2018 General Rate Case · F. Test Year 2018 Request for Long Term Incentives (FERC ... Recent History .....50 e) Analysis of Recorded and Forecast Pension Costs ... 1. Summary of

Application No.: A.16-09- Exhibit No.: SCE-06, Vol. 2 Witnesses: M. Bennett

G. Henry C. Hernandez J. Trapp R. Worden

(U 338-E)

2018 General Rate Case

Human Resources (HR) Volume 2 – Benefits And Other Compensation

Before the

Public Utilities Commission of the State of California

Rosemead, CaliforniaSeptember 1, 2016

SUMMARY

This exhibit presents the Test Year 2018 forecast of SCE’s Benefits and Other Compensation.

Compliance requirements are included in Chapter II. Chapter III presents an overview of the 2018 GRC

Total Compensation Study. Each subsequent chapter presents one of SCE’s compensation or benefit

plans, including a summary of historical costs and test year forecast.

Benefits and Other Compensation O&M Expenses 2018 Forecast

(Total Company Constant 2015$Million)

SCE-06: Human Resources Volume 2 - Benefits And Other Compensation

Table Of Contents

Section Page Witness

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I. OVERVIEW OF TOTAL COMPENSATION ..................................................1 M. Bennett

A. Introduction ............................................................................................1

B. Base Pay .................................................................................................1

C. Short Term Incentive Compensation .....................................................1

D. Long Term Incentive Compensation .....................................................1

E. Recognition Programs ............................................................................2

F. Pension and Benefits ..............................................................................2

G. Total Compensation Mix .......................................................................2

H. O&M Request and History ....................................................................3

II. COMPLIANCE REQUIREMENTS ..................................................................4

A. 2015 GRC Decision ...............................................................................4

B. Previous GRC Decisions........................................................................4

C. Joint Minority Parties Settlement ...........................................................5

D. Comparison of Authorized 2015 to Recorded .......................................6

III. SUMMARY OF THE TOTAL COMPENSATION STUDY .........................10 C. Hernandez

A. Background on Total Compensation Study .........................................10

1. 2018 Total Compensation Study ..............................................10

B. Reasonableness of Compensation Paid by SCE ..................................12

IV. COST-OF-SERVICE RATEMAKING, INCENTIVE COMPENSATION, AND BENEFITS ............................................................14 R. Worden

A. The California Public Utilities Commission Regulates Businesses According to Cost-of-Service Ratemaking Principles..............................................................................................14


Table Of Contents (Continued)


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B. Cost-of-Service Ratemaking Principles Assign Responsibility to Both Regulators and the Businesses Subject to Their Authority ...................................................................14

C. The CPUC Should Provide SCE a Reasonable Opportunity to Earn Its Authorized Rate of Return .................................................17

D. Incentive Compensation is a Routine Method of Compensating Employees in Today’s Workforce ...............................18

E. SCE Cannot Dictate to the Market What Form or the Amount of Compensation Employees Will Be Paid ............................20

F. Conclusion ...........................................................................................21

V. SHORT-TERM INCENTIVES .......................................................................22 C. Hernandez

A. Summary of Short-Term Incentive Program Expenses [FERC Accounts 500, 588, 905, and 920/921] ....................................22

B. Program Description and Scope...........................................................23

C. Ratemaking Policy ...............................................................................26

D. STIP Goals Benefit Customers ............................................................27

E. Test Year 2018 Request for STIP (FERC Accounts 500, 588, 905, and 920/921) ........................................................................27

1. Description of Accounts ..........................................................27

2. Analysis of Recorded Data ......................................................28

3. Test Year 2018 Forecast for STIP ...........................................28

VI. EXECUTIVE INCENTIVE COMPENSATION PLAN (EIC) .......................29 J. Trapp

A. Introduction ..........................................................................................29

B. Executive Performance Goals Determination ......................................29

C. Executive Performance Goals Benefit Customers ...............................29

D. Executive Incentive Compensation Determination .............................31




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E. Executive Incentive Compensation Benefits Customers .....................31

VII. LONG-TERM INCENTIVES .........................................................................33 J. Trapp

A. Summary of Long Term Incentives Costs [FERC 920/921] ...............33

B. Historical Rejection of Rate Recovery for LTI Program .....................33

C. Program Description and Scope...........................................................34

D. SCE as a Publicly Traded Company ....................................................35

E. SCE’s LTI Program Benefits Customers .............................................35

F. Test Year 2018 Request for Long Term Incentives (FERC Accounts 920/921) ...............................................................................37

1. Description of Account ............................................................37

2. Analysis of Recorded Data ......................................................37

3. Test Year 2018 Forecast for Long Term Incentives FERC Accounts 920/921 .........................................................37

VIII. RECOGNITION PROGRAMS .......................................................................39 C. Hernandez

A. Introduction ..........................................................................................39

B. Policies Underlying Cash Awards .......................................................39

C. Policies Underlying Non-Cash Awards ...............................................40

D. SCE Recognition Program Expense ....................................................40

IX. PENSION AND BENEFITS PROGRAMS ....................................................42

A. Introduction ..........................................................................................42 M. Bennett

B. Retirement Income-Related Benefits ...................................................44 G. Henry

1. Pension Plan and Expenses ......................................................44

a) Summary of Pension Plan Costs [FERC Account 926] ................................................................44




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b) Summary Description of SCE’s Pension Plan ..............................................................................46 M. Bennett

c) Longer-Term Perspective on Financial Market Returns and SCE Pension Fund Returns .........................................................................48 G. Henry

d) Pension Cost Ratemaking Background and Recent History .............................................................50

e) Analysis of Recorded and Forecast Pension Costs .............................................................................52

f) Pensions Cost Balancing Account ...............................57

2. Edison 401(k) Savings Plan .....................................................59 M. Bennett

a) Summary of Edison 401(k) Savings Plan Costs [FERC Account 926] .........................................59

b) Summary Description of SCE’s 401(k) Savings Plan .................................................................60

c) Test Year 2018 Request for the Edison 401(k) Savings Plan (FERC Account 926) ..................61

