Application No.: A.16-09- Exhibit No.: SCE-08, Vol. 5 Witnesses: S. Kempsey

(U 338-E)

2018 General Rate Case

PUBLIC VERSION

Administrative & General (A&G) Volume 5 - Property & Liability Insurance

Before the

Public Utilities Commission of the State of California

Rosemead, California

September 1, 2016

SUMMARY

SCE requests a Test Year 2018 Operation & Maintenance (O&M) expense of $108.497

million (Constant 2015$) for property & liability insurance. This request includes

$16.070 million for property insurance and $92.427 million for liability insurance.

SCE’s request is based on the estimated Test Year premiums provided by our primary

insurance broker, Marsh USA Inc. (Marsh), to reflect expected insurance market trends

as well as SCE’s specific loss history.

Property & Liability O&M Expenses 2018 Forecast

(Constant 2015$ Million)

Administrative & General (A&G) Volume 5 - Property & Liability Insurance

Table Of Contents Section Page Witness

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I. Property and Liability Insurance Expense .........................................................1 S. Kempsey

A. Summary of Test Year Request .............................................................1

B. Introduction ............................................................................................2

C. Comparison of 2015 Authorized to 2015 Recorded ..............................3

D. Property Insurance Expense (FERC Account 924) ...............................4

1. Activity Description ...................................................................4

a) Non-Nuclear Property Insurance ...................................5

b) Blanket Crime Insurance................................................5

c) Nuclear Property Insurance............................................6

2. Analysis of Recorded Data, Estimating Methodology, and Forecast for Property Insurance Expense (FERC Account 924) ...................................................7

E. Liability Insurance Expense (FERC Account 925) ...............................8

1. Activity Description ...................................................................8

a) General Liability Insurance ............................................8

b) Supplemental Wildfire Insurance ..................................9

c) Fiduciary Liability Insurance .......................................10

d) D&O Liability Insurance .............................................10

e) Workers’ Compensation ..............................................11

f) Miscellaneous Liability Insurance and Surety Bonds ................................................................11

g) Nuclear Liability Insurance ..........................................11

h) Cyber Liability Insurance ............................................12

Administrative & General (A&G) Volume 5 - Property & Liability Insurance

Table Of Contents (Continued) Section Page Witness

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2. Analysis of Recorded Data, Estimating Methodology, and Forecast for Liability Insurance Expense (FERC Account 925) .................................................12

1

I. 1

Property and Liability Insurance Expense 2

A. Summary of Test Year Request 3

For Test Year 2018, SCE forecasts $108.497 million in A&G expense for property and liability 4

insurance. As discussed in greater detail in this chapter, SCE’s recorded expense is not an appropriate 5

basis on which to forecast Test Year expenses. Rather, SCE’s 2018 estimate is based on expected 6

insurance market conditions. SCE’s primary insurance broker, Marsh USA Inc. (Marsh), has estimated 7

Test Year premiums reflecting expected insurance market trends as well as SCE’s specific loss history. 8

This testimony addresses the insurance expense SCE has incurred from 2011 through 2015 for both 9

property and liability insurance, and the estimated insurance expense for 2016 through 2018, as shown 10

in Figure I-1 below. 11

Figure I-1 Summary of Property and Liability Insurance Expense Recorded and Adjusted 2011-2015/ Forecast 2016-2018

(Constant 2015 $000)

Labor 0 0 0 0 0 0 0 0Non-Labor 0 0 0 0 0 0 0 0Other 43,977 50,015 70,242 87,871 85,366 85,411 97,998 108,497Total 43,977 50,015 70,242 87,871 85,366 85,411 97,998 108,497

