incorporated if known by GRC decision Test year capital additions escalated at specified capital escalation rates (generally same as 2007-2008 methodology) Unchanged

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POST-TEST YEAR RATEMAKING ESCALATION RATES

(Will be updated per the Rate Case Plan and as proposed in SCE's testimony)

2018 2019 2020 LABOR ESCALATION (Exhibit SCE-09, Vol. 1, Table VII-28) 2.82% 2.79% 2.74% NONLABOR ESCALATION (Exhibit SCE-09, Vol. 1, Table VII-29) Total Steam Production 2.53% 2.53% 2.37% Total Hydro Production 2.67% 2.67% 2.55% Total Other Production 2.40% 2.42% 2.29% Total Transmission Plant 1.48% 1.53% 1.46% Total Distribution Plant 2.28% 2.36% 2.18% Customer Accounts 2.39% 2.11% 2.14% Electric Customer Service and Information 1.83% 1.82% 1.93% Total Administration and General Without Healthcare 2.42% 2.36% 2.29% CAPITAL ESCALATION (Exhibit SCE-09, Vol. 1, Table VII-32; provided for information only*) Total Steam Production Plant 2.72% 2.51% 2.54% Total Hydraulic Production Plant 2.40% 2.45% 2.40% Total Other Production Plant 1.65% 2.11% 2.64% Total Transmission Plant 2.47% 2.63% 2.62% Total Distribution Plant 2.52% 3.14% 3.18% General Plant 1.88% 1.82% 1.81% Total Nuclear Palo Verde 2.52% 2.55% 2.46%

* SCE's post-test year ratemaking proposal provides for capital additions to be based on a budget-based forecast of capital expenditures (preferred mechanism), or test year capital additions escalated at five percent per year plus an adjustment for the Customer Service Re-Platform capitalized software project (alternate proposal).

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2018 GRC- Rate Base Timeline Overview Differences between CPUC and FERC Ratemaking

November 3, 2016

Presented by: Paul Hunt

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Capital Expenditures to Rate Base1

Year 1 2 3 4 5 6 Capital Expenditures 100 100 50 A Capital Additions 250 CWIP (Average) 50 150 225 AFUDC Rate2 8% 8% 4% B AFUDC 4 12 9 A+B Initial Rate Base (July 1) 275 Depreciation Rate (10-Year)2 5% 10% 10% 10% D Depreciation 14 28 28 28 Ending Rate Base 261 234 206 179 Average Rate Base 268 248 220 193 Rate of Return 3.95% 7.90% 7.90% 7.90% E Return 11 20 17 15 D + E Revenue Requirement3 24 47 45 43

1) Figures represent rounded amounts and may not foot due to rounding. 2) In year 3, CWIP exists for only six months. Additionally, Depreciation accrues for only six months. 3) Revenue Requirement excludes Taxes. 41

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DIFFERENCES BETWEEN FERC RATEMAKING (FORMULA RATE) AND CPUC RATEMAKING FOR SCE

FERC Formula Rate for SCE

• SCE recovers costs as defined in the formula
• Formula is composed of about 35 detailed schedules
• At broadest level, SCE recovers its costs, no more and no less
• Cost changes are immediately reflected in revenues

CPUC Ratemaking

• SCE’s revenue requirement is based on forecast costs
• Except for those parts of the revenue requirement recovered

through balancing accounts, SCE is fully at risk for cost increases during the rate case cycle (test year plus post-test year period)

• Cost reductions during the rate case cycle flow to investors; they

are incorporated in a lower revenue requirement in future rate cases

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2018 GRC RO Model Workshop

November 3, 2016

Presented by: Douglas Tessler

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T able of Contents

• RO Model Overview
• Adjustments & Impacts Matrix
• Case Studies
• Appendix

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• RO Model Overview
• Adjustments & Impacts Matrix
• Case Studies
• Appendix

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Why the RO Model is Used in GRCs?

The Commission has stated that the single most important effort to streamline proceedings is to ensure the simplification and transparency of the RO Model1

– A user-friendly model facilitates the quick calculation of a Revenue Requirement for various scenarios, allowing for quicker turnaround in the GRC process

With only moderate training, a user should be able to accomplish the following:

– Change depreciation rates – Calculate the lead-lag portion of working cash – Calculate all taxes and tax depreciation – Make plant adjustments including adjustments to beginning-of-year plant balances – Calculate Revenue Requirement and Summary of Earnings In the spirit of promoting simplicity and transparency, SCE reviews the RO Model prior to every GRC for opportunities for improvement

1) D.00-07-050 46

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RO Model Overview

• The RO Model consists of four interdependent modules
• Any changes made to the O&M, Capital, and Tax modules flow to the Summary

Reports module

• The Summary Reports module uses information from the O&M, Capital, and Tax

modules to calculate Revenue Requirement

Summary Reports Module O&M Module Tax Module Capital Module

Testimony Reference for RO: SCE 2018 GRC, Exhibit SCE-09, Vol. 01 Testimony Reference for Taxes: SCE 2018 GRC, Exhibit SCE-09, Vol.02 47

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Revenue Requirement and Rate Base

O&M + Depreciation Expense + Property Tax Expense + Payroll Tax Expense + Income Tax Expense + Return on Rate Base = Revenue Requirement Revenue Requirement Net Plant-In-Service + Working Capital – Reserves – Accumulated Deferred Taxes = Rate Base x Rate of Return = Return on Rate Base Return on Rate Base Revenue Requirement consists of the revenue SCE needs to deliver safe, reliable, affordable and clean electricity to its customers

Testimony Reference for Rev Req: SCE 2018 GRC, Exhibit SCE-09, Vol. 01

Testimony Reference for Rate Base: SCE 2018 GRC, Exhibit SCE-09, Vol.02 48

SLIDE 50

2018 RO Model Overview (1 of 2)

Simplicity Transparency User Interface Architecture

(RO Model Level)

Methodology

(Module Level)

Calculations

(Workbook Level)

Enhancements Reassessed and enhanced methodologies where possible Enhanced organization of calculations; clearer build-up to key outputs