(1) Description of Account ....................................61

(2) Analysis of Recorded Data ..............................62

(3) Test Year 2018 Forecast for the Edison 401(k) Savings Plan .............................62

C. Medical Programs ................................................................................63

1. Summary of Medical Programs Costs [FERC Account 926] ............................................................................63

2. Summary Description of SCE’s Medical Programs ................63

a) Medical Plans ...............................................................65

b) Preventive Health Account ..........................................67

c) Employee Assistance Program ....................................67




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3. Test Year 2018 Request for Medical Programs Costs (FERC Account 926) .....................................................68

a) Description of Account ................................................68

b) Analysis of Recorded Data ..........................................68

c) Test Year 2018 Forecast for Medical Programs Costs ............................................................68

d) Higher Costs For Medical Services .............................69

e) Higher Costs for Pharmacy Services ...........................70

f) Legislation....................................................................72

g) New Technologies .......................................................74

h) Lifestyle Choices .........................................................75

i) Aging of the Population ...............................................75

j) Summary Conclusion Regarding Medical Program Forecast for 2018...........................................75

k) Medical Programs Balancing Account ........................76

4. Discussion of Post-Test Year Medical Cost Escalation .................................................................................77

D. Dental Plans .........................................................................................78

1. Summary of Dental Plans Costs [FERC Account 926] ..........................................................................................78

2. Summary Description of SCE’s Dental Plans .........................78

3. Test Year 2018 Request for Dental Plans Costs (FERC Account 926) ...............................................................79






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c) Test Year 2018 Forecast for Dental Plans Costs .............................................................................79

E. Vision Service Plan (VSP) ...................................................................80

1. Summary of Vision Service Plan (VSP) Costs [FERC Account 926] ...............................................................80

2. Summary Description of SCE’s VSP ......................................80

3. Test Year 2018 Request for VSP Costs (FERC Account 926) ............................................................................81



c) Test Year 2018 Forecast for VSP Costs ......................81

F. Retiree Health Care and Life Insurance (Post-Retirement Benefits Other Than Pensions) ............................................................82 G. Henry

1. Summary of PBOP Costs [FERC Account 926]......................82

2. Summary Description of Post-Retirement Benefits Other than Pensions (PBOP) ....................................................83 M. Bennett

a) Flex Retirees ................................................................83

b) PrimeCare ....................................................................85

c) Medicare Part B Premiums ..........................................86

d) Dental and Vision Coverage ........................................86

e) Retiree Life Insurance ..................................................86

3. Ratemaking Background ..........................................................86 G. Henry

a) Tax Deductible Current Funding of PBOP Costs .............................................................................87




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b) PBOP Costs Are Reasonable And Necessary To Meet Funding Requirements Based On Fair Actuarial Assumptions, Contributions, And Investments ..........................................................88

c) Rate Recovery That Exceeds the Lesser Of Tax Deductible Contributions Or ASC 715-60 Expense Is Subject To Refund ................................88

d) PBOP Cost Balancing Account ...................................88

4. Test Year 2018 Request for PBOP Costs (FERC Account 926) ............................................................................89

a) PBOP Costs ..................................................................89


(2) Analysis of Recorded Data ..............................89

(3) Test Year 2018 Forecast for PBOP Costs .................................................................91

b) PBOP Actuarial Fees ...................................................92


(2) Test Year 2018 Forecast for PBOP Actuarial Fees ..................................................92

5. PBOP Balancing Account ........................................................92

G. Group Life Insurance ...........................................................................93 M. Bennett

1. Summary of Group Life Insurance Plan Costs [FERC Account 926] ...............................................................93

2. Summary Description of SCE’s Group Life Insurance Plans ........................................................................94

a) Employee Life Insurance .............................................94

b) Dependent Life Insurance ............................................95




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c) Accidental Death & Dismemberment (AD&D) Insurance .......................................................95

d) Business Travel Accident Insurance ............................95

3. Test Year 2018 Request for Group Life Insurance Plan Costs (FERC Account 926) .............................................95



c) Test Year 2018 Forecast for Group Life Insurance Plan Costs ....................................................96

H. Miscellaneous Benefit Programs .........................................................96

1. Summary of Miscellaneous Benefit Programs Costs [FERC Account 926] ...............................................................96

2. Summary Description of SCE’s Miscellaneous Benefit Programs .....................................................................97

a) Electric Service Discount Reimbursement ..................97

b) Awards to Celebrate Excellence (ACE) ......................98

c) Commuter Programs ....................................................98

d) Educational Reimbursement Program .........................99

3. Test Year 2018 Request for Miscellaneous Benefit Programs Costs (FERC Account 926) .....................................99



c) Test Year 2018 Forecast for Miscellaneous Benefit Programs Costs ................................................99

I. Executive Benefits .............................................................................100

1. Summary of Executive Benefits Costs [FERC Account 926] ..........................................................................100




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2. Summary Description of Executive Benefits .........................100

a) Upcoming Changes to the Executive Retirement Plan ..........................................................102

3. Test Year 2018 Request for Executive Benefits Costs (FERC Account 926) ...................................................103

a) Description of Account ..............................................103

b) Analysis of Recorded Data ........................................103

c) Test Year 2018 Forecast for Executive Benefits Costs ............................................................103