0

20,000

40,000

60,000

80,000

100,000

120,000

2011 2012 2013 2014 2015 2016 2017 2018

Labor Non Labor Other

2

B. Introduction 1

SCE maintains property insurance coverage to limit large, unexpected losses to its productive 2

assets, such as transmission and distribution facilities and equipment, power plants, office buildings and 3

general facilities caused by perils such as fire, earthquake, flood, accidental mechanical breakdown, and 4

terrorism. SCE purchases blanket crime insurance for losses due to theft, robbery, and computer and 5

wire fraud. SCE also purchases liability insurance coverage to limit the losses arising from third-party 6

liability claims and lawsuits. The costs of this insurance coverage are recorded in two FERC accounts. 7

The expense for property and blanket crime insurance is recorded in FERC Account 924. The expense 8

for general liability, supplemental wildfire insurance, fiduciary liability, directors and officers (D&O) 9

liability, workers’ compensation, nuclear liability insurance, and cyber liability insurance is recorded in 10

FERC Account 925.1 Below, Table I-1 identifies the insurance limits and deductibles that SCE 11

maintains, as well as the policy expiration dates. Premiums for insurance coverage are influenced by 12

SCE’s overall loss history, the commercial availability of desired coverage, and the current and 13

anticipated market conditions of the insurance industry. 14

1 Claims and claims reserves expenses, including those for workers’ compensation, also are recorded in FERC

Accounts 924 and 925, but are discussed in SCE-08, Vol. 4.

3

Table I-1 Summary of Insurance Limits and Deductibles

Most of SCE’s insurance coverage is procured by Edison International (EIX) on behalf of itself 1

and its subsidiaries. The premiums are then allocated among EIX and its subsidiaries. Fiduciary liability 2

and blanket crime insurance premiums are allocated based on the number of employees. D&O liability 3

insurance premiums, general liability insurance premiums, and cyber liability insurance premiums are 4

allocated using the multi-factor allocation formula. Workers’ compensation insurance in Nevada is 5

allocated based on payroll in Nevada. Non-nuclear property insurance, nuclear property and liability 6

insurance, and workers’ compensation insurance in California only cover SCE assets or SCE employees, 7

and therefore, no allocation to EIX or EIX’s other subsidiaries is necessary. 8

C. Comparison of 2015 Authorized to 2015 Recorded 9

D.15-11-021, Ordering Paragraph 3, directed SCE to compare 2015 authorized to recorded O&M 10

expenses. As shown in Figure I-2 below, for 2015 SCE estimated $94.4 million (constant 2015$) for this 11

category, and the Commission authorized $89.3 million. In 2015, SCE recorded $85.4 million in 12

Insurance Coverage Limit (a) Deductible (a) Expiration($) ($)

A. Account 924: Property Insurance1. Non Nuclear Property Insurance 750,000,000 5,000,000 11/01/162. Blanket Crime Insurance 50,000,000 1,000,000 09/01/163. Nuclear Property Insurance (b) 2,750,000,000 2,500,000 04/01/17

B. Account 925: Liability Insurance1. i. Non Wildfire Insurance (c) 685,000,000 2,000,000 06/01/17

ii. Wildfire Insurance (c) 610,000,000 10,000,000 06/01/17

3. Fiduciary Liability Insurance 60,000,000 1,000,000 03/31/174. Directors and Officers Liability Insurance 280,000,000 5,000,000 03/31/175. Workers' Compensation Insurance (CA) statutory 1,000,000 11/01/16

Workers' Compensation Insurance (NV) statutory 11/01/166. Miscellaneous Liability Insurance & Bonds various various various7. Nuclear Liability Insurance (b) 375,000,000 12/31/168. Cyber Liability Insurance 50,000,000 5,000,000 07/01/17

(a) Certain policy provisions may cause the limit and deductible to vary.

(b) Nuclear property and liability insurance costs are paid primarily through the nuclear decommissioning trust fund, but certain costs that are not eligible for

recovery through the trust fund are included here.

(c) Some of the limits are shared between non wildfire and wildfire liability insurance.