Inputs Calculations Outputs

Areas of Focus

As part of SCE’s triennial assessment of the RO Model, SCE took a holistic approach in redesigning the 2018 RO Model, incorporating feedback from key stakeholders in the 2015 GRC Redesign Overview

49

SLIDE 51

2018 RO Model Overview (2 of 2)

Workbooks

Redesign Results

Worksheets Model Connections % Reduction 2015 RO Model 2018 RO Model

Redesign enhancements resulted in material improvements to Simplicity, Transparency, and User Interface of the 2018 RO Model

38%

21 13

42%

566 327

82%

986 179

Checks Color Coding1

Minimal +350 Centralized Varied Uniform/Transparent

1) Refer to Slide 29 in Appendix 50

SLIDE 52

RO Model Architecture – Data Interaction

How Data Flows Within and Between Workbooks

‒ Inputs centralization improves transparency and highlights workbook’s main drivers ‒ Calculations only use data within workbooks ‒ Outputs centralization provides insights into the flow of data out of workbooks

Workbook A Inputs Calculations Outputs Workbook B Inputs Calculations Outputs

How RO Model Workbooks Interact

‒ Linear Flow of information enhances interaction between workbooks ‒ Model Connections are controlled within Inputs and Outputs sections of workbooks

51

SLIDE 53

2018 GRC Application

Summary of Earnings ($ in Millions)

Summary of Earnings (CPUC Only) 2018 GRC Application Line Item 2018 2019 2020 1. Total Revenue Requirement 5,885 6,418 6,989 2. Operating Expenses: 3. Production 4. Steam 8 8 8 5. Nuclear 77 77 77 6. Hydro 41 41 41 7. Other 85 85 85 8. Total Production O&M 211 211 211 9. Transmission 90 90 90 10. Distribution 544 544 544 11. Customer Accounts 163 163 163 12. Uncollectibles 12 13 14 13. Customer Service & Information 21 21 21 14. Administrative & General 744 778 781 15. Franchise Requirements 54 59 64 16. Revenue Credits (165) (171) (182) 17. O&M 1,674 1,708 1,706 18. Escalation 125 176 224 19. Depreciation 1,745 1,866 2,045 20. Taxes Other Than On Income 21. Property Taxes 259 279 302 22. Payroll Taxes & Misc 67 70 72 23. Taxes Based On Income 206 338 478 24. Income Taxes 532 686 852 25. Total Operating Expenses 4,076 4,436 4,827 26. Net Operating Income 1,809 1,983 2,161 27. Rate Base 23,005 25,212 27,485 28. Rate Of Return 7.86% 7.86% 7.86% 2018 GRC Application (Base Case)

Testimony Reference: SCE 2018 GRC, Exhibit SCE-09, Vol. 01, pages 24-27

52

SLIDE 54

• RO Model Overview
• Adjustments & Impacts Matrix
• Case Studies
• Appendix

53

SLIDE 55

Adjustments & Impacts Matrix Overview

• The following slides are designed to familiarize GRC stakeholders

with the relationships between common adjustments made to the RO Model and their impacts to the Revenue Requirement

• Intent is to act as a reference guide

54

SLIDE 56

O&M Module (Includes OOR)

(2018 Impacts)

in Labor results in a Revenue Requirement

• Changes to labor impact related O&M Forecasts and Escalation Forecasts

(Capitalized A&G and P&B, Benefit Programs)

• Changes to labor also impact the GRC Labor Allocator; used to functionalize and jurisdicitionalize O&M,

depreciation, payroll taxes, and rate base in Non-Labor results in a Revenue Requirement

• Changes to non-labor impact related O&M Forecasts and Escalation Forecasts
• Changes to non-labor also impact Capitalized A&G and P&B which impact Rate Base

in OOR results in a Revenue Requirement

• Changes to OOR have an opposite impact to Revenue Requirement

in Escalation Rates results in a Revenue Requirement

• The impact from changes to escalation rates depends on the Escalation Groups (A&G, Transmission,

Benefits, etc.) and Cost Types (Labor, Non-Labor, Other)

• Changes to O&M forecasts result in changes to the Escalation Forecasts

1

Labor

2

Non-Labor

3

OOR

4

Escalation Rates

55

SLIDE 57

Capital Expenditures results in Revenue Requirement

• Decreases to capital expenditures result in lower capitalized software deduction which increases

income taxes (flow-through tax treatment) and Revenue Requirement

Capital/T ax Modules

(2018 Impacts)

Capex (100% CPUC; 0% Repair Deduction; With Bonus Depreciation) Capex (Capitalized Software)

Capital Expenditures results in Revenue Requirement in 2018 (Short Term) and Rate Base and Revenue Requirement post 2018 (Long Term)

• Short Term – Decreases to capital expenditures result in lower cost of removal benefit, increasing income

taxes (lower tax deductions) and Revenue Requirement

• Long Term – Decreases to capital expenditures result in lower plant in service in subsequent years

decreasing Rate Base and Revenue Requirement Capital Expenditures results in Revenue Requirement in 2018 (Short Term) and Rate Base and Revenue Requirement post 2018 (Long Term)

• Short Term – Decreases to capital expenditures result in lower tax repair and cost of removal benefits,

increasing income taxes (lower tax deductions) and Revenue Requirement

• Long Term – Decreases to capital expenditures result in lower plant in service in subsequent years

decreasing Rate Base and Revenue Requirement

Capex (100% CPUC; 70% Repair Deduction; With Bonus Depreciation)

1 2 3

56

SLIDE 58

Capital/T ax Modules

(2018 Impacts)

Changes that Rate Base result in Revenue Requirement

• Increases in Expense Lag Days decrease Rate Base and Revenue Requirement
• Decreases in Revenue Lag Days decrease Rate Base and Revenue Requirement
• Decreases to Other Items decrease Rate Base and Revenue Requirement

Other Items include: Materials and Supplies, Mountainview Emissions Credits, Customer Advances, etc.