1

I. 1

OVERVIEW OF TOTAL COMPENSATION 2

A. Introduction 3

SCE’s total compensation programs comprise base pay, short-term incentives, long-term 4

incentives, recognition awards, and benefits. Our compensation programs target the market median and 5

reward employees for individual, Operating Unit and Company performance. To attract and retain the 6

workforce essential to the Company’s operations, SCE offers a market-competitive compensation 7

package. 8

B. Base Pay 9

Base pay represents the foundation of cash compensation, the fixed component of annual pay. 10

Base pay compensates ongoing performance, skills, and knowledge of job responsibilities. The 11

Company’s base pay programs establish and maintain performance-based pay levels that are market-12

competitive and internally equitable, and allow for differentiation based on individual performance. 13

C. Short Term Incentive Compensation 14

The success of any company relies upon the collective contribution of its workforce. The Short-15

term Incentive Plan (STIP) and Executive Incentive Compensation Plan (EIC) are short-term incentive 16

programs that attract, retain, and reward employees and executives by providing a market-competitive 17

bonus opportunity that varies based on performance. The STIP and EIC programs recognize and reward 18

employees and executives for performance in areas such as safety, customer service, reliability, cost 19

control, and efficiency. These programs give employees a financial stake in achieving utility objectives 20

and, as discussed in Chapter IV below, focus employee efforts on SCE’s operational goals that benefit 21

customers. Customers also benefit from the variable pay elements of SCE’s total compensation package, 22

since these bonuses are not paid unless those goals are achieved. Further, these variable pay programs do 23

not add to other employee costs such as pensions and benefits. 24

D. Long Term Incentive Compensation 25

Executives are eligible for long-term incentive compensation in the form of stock options, 26

restricted stock units, and performance shares. These incentives are essential to SCE’s efforts to attract 27

and retain highly valued leaders. Nearly all other employers against whom SCE competes for executive 28

talent also offer long-term incentive compensation. As discussed in Chapter VII below, long-term 29

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incentives align the interests of executives with the long-term interests of customers. Besides being 1

offered by comparable companies, the vesting schedules for stock awards require recipients to remain 2

employed for multiple years to receive full value of their grants. In addition, these long-term incentives 3

do not add to other employee costs such as pensions and benefits. 4

E. Recognition Programs 5

SCE’s recognition programs acknowledge employees for desired behaviors, such as achieving 6

exceptional business results. Recognition programs include both cash and non-cash forms of 7

compensation, including informal recognition, Awards to Celebrate Excellence, and spot bonuses. These 8

programs reward individual and team achievement and complement our comprehensive compensation 9

program by: 10

• Highlighting and encouraging employees’ “above-and-beyond” contributions to our 11

Company’s success. 12

• Providing a more timely way to recognize outstanding performance and achievements, as 13

compared to the annual incentive process. 14

• Fostering an environment where employees and co-workers can celebrate one another’s 15

successes. 16

• Adding a flexible component to SCE’s total compensation program. 17

F. Pension and Benefits 18

Attracting and retaining a skilled workforce depends on offering a total compensation package 19

that includes an appealing benefits component. The core benefits offered by SCE include healthcare 20

(i.e., medical, dental, and vision plans), 401(k) savings plan, pension plan, disability benefits, life 21

insurance, and other benefits, such as the Educational Reimbursement Program and the Electric Service 22

Discount.1 These benefits assist SCE in competing for qualified personnel. 23

G. Total Compensation Mix 24

SCE must offer a competitive compensation package to attract and retain a workforce that best 25

serves the needs of our customers. The Company regularly monitors how its total compensation mix (of 26

cash compensation and benefits) aligns with the market, through compensation surveys, benchmarking 27

1 Refer to SCE-08, Vol. 4 for information regarding disability benefits.

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analysis and similar studies. Through regular reviews, SCE determines how its total compensation mix 1

compares to market practices and what changes are necessary to keep that mix in alignment. 2

In 2016, the Company began the Compensation Design Project to redefine its compensation 3

structure as part of a larger review of SCE’s compensation and benefits plans. This effort supports the 4

Company’s objective of balancing the mix of benefits and compensation to align with the market. 5

H. O&M Request and History 6

This exhibit presents the facts supporting the $518.445 million of expenses we project in Test 7

Year 2018 for SCE’s Benefits and Other Compensation. Estimated expenses in Test Year 2018 are 8

depicted in Table I-1below. 9

Table I-1 Benefits and Other Compensation – Combined

Summary of 2018 Forecast (Constant 2015 $000 and Nominal $000))2

Account Activity 2018

Short-term Incentive Program 920/921, 905, 500, 588

Short-term Incentive Program $133,848

920/921 Long-term Incentives $13,726926 Pension Costs $97,474926 401(k) Savings Plan $79,190926 Medical Programs $110,719926 Dental Plans $15,035926 Vision Service Plan $3,443926 PBOP Costs $36,823926 Group Life Insurance $1,426926 Miscellaneous Benefit Programs $5,592926 Executive Benefits $21,087926 Third Party Billing & Non-Utility

Affiliates P&B Credits $0

Total O&M Expenses $518,363

2 Activity 926 forecasts are presented in nominal $000 dollars. All other activity forecasts are presented in

constant 2015 $000 dollars.