4

Property & Liability O&M expense, approximately $3.9 million, or 4.4%, less than authorized. The 1

difference was primarily due to the uncertainty inherent in forecasting insurance market conditions 2

several years in advance. 3

Figure I-2 Comparison of 2015 Authorized to Recorded O&M Expense

Property & Liability Insurance- FERC 924 and 925 (Constant 2015 $000s)

D. Property Insurance Expense (FERC Account 924) 4

1. Activity Description 5

SCE purchases the following types of property insurance: (1) non-nuclear property 6

insurance coverage for transmission and distribution facilities and equipment, power plants, office 7

buildings, and general facilities;2 (2) blanket crime insurance for losses due to theft, robbery, and 8

computer and wire fraud; and (3) nuclear property insurance. Each type of insurance is discussed in the 9

following sections. 10

2 Lines, towers, poles, dams, and hydro waterways are not included.

5

a) Non-Nuclear Property Insurance 1

Property insurance protects SCE property against potential physical loss or 2

damage caused by natural disasters such as fire, earthquake, flood, or accidental mechanical breakdown, 3

and acts of terrorism. SCE’s insurance limit is $750 million per occurrence, with a sub-limit of $200 4

million for California earthquake exposure. Insurance is purchased to protect SCE from catastrophic 5

events that, while unlikely, could have devastating consequences. For example, while the probability 6

that SCE would suffer severe earthquake damage in any given year is low, should an earthquake occur, 7

the resulting property damage could be significant. 8

SCE’s property insurance is similar to the insurance most homeowners purchase 9

for their homes. Most homeowners insure their residences to protect against fire and other perils, but are 10

unlikely to ever lose their homes to one of these perils. 11

b) Blanket Crime Insurance 12

SCE purchases blanket crime insurance coverage to protect its assets from losses 13

due to crimes such as theft, robbery, and computer and wire fraud (whether committed by an employee 14

or non-employee). Title I of the Employee Retirement Income Security Act (ERISA) requires certain 15

benefit plans to be bonded. SCE’s crime insurance fulfills this ERISA requirement. The Commission has 16

found that blanket crime insurance coverage is prudent because it covers the remote possibility of severe 17

losses from such crimes as wire transfer fraud.3 The need for blanket crime insurance has become even 18

more important due to the increased use of computers and technology. 19

SCE’s blanket crime insurance coverage has a limit of $50 million per 20

occurrence, with a $1 million deductible. Although SCE has a system of internal controls to reduce the 21

potential of large losses associated with criminal acts, it is not possible to prevent all losses arising out 22

of criminal activity. To date, SCE has not been subject to significant losses, and thus its annual 23

premiums are reasonable in light of the large potential losses it could suffer. 24

3 See generally In re So. Cal Edison Co., D.91-12-076, (mimeo), pp 47-48, 42 CPUC 2d 645, 680-681 (1991).

6

c) Nuclear Property Insurance 1

Property insurance coverage for SCE’s nuclear assets at San Onofre Nuclear 2

Generating Station (SONGS) and Palo Verde Nuclear Generating Station (PVNGS) is purchased from 3

Nuclear Electric Insurance Limited (NEIL).4 NEIL is a mutual insurance company owned by nuclear 4

facility owner/operators. Property insurance expenses related to SONGS are generally recovered through 5

the decommissioning trust, but a small portion of the expense (approximately $30,000 per year) is 6

attributable to the SONGS switchyard5, which is not being decommissioned. That portion of the expense 7

is not recoverable through the decommissioning trust and is included in the General Rate Case filing. In 8

addition, property insurance for PVNGS is procured by Arizona Public Service Company (APS) as the 9

operator of the site, and SCE is billed for its share of the expense by APS. 10

Should losses at any nuclear facility covered by NEIL exceed the accumulated 11

funds for these insurance programs, SCE could be assessed retrospective premium adjustments of up to 12

approximately $52 million per year.6 13

4 Arizona Public Service Company (APS) purchases insurance for PVNGS on behalf of the participants. 5 Refer to WP SCE-08, Vol. 5, p.54. 6 EIX 2Q 2016 10-Q (July 28, 2016) p. 51. Refer to WP SCE-08, Vol. 5, p. 38.