Working Cash

4 in Depreciation Rates results in Revenue Requirement

• Short Term – Reducing depreciation rates decreases Revenue Requirement
• Long Term – Reducing depreciation rates increases Revenue Requirement

Depreciation Rates

5 The following changes to Schedule M result in Revenue Requirement

• Increases to Accrued Vacation Pay Deduction increases ADIT and decreases Rate Base and Revenue

Requirement

• Decreases to Non-Deductible Business Meals decreases Taxes Based on Income and Revenue

Requirement

• Increases in Mixed Service Cost Deduction decreases Rate Base and Revenue Requirement
• Decreases to CIAC Lead typically decreases Rate Base and Revenue Requirement

Schedule M

6

57

SLIDE 59

Summary Reports Module

(2018 Impacts)

Any changes that impact the Revenue Requirement will result in changes to the Franchise Fees and Uncollectibles forecasts

in Uncollectibles % results in a Revenue Requirement

• Changes to Uncollectibles % have a linear impact on Revenue Requirement

in Franchise Fee % results in a Revenue Requirement

• Changes to Franchise Fee % have a linear impact on Revenue Requirement

Uncollectibles %

1

Franchise Fee %

2

58

SLIDE 60

• RO Model Overview
• Adjustments & Impacts Matrix
• Case Studies
• Appendix

59

SLIDE 61

Case S se Studie ies O s Overview iew

• This section provides examples of the Revenue Requirement

impacts resulting from common RO Model adjustments

• The following slides are designed to more thoroughly illustrate the

relationships outlined in the Adjustments & Impacts Matrix section

• f this presentation
• Intent is to act as a reference guide

60

SLIDE 62

RO Model User Guide

Introduction

Summary Reports Module Capital Module Tax Module

Module Overview Module Objectives Workbook Data Flow Diagram Description Inputs Calculations Outputs Scenario Adjustments

O&M Module

A B C D E RO Model Summary Diagram RO Model Workbook Architecture Organization of User Guide

61

SLIDE 63

Case Studies Outline

1) Reduce O&M Forecast ‒ Reduce Labor by $25 million (Gen, T&D, CS) ‒ Reduce Non-Labor by $37 million (Gen, T&D, CS, and A&G) 2) Change Depreciation Rates ‒ Reduce Depreciation Rates ‒ Increase asset life for Account 368 3) Reduce 2017-2018 CapEx With 0% Repair Eligibility ‒ Reduce $100 million of CapEx ‒ Projects closing in late 2017 and early 2018 4) Reduce 2018 CapEx With 0% Repair Eligibility ‒ Reduce $100 million of CapEx ‒ Projects closing on a Specific Blanket 5) Reduce 2018 CapEx With 70% Repair Eligibility ‒ Reduce $100 million of CapEx ‒ Projects closing on a Specific Blanket

62

SLIDE 64

Changes Made Summary of Earnings (CPUC Basis) ‒ 2018-2020 Revenue Requirement detail for this case study is available in the Appendix How to Make Scenario Adjustments ‒ Refer to pages 28-31 of the RO Model User Guide ‒ Adjustments outlined include 2018 Forecast, Escalation Rates, Capitalization Rates, STIP, and other A&G related assumptions Case Study Reference Material Summary of Key Variances

1) Reduce O&M

Revenue Requirement (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Revenue Requirement 5,885 5,831 O&M 1,799 1,739 Depreciation 1,745 1,749 Taxes 532 533 Net Operating Income 1,809 1,811 Rate Base (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Plant-In-Service 38,936 38,967 Working Capital 461 467 Reserves (12,107) (12,120) Deferred Taxes (4,285) (4,285) Total Rate Base 23,005 23,030

O&M (Total Company Basis) ‒ in Labor & Non-Labor forecast by $25 & $37 million ‒ Expect incremental changes outlined on Slide 12 Key Considerations ‒ Non-linear impacts from changes to Labor (Benefits, Cap. A&G and P&B, and Labor Allocator) ‒ Jurisdicationalization impacts resulting from changes to O&M Labor

Notes on Key Variances Revenue Requirement due to reductions to O&M O&M due to direct and indirect reductions to O&M Depreciation from higher CPUC allocation (GRC Labor Allocator) Income Taxes due to higher Net Operating Income Net Operating Income due to higher Rate Base Driven by higher CPUC allocation (GRC Labor Allocator) Driven by higher CPUC allocation (GRC Labor Allocator) Driven by higher CPUC allocation (GRC Labor Allocator) Rate Base primarily due to higher Plant-In-Service

1 2 31 (13) 24 6 3 (60) (54)

Note: Figures are rounded to the nearest million

63

SLIDE 65

Changes Made Summary of Earnings (CPUC Basis) ‒ 2018-2020 Revenue Requirement detail for this case study is available in the Appendix How to Make Scenario Adjustments ‒ Refer to page 45-48 of the RO Model User Guide ‒ Adjustments outlined include changing depreciation assumptions, hydro adjustments, and generation weighting Case Study Reference Material Summary of Key Variances

2) Change Depreciation Rates

Revenue Requirement (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Revenue Requirement 5,885 5,829 O&M 1,799 1,798 Depreciation 1,745 1,702 Taxes 532 519 Net Operating Income 1,809 1,810 Rate Base (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Plant-In-Service 38,936 38,936 Working Capital 461 456 Reserves (12,107) (12,086) Deferred Taxes (4,285) (4,288) Total Rate Base 23,005 23,018

Depreciation Rates (CPUC Basis) ‒ Increase asset life for Account 368 (Line Transformers) Account Assumptions

Notes on Key Variances Revenue Requirement due to higher Taxes and Depreciation Depreciation due to reducing net salvage rates (↓ Dep Rates) Income Taxes from lower Revenue Requirement Net Operating Income due to higher Rate Base Working Cash due to reduction in Depreciation and Income Taxes Reserves from lower Depreciation Deferred Taxes due to lower Depreciation Rate Base primarily from lower Reserves

Account 368 Base Case Scenario Life 33-Year Life 36-Year Life Net Salvage (25%) (20%)