4

II. 1

COMPLIANCE REQUIREMENTS 2

A. 2015 GRC Decision 3

In its 2015 decision, the Commission directed SCE to address the following items, which are 4

included in this exhibit: 5

- Recognition Programs – “…present a clear and coordinated showing on its recognition 6

programs including Spot Bonuses and Awards to Celebrate Excellence.”3 Testimony 7

addressing this compliance item can be found in Chapter VIII. 8

- Executive Incentive Compensation Plan (EIC) – “…provide substantially more evidence that 9

the EIC awards incent executives to achieve customer benefits.”4 Testimony addressing this 10

compliance item can be found in Chapter VI. 11

- “Where a utility requests the same relief that was denied in a previous GRC, the utility must 12

explain what has changed to warrant a different outcome in the present case. Significant 13

portions of SCE’s direct testimony in this 2015 GRC are similar to corresponding 2012 GRC 14

testimony. As previously indicated in SCE’s 2012 GRC, whether an expense is part of SCE’s 15

business model is a separate question from whether the costs are necessary for the delivery of 16

electric service.” Testimony addressing this compliance item can be found in Chapters IV, V, 17

VI, and VII. 18

B. Previous GRC Decisions 19

In its 2012 GRC decision, the Commission stated: “If SCE and DRA undertake an RFP for a 20

compensation study in a future GRC, SCE shall ensure that applicants are required to disclose if they 21

receive more than 10% of their annual revenues from other SCE contracts.”5 SCE’s RFP for the 2018 22

Total Compensation Study complied with this directive and none of the vendors who submitted 23

proposals received over 10 percent of their annual revenues from other SCE contracts.6 24

3 See D.15-11-021, Ordering Paragraph (OP) 9d.

4 Id. at 261.

5 See D.12-11-051, Conclusion of Law (COL) 382.

6 Refer to WP SCE-06, Vol. 02 Chapter III – VIII, p. 116.

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C. Joint Minority Parties Settlement 1

The following agreements in the Joint Minority Parties Settlement7 are addressed in this exhibit: 2

• SCE will solicit competitive proposals for a Total Compensation Study (“TCS”) prior to 3

filing the next GRC application. 4

• As part of the TCS study, SCE will again seek Los Angeles Department of Water and 5

Power’s (“LADWP”) participation as a comparator company. 6

• SCE will invite the Joint Minority Parties and other intervenors to comment on the 7

comparator companies selected for the TCS. 8

Please refer to Section III.A.1 for an overview of SCE’s 2018 Total Compensation Study, 9

including SCE’s compliance with the above-referenced items. 10

7 Refer to WP SCE-06, Vol. 01, pp. 117-140. SCE and the Joint Minority Parties came to a settlement-in-

principle regarding its 2015 GRC Application on September 16, 2014, and the settlement agreement was fully executed on December 19, 2014. SCE and the Joint Minority Parties filed a Joint Motion for Approval of the Settlement Agreement on February 5, 2015. A copy of the Joint Motion is available at http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M148/K259/148259642.PDF [as of August 22, 2016]. The settlement was approved in D.15-11-021, OP 21.

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D. Comparison of Authorized 2015 to Recorded 1

Figure II-1 Benefits Programs

20015 GRC Authorized and Recorded (Nominal $000)

Medical Benefits, Retiree Health Care and Life Insurance (PBOP), and Executive Benefits are 2

the primary drivers for the variance in authorized dollars versus 2015 recorded dollars in Figure II-1 3

above. Medical, dental and vision costs are subject to a two-way Medical Programs Balancing Account 4

(MPBA). Although an authorized amount is established in a GRC decision, through the operation of the 5

MPBA, SCE recovers its recorded medical, dental and vision costs, and returns any overcollection to its 6

customers. 7

The PBOP variance is due to higher than projected 2013 and 2014 investment returns and 8

favorable interim health claims experience, which more than offset the unfavorable effects of a reduced 9

2015 expected return on plan assets and updated mortality assumptions recommended by the Society of 10

($1,308)

($35,991)

($22,119) ($131)

$2,932 $11,352 $125

$436

$230,492

$215,898

$171,193

0

50,000

100,000

150,000

200,000

250,000

2015Request

2015Authorized

DentalVariance

DisabilityVariance

ExecBenefitsVariance

LifeInsuranceVariance

MedicalVariance

Misc.Benefit

Variance

PBOPCosts

Variance

VisionVariance

2015Recorded

926 - Dental Plans 926 - Disability Programs 926 - Executives Benefits926 - Group Life Insurance 926 - Medical Programs 926 - Miscellaneous Benefit Programs926 - PBOP Costs 926 - Vision Service Plan

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Actuaries in 2014. PBOP costs are subject to the two-way Post-Employment Benefit Other than 1

Pensions Balancing Account (PBOP BA). Although an authorized amount is established in a GRC 2

decision, through the operation of the PBOP BA, SCE recovers its recorded PBOP costs and returns any 3

overcollection to its customers. 4

Regarding Executive Benefits, SCE’s forecast for Executive Benefits in the 2015 GRC 5

Application was $17.3 million, but the 2015 recorded expense was $19.7 million due to a drop in the 6

discount rate and differences from expected pay and demographic experience. In addition, the 2015 7

GRC Decision authorized funding of half of SCE’s Executive Benefits request. 8

Figure II-2 Short-Term Incentive Program (STIP) 2015 GRC Authorized and Recorded

(Nominal $000)

As shown in Figure II-2 above, SCE’s recorded STIP expense in 2015 exceeded the authorized 9

amount by $21.564 million. This variance is driven primarily by the Commission’s disallowance of 10

approximately 32% of SCE’s forecast of 2015 expenses for STIP. 11

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Figure II-3 Long-Term Incentives


Long-term incentives program expenses were not authorized in the 2015 GRC Decision. 1

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Figure II-4 Pension and 401(k) Savings Plans


Costs related to the 401(k) Savings Plan were the primary driver of the variance reflected in 1

Figure II-4 above. While SCE forecasts 401(k) costs using the itemized methodology based on the 2