7

2. Analysis of Recorded Data, Estimating Methodology, and Forecast for Property 1

Insurance Expense (FERC Account 924) 2

Figure I-3 Property Insurance Expense

Recorded and Adjusted 2011-2015/ Forecast 2016-2018 FERC 924 (Constant 2015 $000)

Insurance expense charged to FERC Account 924 increased from $12.015 million in 3

2011 to $14.070 million in 2015, as shown above in Figure I-3.7 The increase is primarily due to pricing 4

fluctuations over time in the property insurance market, as well as an increase in the replacement value 5

of SCE’s insured assets. The insurable value of SCE’s assets grows over time due to two factors: (1) the 6

utility’s ongoing capital expenditure program results in additional physical assets that need to be 7

insured, and (2) for any given physical asset, the replacement value tends to increase over time with 8

inflation. SCE’s insurable values have grown from approximately $17.1 billion in 2011 to $21.4 billion 9

in 2015, a 25 percent increase. This growth in insurable values results in higher insurance premiums. 10

SCE’s estimated property insurance expense of $16.070 million for Test Year 2018 is 11

based on an assessment of overall insurance market conditions, SCE’s loss history, and SCE’s property 12

7 Refer to WP SCE-08, Vol. 5, pp. 1-18.

8

values. The assessment of the overall insurance market condition and projected trends is based on 1

Marsh’s assessment of the market.8 2

E. Liability Insurance Expense (FERC Account 925) 3

1. Activity Description 4

SCE maintains several types of liability insurance, which are separately discussed below. 5

SCE’s general liability insurance provides coverage to limit exposure due to unpredictable losses that 6

may occur as a result of lawsuits alleging third-party bodily injury, personal injury, or property damage. 7

In addition, SCE purchases supplemental wildfire liability insurance to further protect itself from third-8

party lawsuits alleging property damage caused by SCE facilities. SCE also has fiduciary liability 9

insurance to protect itself in connection with the administration of employee benefit plans. SCE 10

purchases D&O liability insurance to protect its directors and officers in the event of lawsuits alleging 11

errors in judgment in managing the Company. SCE purchases workers’ compensation insurance to 12

protect it from exposure to costs incurred by employees who are injured on the job. SCE also continues 13

to purchase nuclear liability insurance for SONGS, PVNGS, and a former repair facility located in 14

Westminster. In 2015, SCE began purchasing cyber liability insurance. 15

a) General Liability Insurance 16

General liability insurance protects the Company from losses that result from 17

lawsuits or negotiated settlements with third parties alleging bodily injury, personal injury, or property 18

damage for which the Company may be found liable. The wildfires in Southern California caused by 19

utility facilities in 2007 and 2008 led to several years of turmoil in the wildfire liability insurance 20

market. The market finally improved to some extent in 2015, but a wildfire in Northern California 21

caused by utility facilities late in 2015 has sent the insurance market back into turmoil. That fire was 22

particularly disturbing to the insurance market because Northern California had been perceived by the 23

market as having relatively low wildfire risk. Prolonged drought conditions in California have increased 24

the duration of the wildfire season and the risk of severe wildfire events. In addition to the large number 25

of wildfires occurring in the state, insurers are also strongly opposed to the doctrine of inverse 26

condemnation in California. Under that doctrine, a utility can be held strictly liable (including liability 27

for a claimant’s attorneys’ fees) for property damage caused by utility facilities, even if there was no 28

8 Refer to WP SCE-08, Vol. 5, p. 53 for copy of Marsh letter to SCE.

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negligence on the utility’s part. All of these factors combined have made it very unattractive for insurers 1

to offer wildfire liability insurance to utilities in California. As a result, some insurance companies are 2

dropping out of the California wildfire insurance market, others are reducing the amount of wildfire 3

insurance they are willing to sell in California, and still others are indicating they will drop out of 4