(56) (43) (13) 1 (1) (5) (3) 21 13

Note: Figures are rounded to the nearest million

64

SLIDE 66

Changes Made Summary of Earnings (CPUC Basis) ‒ 2018-2020 Revenue Requirement detail for this case study is available in the Appendix How to Make Scenario Adjustments ‒ Refer to pages 37-44 of the RO Model User Guide ‒ Adjustments outlined include AFUDC rates, Capital Expenditures, forecast characteristics, CWIP, Retirements, and beginning balances Case Study Reference Material Summary of Key Variances

3) Reduce 2017-18 CapEx With 0% Repair Eligibility

Revenue Requirement (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Revenue Requirement 5,885 5,867 O&M 1,799 1,799 Depreciation 1,745 1,735 Taxes 532 532 Net Operating Income 1,809 1,802 Rate Base (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Plant-In-Service 38,936 38,850 Working Capital 461 460 Reserves (12,107) (12,105) Deferred Taxes (4,285) (4,283) Total Rate Base 23,005 22,921

Capital Expenditures (CPUC Basis) ‒ Reduce 2017-2018 CapEx by $100 million Project Assumptions ‒ 100% CPUC jurisdictional ‒ Eligible for bonus depreciation ‒ 0% eligibility for repair deductions ‒ Closes in late 2017 and early 2018

Notes on Key Variances Revenue Requirement due to higher Taxes Depreciation due to less closing from lower Plant-In-Service Net Operating Income due to lower Rate Base Plant-In-Service due to lower Capital Expenditures Rate Base due to lower Plant-In-Service

(10) (7) (86) (1) (84) 2 (18) 2

Note: Figures are rounded to the nearest million

65

SLIDE 67

Changes Made Summary of Earnings (CPUC Basis) ‒ 2018-2020 Revenue Requirement detail for this case study is available in the Appendix How to Make Scenario Adjustments ‒ Refer to pages 37-44 of the RO Model User Guide ‒ Adjustments outlined include AFUDC rates, Capital Expenditures, forecast characteristics, CWIP, Retirements, and beginning balances Case Study Reference Material Summary of Key Variances

4) Reduce 2018 CapEx With 0% Repair Eligibility

Revenue Requirement (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Revenue Requirement 5,885 5,888 O&M 1,799 1,799 Depreciation 1,745 1,745 Taxes 532 538 Net Operating Income 1,809 1,807 Rate Base (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Plant-In-Service 38,936 38,918 Working Capital 461 461 Reserves (12,107) (12,115) Deferred Taxes (4,285) (4,282) Total Rate Base 23,005 22,981

Capital Expenditures (CPUC Basis) ‒ Reduce 2018 CapEx by $100 million Project Assumptions ‒ 100% CPUC jurisdictional ‒ Eligible for bonus depreciation ‒ 0% eligibility for repair deductions ‒ Closes as a blanket specific (on a lag)

Notes on Key Variances Revenue Requirement due to higher Taxes Taxes due to lower tax depreciation and cost of removal (COR) Net Operating Income due to lower Rate Base Plant-In-Service due to closing lags and effects of averaging Reserves from lower COR slightly offset by lower Depreciation Rate Base due to lower Plant-In-Service and Reserves

3 5 (2) (18) (8) (23) 3 (1)

Note: Figures are rounded to the nearest million

66

SLIDE 68

Changes Made Summary of Earnings (CPUC Basis) ‒ 2018-2020 Revenue Requirement detail for this case study is available in the Appendix How to Make Scenario Adjustments ‒ Refer to pages 37-44 of the RO Model User Guide ‒ Adjustments outlined include AFUDC rates, Capital Expenditures, forecast characteristics, CWIP, Retirements, and beginning balances Case Study Reference Material Summary of Key Variances

5) Reduce 2018 CapEx With 70% Repair Eligibility

Revenue Requirement (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Revenue Requirement 5,885 5,922 O&M 1,799 1,799 Depreciation 1,745 1,745 Taxes 532 571 Net Operating Income 1,809 1,807 Rate Base (CPUC Jurisdictional, 2018 $ in Millions) Application Scenario Variance Plant-In-Service 38,936 38,918 Working Capital 461 463 Reserves (12,107) (12,115) Deferred Taxes (4,285) (4,284) Total Rate Base 23,005 22,981

Capital Expenditures (CPUC Basis) ‒ Reduce 2018 CapEx by $100 million Project Assumptions ‒ 100% CPUC jurisdictional ‒ Eligible for bonus depreciation ‒ 70% eligibility for repair deductions ‒ Closes as a blanket specific (on a lag)

Notes on Key Variances Revenue Requirement from higher Taxes Taxes due to lower repair and cost of removal (COR) benefits Net Operating Income due to lower Rate Base Plant-In-Service due to closing lags and effects of averaging Reserves from lower COR slightly offset by lower Depreciation Rate Base due to lower Plant-In-Service and Reserves

36 39 (2) (18) (8) (23) 1 2 (1)

Note: Figures are rounded to the nearest million

67

SLIDE 69

• RO Model Overview
• Adjustments & Impacts Matrix
• Case Studies
• Appendix

– RO Model Overview – Case Studies – O&M and Capital Expenditure Information

68

SLIDE 70

• RO Model Overview
• Adjustments & Impacts Matrix
• Case Studies
• Appendix

– RO Model Overview

– Case Studies – O&M and Capital Expenditure Information

69

SLIDE 71

RO Model

Summary Reports Module 2 Files O&M Module Capital Module Tax Module

5 Files 4 Files 2 Files

Admin Files

VBGlobal SCE20XXGRC_Toolbar

• th_ro_comparison

SCE20XXGRC_ToolbarCopy

• th_ro_blank

Data Flow Diagram

• th_ro_reporting
• th_ro_file

8 Files

RO Model – Excel Workbook Organization

rev_oth_prr S2 O&M Dashboard O1 O&M Tables O2 cap_dep_Capital_Inputs C1 cap_dep_Rate Base and Supporting Schedules C5 cap_dep_Rate Determination Schedule C2 cap_dep_Capital Calculations C3 cap_dep_Other Rate Base Items C4 cap_tax_DEPR & DFIT T1 exp_it_incometax T2 exp_pr_paytax T3 exp_pt_property_tax T4 GRC S1 File Name ID Key 70