Company’s labor forecast and labor escalation rate, these costs are also affected by plan participation 3

rates. Changes in one or more of these factors over the recorded period has an impact on the costs that 4

the Company ultimately bears for this benefit. 5

Pension costs are subject to the two-way Pensions Cost Balancing Account (PCBA). Although 6

authorized amounts are established in a GRC decision, through the operation of the PCBA, SCE 7

recovers its recorded pension costs and returns any overcollection to its customers. 8

($587)

$7,419 $152,949 $150,715 $157,547

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2015 Request 2015 Authorized 401k Variance Pension Variance 2015 Recorded

926 - 401(K) Savings Plan 926 - Pension Costs

10

III. 1

SUMMARY OF THE TOTAL COMPENSATION STUDY 2

A. Background on Total Compensation Study 3

Total compensation studies have been an element of energy utilities’ General Rate Case (GRC) 4

proceedings for over 20 years. Historically, SCE and ORA have jointly sponsored a total compensation 5

study.8 However, as in PG&E’s recent GRC, ORA notified SCE in October 2015 that it did not intend to 6

participate in the development of a total compensation study. During a meeting between SCE and ORA 7

later in December 2015, ORA confirmed it would not be jointly participating in the total compensation 8

study. Notwithstanding ORA’s position, under the direction provided by the Commission in past GRCs, 9

SCE selected an independent expert to perform the 2018 Total Compensation Study. Consistent with the 10

Commission’s direction, the selected independent expert performed the study and conducted analyses 11

regarding benchmarking, job matching, and selecting comparator companies. 12

1. 2018 Total Compensation Study 13

In planning for SCE’s 2018 GRC filing, SCE solicited competitive bid proposals for an 14

independent expert who would perform the Total Compensation Study. In January 2016, a Request for 15

Proposal (RFP) was sent by SCE to three consulting firms: Aon Hewitt Consulting (Aon Hewitt), Willis 16

Towers Watson, and Mercer. Two firms submitted proposals in response to the RFP. Based on SCE’s 17

analysis of the proposals, Aon Hewitt was selected to perform the Total Compensation Study. On March 18

3, 2016, Aon Hewitt and SCE began developing the Total Compensation Study (the Study) for SCE’s 19

2018 GRC.9 20

Mirroring the joint agreements between SCE and ORA in the 2015 Study, the following 21

methodology was employed for analyzing the competitiveness of SCE’s total compensation levels: (1) 22

included Paid Time Off in the benefits valuation; (2) included municipal utilities (namely, Los Angeles 23

Department of Water & Power (LADWP) and Sacramento Municipal Utility District) as comparator 24

companies for valuing executive compensation and benefits; and (3) utilized SCE’s historical executive 25

8 See D.87-12-066, OP 26 (mimeo).

9 See SCE-06, Vol. 3, Total Compensation Study.

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demographic data for executive benefits valuation.10 In addition, after the comparator companies were 1

selected for the Study, the Joint Minority Parties and other intervenors were notified and invited to 2

comment on the comparator companies selected. 3

The Total Compensation Study Report describes the data gathering process and analysis 4

underlying the Study. At a high level, the Study encompassed the following steps: 5

1. As in past Studies, Aon Hewitt and SCE selected a sample of SCE jobs from five 6

categories – Physical/Technical, Clerical, Professional/Technical, 7

Manager/Supervisor, and Executive. Collectively, the 2018 Study benchmark jobs 8

represent approximately 73 percent of SCE’s workforce. 9

2. Aon Hewitt and SCE identified a marketplace of employers (comparator companies) 10

with which SCE competes to fill the jobs in each of these categories. The starting 11

point for this list of companies were the comparator companies used in the 2015 12

Study. 13

3. Aon Hewitt, with input from SCE, matched the SCE benchmark jobs to comparable 14

positions at the comparator companies utilizing well-established, industry 15

compensation surveys. Executive level SCE benchmark jobs were compared to the 16

selected comparator companies from those same compensation surveys. 17

4. Aon Hewitt calculated the benefit value for each benchmark job for each comparator 18

company for which they could find a match, to present that data on a cash-equivalent 19

basis for comparison purposes. This calculation was determined by applying SCE’s 20

employee demographic profile (and not the profiles of each comparator company) to 21

provide an “apples-to-apples” value comparison. 22

5. Aon Hewitt compared SCE’s total compensation to that of the comparator companies 23

for each benchmark job in each of the five job categories. SCE’s labor market 24

definition for many jobs includes the Southern California market. Since data for 25

Southern California is not reported, or inconsistently reported, across all of the 26

surveys, national cuts of data were collected and a geographic differential of 12 27

10 As it was in the 2015 Study, the CPUC was also invited to participate in the 2018 Study as a comparator

company, but was unable to do so.

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percent was applied. This factor was determined by extracting geographic differential 1

data from the Economic Research Institute’s Geographic Assessor. It is consistent 2

with the methodology approach used and the same as the geographic factor applied in 3

the 2015 Study. 4

6. Finally, Aon Hewitt “weighted” the results for each of the five job categories and, 5

based on the relative percentage of that category to SCE’s total 2015 payroll, 6

calculated the comparison of SCE’s total compensation to the market. 7

All of the foregoing, including the methodology, data gathering, analyses, and results of 8

the 2018 Study, is detailed in the Total Compensation Study Report.11 9

B. Reasonableness of Compensation Paid by SCE 10

Table III-2 summarizes the results of the 2018 Study performed by Aon Hewitt for this GRC. 11

The percentages in the table are the amounts by which SCE’s base pay, incentive compensation, and 12

benefits deviate from the market, both in the aggregate and for each of the five job categories into which 13

SCE’s workforce was divided for the Study. In this context, total compensation comprises the base pay, 14

short-term incentives, paid time off, and benefits received by SCE’s workforce. For Executives and 15

certain jobs in the Manager/Supervisor category, total compensation also includes long-term incentives. 16