California if there is another wildfire caused by utility facilities. Consequently, some of the wildfire 5

insurance that SCE bought previously is becoming unavailable except at extremely high premiums. As 6

insurance companies continue to reduce or eliminate their wildfire liability coverage, premiums have 7

begun to increase sharply and available insurance is decreasing. This increase is reflected in SCE’s 8

forecast of premiums for 2018. Of the $92.427 million forecast for total liability insurance expense in 9

the test year, $71.340 million is attributable to general liability insurance. 10

SCE purchases as much wildfire liability insurance as is commercially available 11

at a competitive price, and with other reasonable terms.9 SCE also purchases liability insurance to cover 12

its non-wildfire exposures. Some of SCE’s general liability insurance policies cover both wildfire and 13

non-wildfire exposures, but the majority are dedicated to either wildfire or non-wildfire. Since wildfire 14

coverage is more limited in availability and more expensive than non-wildfire coverage, SCE buys 15

separate coverage so that non-wildfire claims will not use up the expensive wildfire insurance. 16

b) Supplemental Wildfire Insurance 17

18

9 Any liability associated with claims incurred above the limits of insurance is not currently included or

forecast in customer rates.

10

c) Fiduciary Liability Insurance 1

Fiduciary liability insurance protects SCE against lawsuits that may arise over its 2

administration of the employee benefit plans governed by ERISA. This insurance, which has an 3

aggregate limit of $60 million, provides coverage for fiduciaries of the benefit plans.10 4

d) D&O Liability Insurance 5

D&O liability insurance protects directors, officers, trustees, and senior officials 6

of the Company against lawsuits alleging errors in judgment while managing the Company. The 7

proliferation of D&O suits and the high cost of defending them have made the purchase of this coverage 8

necessary and prudent.11 9

Because directors and officers can be held personally liable in lawsuits, SCE 10

could not attract qualified directors, officers, and trustees if adequate protection for these individuals 11

were not provided. Consequently, the purchase of this coverage is essential to the normal operations of 12

virtually any large institution such as SCE. A 2013 report from the consultant Advisen noted that in 13

2013, the average securities class-action lawsuit settlement (including proposed and tentative 14

settlements) was $51.5 million, up from $13.2 million in 2012.12 Advisen’s report also noted that large 15

settlements still abound. The largest settlement in 2013 was for $2.5 billion, with several other notable 16

settlements, including one for $1.2 billion and another one for $725 million. SCE’s D&O liability 17

insurance has an aggregate limit of $280 million. The premiums and liability limits are prudent in view 18

of the possibility of lawsuits and SCE’s need to attract qualified directors and officers, as discussed 19

above. 20

In SCE’s 1988 Test Year GRC decision, the Commission found that D&O 21

insurance represented a normal and prudent business expense reasonable for ratemaking purposes. In the 22

1995 GRC decision, the Commission ordered that only half of SCE’s D&O insurance expense be paid 23

by customers. Pursuant to that direction, SCE’s D&O insurance expense is now shared on an equal basis 24

between customers and shareholders, which has been taken into account in this testimony and SCE’s 25

10 Refer to WP SCE-08, Vol. 5, pp. 39-43. 11 Id. 12 Refer to WP SCE-08, Vol. 5, pp. 44-52.

11

2018 forecast.13 Therefore, the Test Year forecast includes only the 50 percent customer share of D&O 1

insurance costs. 2

e) Workers’ Compensation 3

Workers’ compensation insurance provides four types of benefits (medical care, 4

death, disability, and rehabilitation) for employee job-related injuries or diseases. Each state requires 5

that benefits be paid to injured employees with the amount and term set by the state based upon the 6

extent and type of injury. To serve as proof these benefits will and can be paid by employers, insurance 7

or state-approved self-insurance must be arranged. Requirements for self-insurance are set by each state 8

and require the employer to provide financial security in an amount determined by the state. 9