SLIDE 72

RO Model – Processing Sequence

rev_oth_prr S2 O&M Dashboard O1 O&M Tables O2 cap_dep_Capital_Inputs C1 cap_dep_Rate Base and Supporting Schedules C5 cap_dep_Rate Determination Schedule C2 cap_dep_Capital Calculations C3 cap_dep_Other Rate Base Items C4 cap_tax_DEPR & DFIT T1 exp_it_incometax T2 exp_pr_paytax T3 exp_pt_property_tax T4

• th_ro_reporting

A1

• th_ro_blank

A2 GRC S1

Legend RO Model Cycle and Workbook Sequence

O&M Capital 01 Capital 03 Tax Tax Loop O&M FFU Capital FFU Tax FFU Capital 02 Refresh workbook sequence S1 O1 T3 S1 O1 S1 A2 C4 C1 C3 T2 S1 A2 T1 A2 C5 T3 T4 T2 O1 C4 C5 T1 S2 S1 A1 O2 T4 T2 A2 A2 O1 C4 C5 T1 S1 A1 O2 O1 S1 A1 O2 C4 C5 S1 A1 T4 T2 O1 O2 C4 C5 T1 S2 S1 A1 O2 O2 Refresh cycle sequence File Name ID 71

SLIDE 73

RO Model Color Coding

Cell Formatting Cell Type Format Color Code Inputs/Plugs where changes are not meant to be made Blue (0, 0, 255) Inputs/Plugs where changes by the Commission/Intervenors are meant to be made Blue Yellow Shading (0, 0, 255) (255, 255, 204) Links to Worksheets Green (0, 128, 0) Links to Workbooks Red (255, 0, 0) Calculations Black (0, 0, 0) Tab/Worksheet Formatting Tab/Worksheet Type Format Color Code Inputs Tab Name (255, 255, 204) Calculations Tab Name (226, 239, 218) Outputs Tab Name (221, 235, 247) Tab Divider (Inputs, Calculations, Outputs) || Tab Divider Name || Same as Tab Type Info Tab || Info Tab || (0, 0, 0) Audit Log || Audit Log || (0, 0, 0) Checks || Checks || (255, 213, 213)

72

SLIDE 74

• RO Model Overview
• Adjustments & Impacts Matrix
• Case Studies
• Appendix

– RO Model Overview

– Case Studies

– O&M and Capital Expenditure Information

73

SLIDE 75

1) Reduce O&M

Summary of Earnings (CPUC Only)

Changes Made O&M (Total Company Basis)

‒ in Labor & Non-Labor forecast by $25 & $37 million ‒ Incremental changes outlined on Slide 12 Key Considerations ‒ Non-linear impacts from changes to Labor (Benefits, Cap. A&G and P&B, and Labor Allocator) ‒ Jurisdicationalization impacts resulting from changes to O&M Labor

Summary of Earnings (CPUC Only) 2018 GRC Application 2018 GRC Application Variance $ in Millions (Base Case) (Scenario) Line Item 2018 2019 2020 2018 2019 2020 2018 2019 2020 1. Total Operating Revenues 5,885 6,418 6,989 5,831 6,363 6,932 (54) (55) (56) 2. O&M 1,773 1,808 1,810 1,718 1,752 1,755 (55) (55) (55) 3. FF&U 66 72 78 65 71 77 (1) (1) (1) 4. Revenue Credits (165) (171) (182) (165) (171) (182) – – – 5. Total O&M 1,674 1,708 1,706 1,618 1,652 1,650 (56) (56) (56) 6. Escalation 125 176 224 121 171 218 (4) (5) (6) 7. Depreciation 1,745 1,866 2,045 1,749 1,869 2,048 3 3 4 8. Property Taxes 259 279 302 259 279 303 – – – 9. Payroll Taxes 67 70 72 66 68 70 (2) (2) (2) 10. Taxes Based On Income 206 338 478 208 340 480 2 2 2 11. Total Taxes 532 686 852 533 687 853 1 1 1 12. Total Operating Expenses 4,076 4,436 4,827 4,021 4,379 4,769 (56) (57) (58) 13. Net Operating Revenue 1,809 1,983 2,161 1,811 1,984 2,163 2 2 2 14. Rate Base 23,005 25,212 27,485 23,030 25,236 27,507 25 23 22 15. Rate of Return 7.86% 7.86% 7.86% 7.86% 7.86% 7.86%

Note: Figures are rounded to the nearest million

74

SLIDE 76

2) Change Depreciation Rates

Summary of Earnings (CPUC Only)

Summary of Earnings (CPUC Only) 2018 GRC Application 2018 GRC Application Variance $ in Millions (Base Case) (Scenario) Line Item 2018 2019 2020 2018 2019 2020 2018 2019 2020 1. Total Operating Revenues 5,885 6,418 6,989 5,829 6,366 6,936 (56) (53) (52) 2. O&M 1,773 1,808 1,810 1,773 1,808 1,810 – – – 3. FF&U 66 72 78 65 71 77 (1) (1) (1) 4. Revenue Credits (165) (171) (182) (165) (171) (182) – – – 5. Total O&M 1,674 1,708 1,706 1,674 1,707 1,706 (1) (1) (1) 6. Escalation 125 176 224 125 176 224 – – – 7. Depreciation 1,745 1,866 2,045 1,702 1,820 1,996 (43) (46) (49) 8. Property Taxes 259 279 302 259 279 303 – – 1 9. Payroll Taxes 67 70 72 67 70 72 – – – 10. Taxes Based On Income 206 338 478 193 328 468 (13) (10) (10) 11. Total Taxes 532 686 852 519 677 843 (13) (10) (9) 12. Total Operating Expenses 4,076 4,436 4,827 4,019 4,379 4,769 (57) (56) (59) 13. Net Operating Revenue 1,809 1,983 2,161 1,810 1,986 2,168 1 4 6 14. Rate Base 23,005 25,212 27,485 23,018 25,259 27,566 13 46 81 15. Rate of Return 7.86% 7.86% 7.86% 7.86% 7.86% 7.86%