The Study shows SCE’s aggregate compensation to be 1.9 percent below market levels. Given the 17

sampling error inherent in such studies, this result shows SCE’s total compensation to be statistically 18

equivalent to the market average. 19

11 See SCE-06, Vol. 3, Total Compensation Study.

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Table III-2 Summary Results of the 2018 GRC Total Compensation Study

Based on the results of the Study, the Commission should find that the total compensation paid 1

by SCE to its workforce is at market and reasonable.2

14

IV. 1

COST-OF-SERVICE RATEMAKING, INCENTIVE COMPENSATION, AND BENEFITS 2

A. The California Public Utilities Commission Regulates Businesses According to Cost-of-3

Service Ratemaking Principles 4

The testimony below addresses the Commission’s recent pattern of excluding various forms of 5

employee incentive compensation from authorized revenue requirements. 6

When the Hope decision established that rates for regulated service would be set based on the 7

“original cost” of utility assets and that regulators establish a rate of return sufficient to attract capital 8

investment, the major elements of cost-of-service ratemaking were determined.12 By knowing the 9

original cost of assets dedicated to utility service, along with the operating expenses for each year, and a 10

rate of return on the assets sufficient to attract capital investment, the regulator could determine rates to 11

charge for utility service. The Commission’s challenge is to arrive at a balance of authorizing sufficient 12

revenues to provide reliable utility service and attract investment, at a cost to serve that is just and 13

reasonable for customers. The Commission regulates businesses according to cost-of-service principles, 14

and this policy is manifest primarily in the general rate case and cost-of-capital dockets. 15

B. Cost-of-Service Ratemaking Principles Assign Responsibility to Both Regulators and the 16

Businesses Subject to Their Authority 17

Through the exhaustive, and litigious process of establishing an authorized general rate case 18

revenue requirement the Commission arrives at a forecast of SCE’s cost to provide electric service to its 19

customers. The fact-finding exercise of discovery, audit, testimony and cross-examination ultimately 20

leads to an evidentiary record that enables the Commission to set an authorized revenue requirement, the 21

basis for adjusting customer rates. 22

Parties will often have differing views about such issues as the right number of inspections of 23

utility hardware that should be assumed in a forecast, or the right number of apprentices to be hired to 24

have an adequate workforce available to provide utility service. In the end, the lengthy process of a 25

general rate case arrives at sufficient facts to enable the Commission to determine a reasonable level of 26

expense permitted for each facet of company operations. The utility’s forecasts are sometimes adopted, 27

12 See Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944).

-15-

other times modified, and in many instances the forecasts proposed by other parties are adopted in lieu 1

of SCE’s forecasts. No entity involved in this process can forecast precisely the cost to operate the 2

company over the course of a GRC’s three-year cycle. However, once the forecasts are established by 3

the Commission, it permits the utility to change rates to recover revenues sufficient to meet forecast 4

expenses and a reasonable opportunity to earn its authorized return on rate base. The Commission 5

implements this reasonable opportunity to earn by multiplying the authorized rate of return on the rate 6

base. Multiplying rate base by the authorized rate of return, and including this forecast of “net operating 7

revenue” in the authorized revenue requirement, the Commission creates a revenue stream available to 8

pay bond holders and those who hold common equity their expected payments in return for the use of 9

their funds advanced to SCE. 10

The evidentiary record in SCE’s GRC has historically included the Total Compensation Study 11

(TCS), which is evidence that compares SCE’s aggregate compensation level against the “market.” In 12

other words, it measures SCE’s employee compensation against the various labor markets where SCE 13

competes for employees. The earliest reference to the study for SCE is found in the Test Year 1988 14

general rate case, A. 86-12-047. In this instance, the Public Staff Division (PSD) had acquired some 15

compensation studies through data requests and compiled its own assessment of SCE’s compensation 16

relative to the labor market. In the final decision, D. 87-12-066, the Commission noted that the survey 17

data relied upon by the PSD was “…a significant improvement over its PG&E proposal.” The 18

Commission nevertheless directed SCE and the Commission staff to jointly develop a data base for use 19

in evaluating employee compensation in SCE’s next general rate case.”13 The Commission’s intent, at 20

this early date, is stated clearly: 21

Our objective is to ensure that ratepayers are not burdened with paying for employee 22 compensation levels beyond that which is necessary for Edison to provide safe reliable 23 service at reasonable rates.14 24

At a subsequent workshop, the consensus of the participants was that the Commission would not 25

take issue with the “mix” or formula used to determine what percentage of compensation is base pay, 26

and what percentage is incentive-based, either long or short-term instruments.15 The Commission has 27

13 D.87-12-066, OP 26 (mimeo).

14 Id. at 103.

15 D.92-12-057, p. 85 (mimeo).

-16-

had before it evidence that the level of compensation is reasonable and is a legitimate cost of service. In 1

other words, the Commission has not concluded that SCE employees should be paid less. If the 2

Commission has evidence that SCE’s compensation level is “at market” and has no evidence that the 3

level of compensation is unreasonable, then fidelity to cost-of-service principles requires this expense be 4

included in the authorized revenue requirement. 5

If the Commission expressly denies cost recovery through rates for an expense that the evidence 6

demonstrates is reasonable and “at market,” then such a GRC decision is an impediment to SCE earning 7

its Commission-authorized return. In recent years, the Commission has been very clear that its intent is 8

to not authorize cost recovery for certain types of incentive-based pay for qualitative reasons and that 9

SCE is to fund this expense with revenues that the CPUC has designated for investors. The decision in 10

SCE’s Test year 2012 GRC stated: 11

In our decision today, we are not recommending reduced compensation for executive 12 officers. We are merely assigning certain costs to shareholders based on what is just and 13 reasonable to assign to ratepayers. The TCS did not specify or differentiate between 14 ratepayer and shareholder funding for either comparator company compensation or SCE 15 compensation.16 16