SCE self-insures its workers’ compensation exposure for its employees in 10

California, as discussed in Exhibit SCE-08, Vol. 4. However, SCE also purchases excess workers’ 11

compensation insurance to cover large claims for SCE’s California employees.14 The policy for SCE’s 12

non-nuclear workers has a deductible of $1 million and statutory limits. 13

SCE also employs workers in Nevada operating the Eldorado Substation. SCE 14

purchases workers’ compensation insurance to cover this exposure. The Nevada workers’ compensation 15

policy has a zero deductible and statutory limits. Workers’ compensation insurance is necessary and 16

prudent because of the high cost of benefits and the potential financial exposure from a single incident 17

with multiple injuries. 18

f) Miscellaneous Liability Insurance and Surety Bonds 19

SCE incurs expense for a variety of small insurance policies and surety bonds. For 20

example, SCE has an aviation liability insurance policy, which covers bodily injury and property 21

damage to third parties caused by SCE aircraft. 22

g) Nuclear Liability Insurance 23

Nuclear liability insurance covers losses involving radiological injuries and 24

damages to third parties involving SCE’s facilities at SONGS or PVNGS, or at a former SCE repair 25

13 D.96-01-11, (mineo), pp. 140-141, 64 CPUC 2d 241, 319 (1996). 14 The insurance is structured as a reimbursement agreement whereby SCE pays all claims and then submits

eligible claims to the insurer for reimbursement.

12

facility located in Westminster. Nuclear liability insurance expenses related to SONGS are generally 1

recovered through the decommissioning trust, but a small portion of the expense (approximately 2

$45,000 per year)15 is attributable to the Westminster facility, which is not recoverable through the 3

decommissioning trust. That portion of the expense is included in this General Rate Case filing. 4

Liability insurance for the PVNGS is procured by APS as the operator of the site, and SCE is billed for 5

its share of the expense by APS. 6

h) Cyber Liability Insurance 7

SCE purchased cyber liability insurance in 2015. In recent years, several 8

companies have reported that personal information relating to customers or employees has been 9

compromised resulting in notification and monitoring expenses. SCE’s cyber liability insurance covers 10

the liability that could result from such a compromise, as well as coverage for the extra expenses (such 11

as restoring affected servers) associated with a cyber-attack on SCE’s systems. SCE purchases $50 12

million of cyber liability insurance with a $5 million deductible. 13

2. Analysis of Recorded Data, Estimating Methodology, and Forecast for Liability 14

Insurance Expense (FERC Account 925) 15

The insurance expense charged to FERC Account 925 increased from $31.962 million in 16

2011 to $71.296 million in 2015, as shown below in Figure I-4.16 Most of the increase was due to an 17

increase in the cost of wildfire liability insurance. 18

15 Refer to WP SCE-08, Vol. 5, p.29. 16 Refer to WP SCE-08, Vol. 5, pp. 19-37.

13

Figure I-4 Liability Insurance Expense

Recorded and Adjusted 2011-2015/ Forecast 2016-2018 FERC Acct. 925

(Constant 2015 $000)

As described more fully in the General Liability Insurance section, several factors have driven 1

the large increase in the cost of wildfire liability insurance. The main factors include the doctrine of 2

inverse condemnation, the large wildfire claims that have occurred in California over the last decade, 3

and the prolonged drought. In addition, population growth in wildland fire-prone areas has increased the 4

exposure of insurance companies when a fire does occur. All of these factors have led insurance 5

companies to increase premiums sharply and reduce available insurance limits. 6

7

As with the property insurance premiums, Marsh has estimated Test Year premiums for liability 9

insurance. The Test Year expenses are expected to be $92.427 million,17 a 30 percent increase over the 10

2015 recorded amount of $71.296 million. Most of this increase is due to the expected increase in the 11

cost for general liability insurance, as discussed above. Insurance premiums have long been accorded 12

17 Refer to SCE-08, Vol. 5, p. 55.

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cost recovery in rates as a necessary cost of doing business. The financial risk posed by wildfire liability 1

underscores the need for SCE to maintain its insurance program. 2

Appendix A

Declaration of David Heller