Depreciation Rates (CPUC Basis) ‒ Increase asset life for Account 368 (Line Transformers) Account Assumptions Account 368 Base Case Scenario Life 33-Year Life 36-Year Life Net Salvage (25%) (20%) Changes Made

Note: Figures are rounded to the nearest million

75

SLIDE 77

3) Reduce 2017-18 CapEx with 0% Repair Eligibility

Summary of Earnings (CPUC Only)

Summary of Earnings (CPUC Only) 2018 GRC Application 2018 GRC Application Variance $ in Millions (Base Case) (Scenario) Line Item 2018 2019 2020 2018 2019 2020 2018 2019 2020 1. Total Operating Revenues 5,885 6,418 6,989 5,867 6,398 6,967 (18) (20) (22) 2. O&M 1,773 1,808 1,810 1,773 1,808 1,810 – – – 3. FF&U 66 72 78 66 71 78 – – – 4. Revenue Credits (165) (171) (182) (165) (171) (182) – – – 5. Total O&M 1,674 1,708 1,706 1,674 1,708 1,706 – – – 6. Escalation 125 176 224 125 176 224 – – – 7. Depreciation 1,745 1,866 2,045 1,735 1,853 2,032 (11) (13) (13) 8. Property Taxes 259 279 302 258 278 302 – (1) (1) 9. Payroll Taxes 67 70 72 67 70 72 – – – 10. Taxes Based On Income 206 338 478 206 338 475 – – (3) 11. Total Taxes 532 686 852 532 686 849 – (1) (3) 12. Total Operating Expenses 4,076 4,436 4,827 4,065 4,422 4,811 (11) (14) (17) 13. Net Operating Revenue 1,809 1,983 2,161 1,802 1,976 2,156 (7) (6) (5) 14. Rate Base 23,005 25,212 27,485 22,922 25,135 27,420 (83) (77) (64) 15. Rate of Return 7.86% 7.86% 7.86% 7.86% 7.86% 7.86%

Changes Made Capital Expenditures (CPUC Basis) ‒ Reduce 2017-2018 CapEx by $100 million Project Assumptions ‒ 100% CPUC jurisdictional ‒ Eligible for bonus depreciation ‒ 0% eligibility for repair deductions ‒ Closes in late 2017 and early 2018

Note: Figures are rounded to the nearest million

76

SLIDE 78

4) Reduce 2018 CapEx With 0% Repair Eligibility

Summary of Earnings (CPUC Only)

Summary of Earnings (CPUC Only) 2018 GRC Application 2018 GRC Application Variance $ in Millions (Base Case) (Scenario) Line Item 2018 2019 2020 2018 2019 2020 2018 2019 2020 1. Total Operating Revenues 5,885 6,418 6,989 5,888 6,401 6,974 3 (17) (15) 2. O&M 1,773 1,808 1,810 1,773 1,808 1,810 – – – 3. FF&U 66 72 78 66 71 78 – – – 4. Revenue Credits (165) (171) (182) (165) (171) (182) – – – 5. Total O&M 1,674 1,708 1,706 1,674 1,708 1,706 – – – 6. Escalation 125 176 224 125 176 224 – – – 7. Depreciation 1,745 1,866 2,045 1,745 1,862 2,041 (1) (4) (4) 8. Property Taxes 259 279 302 259 278 302 – – (1) 9. Payroll Taxes 67 70 72 67 70 72 – – – 10. Taxes Based On Income 206 338 478 211 332 474 6 (6) (3) 11. Total Taxes 532 686 852 538 680 848 5 (6) (4) 12. Total Operating Expenses 4,076 4,436 4,827 4,081 4,426 4,819 5 (10) (8) 13. Net Operating Revenue 1,809 1,983 2,161 1,807 1,976 2,155 (2) (7) (7) 14. Rate Base 23,005 25,212 27,485 22,981 25,125 27,399 (23) (87) (85) 15. Rate of Return 7.86% 7.86% 7.86% 7.86% 7.86% 7.86%

Changes Made Capital Expenditures (CPUC Basis) ‒ Reduce 2018 CapEx by $100 million Project Assumptions ‒ 100% CPUC jurisdictional ‒ Eligible for bonus depreciation ‒ 0% eligibility for repair deductions ‒ Closes as a blanket specific (on a lag)

Note: Figures are rounded to the nearest million

77

SLIDE 79

5) Reduce 2018 CapEx with 70% Repair Eligibility

Summary of Earnings (CPUC Only)

Summary of Earnings (CPUC Only) 2018 GRC Application 2018 GRC Application Variance $ in Millions (Base Case) (Scenario) Line Item 2018 2019 2020 2018 2019 2020 2018 2019 2020 1. Total Operating Revenues 5,885 6,418 6,989 5,922 6,415 6,970 36 (4) (19) 2. O&M 1,773 1,808 1,810 1,773 1,808 1,810 – – – 3. FF&U 66 72 78 66 72 78 – – – 4. Revenue Credits (165) (171) (182) (165) (171) (182) – – – 5. Total O&M 1,674 1,708 1,706 1,675 1,708 1,706 – – – 6. Escalation 125 176 224 125 176 224 – – – 7. Depreciation 1,745 1,866 2,045 1,745 1,862 2,041 (1) (4) (4) 8. Property Taxes 259 279 302 259 278 301 – (1) (1) 9. Payroll Taxes 67 70 72 67 70 72 – – – 10. Taxes Based On Income 206 338 478 245 346 471 39 8 (6) 11. Total Taxes 532 686 852 571 694 845 39 7 (8) 12. Total Operating Expenses 4,076 4,436 4,827 4,114 4,440 4,816 38 4 (11) 13. Net Operating Revenue 1,809 1,983 2,161 1,807 1,975 2,154 (2) (7) (8) 14. Rate Base 23,005 25,212 27,485 22,981 25,118 27,388 (23) (95) (97) 15. Rate of Return 7.86% 7.86% 7.86% 7.86% 7.86% 7.86%

Changes Made Capital Expenditures (CPUC Basis) ‒ Reduce 2018 CapEx by $100 million Project Assumptions ‒ 100% CPUC jurisdictional ‒ Eligible for bonus depreciation ‒ 70% eligibility for repair deductions ‒ Closes as a blanket specific (on a lag)