The Commission chose to assign an expense, which it does not dispute SCE was going to incur, 17

to revenues the Commission earmarked for earnings. Stated another way, the Commission’s decision 18

added another expense SCE would bear without matching revenues. On one hand, in the Cost-of-Capital 19

docket, the Commission established a return for SCE that it expects would be sufficient to attract capital 20

investment to finance SCE’s operations for electric service. Then on the other hand, it made a decision 21

to consciously impede SCE’s ability to realize such a return. This clear departure from cost-of-service 22

principles should not be taking place. 23

In the 2012 GRC decision, quoted above, the Commission makes a further error by assuming 24

that comparator companies likewise have two sources of funds to pay incentive compensation, (1) an 25

investor fund and (2) a customer or ratepayer fund. The decision faults the TCS for not delineating these 26

two fictional categories of revenues for the comparator companies. This assumption reveals an 27

unfamiliarity with unregulated businesses and their accounting. An unregulated business would record 28

its expenses on its books and these expenses would be reflected in the income statement to display profit 29

or loss. To the extent a comparator company is a regulated utility, the expense would be treated the same 30

16 D.12-11-051, p. 450.

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way as SCE accounts for it -- either matched by authorized revenues or not. For those expenses not 1

defrayed by authorized revenues, a reduced return on equity is the result. 2

The Commission repeated the practice of consciously excluding these expenses from the 3

authorized revenue requirement in SCE’s Test Year 2015 GRC. The decision states: 4

In recent decisions, we have held that LTI is not recoverable from ratepayers because LTI 5 does not align executives’ interests with ratepayer interests. SCE’s arguments to the contrary 6 are vague, limited, and unpersuasive. SCE has not demonstrated that LTI furthers the 7 provision of safe and reliable service at just and reasonable rates. We continue our consistent 8 practice and reject rate recovery of SCE’s LTI program.17 9

This decision does not conclude that SCE’s overall compensation is too generous or that SCE 10

might not incur the expense. In the 2015 GRC decision, the Commission concludes that the form of 11

compensation is against its policy. What this Commission policy does not address is the effect such an 12

exclusion has on the authorized revenue requirement. When the Commission excludes known expenses 13

from the authorized revenue requirement, SCE is faced with either not spending authorized revenues in 14

some other area of its operations, or not pay investors their expected return, which is detrimental to 15

customers over time. The Commission should not establish an authorized return on equity in one docket, 16

then impede its realization in the GRC docket. 17

C. The CPUC Should Provide SCE a Reasonable Opportunity to Earn Its Authorized Rate of 18

Return 19

The Commission has recognized that SCE’s compensation paid to employees is validated by 20

Total Compensation Studies. These studies are a fixture in California general rate cases, and ordered by 21

the CPUC to be jointly-managed by ORA and SCE to mitigate bias in the outcome.18 The TCS is the 22

best indicator of what the market is paying employees who perform work similar to SCE employees. 23

This market validation of SCE’s overall compensation is the optimal measure of both how much SCE 24

must pay employees and that the forms of compensation that in aggregate are “at market.” 25

Parties, and ultimately the Commission, have taken issue with goals used by SCE management to 26

set as objectives to measure employee performance in awarding incentive-based compensation. As 27

17 D.15-11-021, p. 266.

18 In this GRC, however, ORA informed SCE that it would not participate in the design and preparation of the TCS. This change in policy is unfortunate. SCE continues to believe the study has value to the Commission and has included such a study in this 2018 GRC.

-18-

recently as SCE’s Test Year 2015 GRC decision, the Commission recognized that not every goal has a 1

mutually-exclusive outcome – only benefitting either SCE’s customers or its investors. Specifically, the 2

decision stated, “We agree with SCE that there are many examples of issues where shareholder and 3

ratepayer benefits are aligned, including, for example, attracting, retaining, and motivating high quality 4

employees.”19 Nevertheless, the Commission has apparently concluded that some of the goals, if 5

achieved, benefit investors disproportionally and disadvantage customers or somehow inhibits reliable 6

service to SCE customers. Such a conclusion is at odds with the actual goals, which indeed provide 7

tangible benefits to SCE customers. For example, only by managing authorized revenues as intended by 8

this Commission when it approves a general rate case, will SCE be able to pay investors the return they 9

expect. And only by meeting their expectations for a return equal to investments in similarly situated 10

companies, can SCE keep borrowing costs at a reasonable level. Only by keeping borrowing costs at a 11

reasonable level – consistent with Commission expectations when it authorized “net operating revenue” 12

in a GRC – will SCE be able to continue investing in the electric grid at a pace sufficient to maintain 13

existing levels of reliable service. 14

In addition, there will be year-to-year variances in the degree to which a utility like SCE will 15

either over-earn or under-earn its recorded rate of return. Such a departure from authorized returns on 16

equity are short-lived because authorized revenue requirement levels are reviewed and adjusted every 17

general rate case. These outcomes are also often determined by uncontrollable factors such as the 18

number of new customers. The issue being discussed in this testimony should be addressed and 19

corrected because it is the result of deliberate policy by the Commission, and not an issue that is 20

unpredictable. 21

D. Incentive Compensation is a Routine Method of Compensating Employees in Today’s 22

Workforce 23

Despite recognizing incentive compensation as a routine form of reward for employees, the 24

Commission has expressly prohibited a significant portion of its cost recovery through customer rates. 25

The 2015 GRC decision addressing incentive compensation has a discussion regarding who benefits – 26

customers or shareholders – from the presence of certain goals as targets for employee incentive 27

compensation. A review of goals used for awarding Incentive Compensation revealed they are in 28