Note: Figures are rounded to the nearest million

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• RO Model Overview
• Adjustments & Impacts Matrix
• Case Studies
• Appendix

– RO Model Overview – Case Studies

– O&M and Capital Expenditure Information

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O&M Expense Forecast Development

General Ledger

(SAP)

FERC Form 1

(2011-2015)

Adjustments1

(2011-2015)

Forecast O&M Expenses2 Historical O&M Expenses

Last Recorded Year Average Trend Itemized 2018 Forecast 2012 2011 2013 2014 2015

Select from 2-Year, 3-Year, 4-Year, or 5-Year Average Select from 3-Year, 4-Year, or 5-Year Trend Based on detailed analysis of expected costs in test year

Recorded Adjusted

(2011-2015)

1) Includes Company Wide and Operating Unit level adjustments. These adjustments include removal of non-recurring expenses and non-GRC expenses 2) Several O&M forecasts (Benefits, Capitalized A&G and P&B, FF&U, etc.) are developed in the RO Model

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O&M Expense Forecast Development

Example

Workpaper Summary Forecasting Methods

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SCE-10, Volume 1 – Page 16-20

• SCE performs a study of its recorded T&D expenses, applying various metrics and ratios to separate costs

between CAISO and non-CAISO

• This study is consistent with methodology prescribed in SCE’s FERC Formula Rate Tariff

SCE-10, Volume 1 – Page 20

• SCE performs a study of recorded T&D plant, reported in SCE’s prior year FERC Form 1 filing, to separate plant

costs between CAISO or non-CAISO

• Assets under CAISO control are classified as CAISO, while assets not under CAISO control are classified as non-

CAISO.

• Where it is not possible to directly classify the assets for a particular location, SCE analyzes individual

components to determine the jurisdiction that has operational control of the component

• Forecasted cap ex is assigned based on the defined scope of work or by using a historically-based allocator for

recurring annual blanket expenditures

O&M and CapEx Jurisdictionalization

O&M CapEx

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Jurisdictionalization (2 of 2)

SCE-9, Volume 1 – Page 14 Table IV-6 Jurisdictional Split Methodology By RO Cost Component

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Capital Additions Forecasting Process

SCE-09, Volume 2 Figure I-1

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2018 GRC Overview of SCE’s T ax Request

November 3, 2016

Presented by: Mark Childs

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Summary

SCE applies currently enacted tax law to provide its customers with prudent tax deductions that help minimize current rates. Most of the significant tax adjustments in the GRC are a function of: – The capital additions forecast in this GRC; and – Historical ratios of capital additions to eligible tax deductions Topics for Today’s Discussion:

• Overview of Request

– Tax Cost of Service Overview – Flow-through / Normalized Ratemaking Comparisons

• Key 2018 GRC Tax Topics

– Repair Deduction – Extension of the Tax Accounting Memorandum Account (TAMA) – Bonus Depreciation – Employee Stock Option Plan (ESOP)

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T

• tal T

ax Request

• The following table lays out the components of tax expense for the 2018

test year and 2019/2020 attrition years

• This presentation will focus on the taxes based on income component of

this request CPUC-jurisdictional (Nominal $000) Test Year Attrition Attrition 2018 2019 2020 Property Taxes 258,813 278,939 302,464 Payroll Taxes & Misc. 67,420 69,759 72,133 Taxes based on Income 205,911 337,760 477,716 532,144 686,458 852,313

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T ax Cost of Service

• The income tax expense line is made up of two components:

– Taxes on the equity return on rate base (i.e., the Company pays income taxes on the revenue it earns) – Flow-through (F/T) tax impacts (e.g., repair deductions, cost of removal, depreciation)

• The year over year income tax increase is due to:

– Increases in revenue requirements due to rate base growth – Declining flow-through tax benefits

• Flow-through taxes decline over the three years primarily due to increases in

the recovery of prior years’ repair benefits

– Repair benefits remain similar over the three-year period, BUT the recovery of prior year repair benefits increases each year as a new “vintage” of repair benefits have been given to customers

*This rate is a combination of the Common Stock Equity Rate of 5.02% plus the Preferred Stock Equity Rate of 0.52%, approved in SCE's Cost of Capital proceeding. The income tax expense calculation does not include the Debt Rate of Return percentage because the debt interest expense is deductible for tax purposes whereas common stock and preferred stock dividends are not deductible for tax purposes and, as such, must be grossed-up to a revenue requirement in order for SCE to receive its after-tax equity rate of return of 5.54%.

(Nominal $000) Test Year Attrition Attrition 2018 2019 2020 1 Rate Base 23,004,694 25,212,394 27,484,750 2 Equity Return Rate* 5.54% 5.54% 5.54% 3 Return on Equity 1,273,793 1,396,035 1,521,858 4 Gross Up Rate 0.78063 0.78063 0.78063 5 Tax Expense on Return 994,357 1,089,783 1,188,003 6 F/T Tax Benefits (788,446) (752,023) (710,287) 7 CPUC Total Tax Expense 205,911 337,760 477,716 Line No.

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Flow-through and Normalized Ratemaking

• Flow-through ratemaking is designed to immediately benefit

customers by reducing rates in year one for the cash tax benefits

• realized. These benefits are then repaid by the customers as cash

tax detriments are recognized in future tax years

– Tax Repairs is an example of a significant flow-through deduction included in the 2018 GRC

• Normalized ratemaking is designed to provide longer-term

benefits to customers by reducing rate base for cash tax benefits realized by the Company in year one. Rate base is increased as SCE pays higher taxes in future years

– Bonus Depreciation is an example of a significant normalized deduction included in the 2018 GRC

• See example in appendix, which highlights the fundamental

differences between flow-through and normalized ratemaking

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Flow-through versus Normalized Example

Assumptions Purchased Asset 100 $ Book Life 10 Years 100% deductible for Tax in Year 1 Rate of Source of Funds Pct Return Debt 50 $

50.00% 5.50%

Pref Stock

• $

0.00%

Equity 50 $

50.00% 10.50%

Debt Rate 2.75% Equity Rate 5.25% Total Return 8.00%

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Flow-through Example

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total NPV Average Rate Base 45.00 85.00 75.00 65.00 55.00 45.00 35.00 25.00 15.00 5.00 Return % 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% Required Return 3.60 6.80 6.00 5.20 4.40 3.60 2.80 2.00 1.20 0.40 36.00 Summary of Revenue Recover Depreciation 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 100.00 Required Return 3.60 6.80 6.00 5.20 4.40 3.60 2.80 2.00 1.20 0.40 36.00 Recover Tax Expense (60.26) 9.95 9.58 9.22 8.86 8.50 8.14 7.78 7.42 7.06 16.25 (46.66) 26.75 25.58 24.42 23.26 22.10 20.94 19.78 18.62 17.46 152.25 $88.05

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Normalized Example

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total NPV Average Rate Base 26.66 50.37 44.44 38.52 32.59 26.66 20.74 14.81 8.89 2.96 Return % 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% Required Return 2.13 4.03 3.56 3.08 2.61 2.13 1.66 1.19 0.71 0.24 21.33 Summary of Revenue Recover Depreciation 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 100.00 Required Return 2.13 4.03 3.56 3.08 2.61 2.13 1.66 1.19 0.71 0.24 21.33 Recover Tax Expense 0.96 1.82 1.60 1.39 1.18 0.96 0.75 0.53 0.32 0.11 9.63 13.10 15.85 15.16 14.47 13.78 13.10 12.41 11.72 11.03 10.34 130.96 $89.90

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Differences

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total NPV Average Rate Base 18.34 34.63 30.56 26.48 22.41 18.34 14.26 10.19 6.11 2.04 Return % 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% Required Return 1.47 2.77 2.44 2.12 1.79 1.47 1.14 0.81 0.49 0.16 14.67 Summary of Revenue Recover Depreciation

• Required Return

1.47 2.77 2.44 2.12 1.79 1.47 1.14 0.81 0.49 0.16 14.67 Recover Tax Expense (61.23) 8.13 7.98 7.83 7.69 7.54 7.39 7.24 7.10 6.95 6.62 (59.76) 10.90 10.42 9.95 9.48 9.01 8.53 8.06 7.59 7.11 21.29 ($1.85)

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T ax Repair Benefits

• Tax repair benefits are the incremental tax deductions associated with

capital additions

– Capitalized for ratemaking – Qualify as repairs under the tax rules

• 2012 through 2014 repair benefits

– SCE addressed variances between recorded and authorized tax repair deductions with a combination of (a) the rate base adjustment implemented in compliance with SCE’s 2015 GRC decision; and (b) Advice Letter 3368-E, approved on April 12, 2016.

• 2015 through 2017 repair benefits

– SCE incorporated incremental repair benefits into rates beginning in 2015. – To address variances between recorded and authorized tax repairs, the Tax Accounting Memorandum Account (TAMA) includes a true-up mechanism, which gives customers the full benefit of the repair deductions.

• 2018 through 2020 repair benefits

– SCE forecasts approximately $1 billion a year in tax repair deductions, which reduces the revenue requirement by approximately $675 million a year. – SCE estimated tax repair deductions based on the capital expenditure forecasts by program type multiplied by the historical average of eligible repair ratio within that program type. – The timing of the repair deductions coincides with capital additions.

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T ax Accounting Memorandum Account (TAMA)

• The 2015 GRC decision adopted the TAMA for 2015-2017 to cover the

following recorded / authorized differences:

– Differences resulting from tax accounting method changes made by SCE between rate cycles; – Changes in tax law, such as the extension of bonus depreciation rules; – Differences between recorded and authorized tax repair deductions; and – Changes in statutory tax rates.

• SCE proposes to extend the TAMA through 2020

– Customers will receive the full benefits associated with tax repair deductions – The TAMA is a two way balancing account, and customers will either receive incremental tax benefits or repay a reduction in tax benefits through the TAMA depending on the differences between recorded to authorized tax repair deductions

• With the TAMA in place, the Company can avail itself of favorable tax

guidance at the time the IRS makes these changes available, while mitigating the uncertainty of how to deal with any interim benefits and detriments not captured in rates.

• Extending the TAMA mitigates the estimating variances inherent with tax

repairs, and covers issues such as:

– IRS Audit risk; – Mandated prospective changes in how the repair calculations are made; and – Ongoing guidance still being issued by the IRS governing the scope of eligible tax repairs.

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Bonus Depreciation

• Customers will continue to realize the benefits of bonus depreciation

through 2019 based on currently enacted tax law

– The bonus depreciation rate in 2018 drops to 40% (from 50% for prior years), with a forecast $800 million in bonus depreciation – The bonus depreciation rate in 2019 drops to 30% with a forecast $725 million in bonus depreciation

• The 2018 GRC includes a rate base reduction of $3.8 billion for accelerated

tax deductions realized in 2017 and earlier tax years

– This amount includes the bonus depreciation benefits for all previous tax years

• As required by the normalization rules, the full benefits of bonus

depreciation will be passed on to customers when the tax benefits have been monetized

• Beginning in 2020, when the full benefits of bonus depreciation no longer

apply, book normalized depreciation will be greater than the tax depreciation deduction

– SCE will begin to pay higher taxes – The increased tax expense will increase rate base (by reducing the favorable rate base adjustment discussed above)

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Employee Stock Ownership Plan (ESOP)

• SCE proposes to remove, from ratemaking, the tax benefits

associated with the dividends paid into the ESOP beginning in 2018.

• The tax deduction arises when Edison International (EIX) declares

and then pays a common stock dividend out of retained earnings. To the extent the stock is held in an ESOP , the related dividend generates a tax deduction.

• The Commission has determined that when deductions were not

part of a utility’s cost of service, but were generated with shareholder funds, the deductions are the property of shareholders and not customers. – Shareholders of EIX fund the cost of dividends paid by EIX. – The ESOP does not arise from employee’s wages or any other expense included in this proceeding’s cost-of-service ratemaking.

• SCE’s proposed 2018 ratemaking is consistent with PG&E’s

Commission-approved treatment of the same issue.

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