19 D.15-11-021, p. 256.

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conformance with the Commission’s intent. There are no goals which, if met, would be detrimental to 1

customers’ interests or would diminish SCE’s ability to provide safe and reliable service – in fact, quite 2

the opposite. The goals align customer and investor interests in having a healthy company that provides 3

reliable service to customers and manages its business well enough to pay the returns investors expect 4

when they advanced their funds to SCE. The presence of a company goal to meet an “earnings per 5

share” target is in direct alignment with Commission policy and essential to manage the allocation of 6

“net operating revenues” authorized by this Commission in general rate cases. Managing the company 7

as the Commission intended (i.e. having sufficient net operating income available to pay investor 8

returns) is necessary to sustaining safe and reliable service to customers because it helps assure 9

consistent ability to make system infrastructure investments. The presence of such goals, or their 10

attainment, has not created a misalignment between the needs of customers or investors. 11

In the 2015 GRC decision, the Commission described how it views incentive compensation, 12

stating: 13

To the extent an incentive program (or any other cost) is designed to further objectives other 14 than providing safe and reliable service at just and reasonable rates, the costs of that incentive 15 program are not a reasonable cost-of-service, even if total compensation (including 16 incentives) is at market. This is not unique to incentive compensation; if SCE pays an 17 employee a salary to further objectives other than providing safe and reliable service at just 18 and reasonable rates, that salary is not a reasonable cost-of-service, regardless of the level of 19 total compensation. SCE bears the burden of proving that the costs of an incentive program 20 are a reasonable cost-of-service. To the extent that SCE fails to meet this burden, ratepayers 21 should not pay the costs. Such a finding in no way bars SCE’s shareholders from funding 22 such an incentive program.20 23

This statement in the Commission’s decision is a significant oversimplification of the broad 24

responsibilities of our employees. SCE is a company of about 12,000 employees, some of whom have a 25

direct impact on the quality of electric service to our customers every day. On the other hand, some 26

employees whose work is essential to the efficient functioning of the company, such as the employees 27

who manage memorandum and balancing accounts, or the employees who manage our corporate 28

compliance filings, are not likely to ever be in the position of having a direct and immediate impact on 29

safe and reliable electric service to our customers. Nevertheless, their work is essential to efficient 30

functioning of a large company such as SCE. SCE’s request for cost recovery of incentive compensation 31

should not fall prey to an artificial and binary conclusion that company goals must have a direct impact 32

20 Id. at 257.

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on providing reliable electric service. Their work is a legitimate cost-of-service and their total 1

compensation should be recovered through customer rates. 2

The Commission then went on to state, “We reject SCE’s analysis, and highlight one alternative 3

option for SCE management: target incentive compensation to achieve ratepayer benefits. This does not 4

mean that shareholders cannot benefit from the incentives created, but simply that the metrics used to 5

award incentive compensation should be designed explicitly to advance ratepayer interests.”21 Based 6

upon a review of current employee goals, SCE has met the Commission’s intent. Company goals, 7

especially those upon which awards of incentive compensation will be based, provide benefits for both 8

customers and investors – SCE’s investors do not benefit to the detriment of SCE customers. Operating 9

the company within the revenues authorized by this Commission, which includes having the authorized 10

net operating revenue available to pay investors (i.e. realizing an earnings target), is in SCE customers’ 11

best interests. Having a predictable and stable earnings pattern is essential to keeping the cost of 12

borrowing funds to finance the business at acceptable levels. 13

If, at the outset, SCE knows that it must pay employees “at market” and some portion of these 14

operating expenses will be excluded from its authorized revenue requirement, then the company must 15

economize elsewhere to pay investors at expected levels. Invariably, this circumstance forces SCE to 16

realize savings elsewhere in its operations, which may be contrary to the Commission’s intent. 17

E. SCE Cannot Dictate to the Market What Form or the Amount of Compensation Employees 18

Will Be Paid 19

SCE recruits employees from the available labor markets as it finds them. SCE could offer 20

salaries and benefits that exclude the compensation disallowed by the Commission in recent general rate 21

case decisions. Inevitably, such a decision would cause SCE to lose candidates for skilled jobs or have 22

an unacceptable attrition level as employees recognize better compensation could be found elsewhere. 23

Some parties decry compensation levels of certain job classifications, such as executives. However, SCE 24

cannot change the market, or the employees’ expectations. SCE is in a circumstance in which it has to 25

pay employees a market-based level of compensation, an indisputable cost-of-service. SCE has to 26

operate in the labor market it finds, not the market it wishes existed. Often, when reading the newspaper 27

or reports online each of us marvels at the high compensation paid to professional sports figures, then 28

21 Ibid.

-21-

learn of the meager salaries paid to those in other professions. These extreme examples are markets 1

nevertheless. Likewise, SCE must pay a market-based level of compensation and utility regulation 2

cannot change this circumstance, nor should SCE’s compensation request be disallowed because of a 3

perceived unfairness in certain labor markets. 4

F. Conclusion 5

In this general rate case, the Commission should revisit its recent policy of assigning some 6

portion of employees’ incentive compensation to be paid from earnings. This policy is a departure from 7

the principles of cost-of-service ratemaking because it represents an intentional obstacle to earning the 8

authorized return the Commission established in the cost-of-capital proceeding. Further, the 9

Commission should not fall prey to the false claim that a goal used for employee compensation will 10

either benefit customers or investors, and a benefit to one must be a detriment to the other. SCE’s 11

corporate goals align investors’ interests in stable, predictable returns and customers benefit from stable 12

investment patterns and low-cost financing for SCE to continue investment in safe and reliable electric 13

service.14

22

V. 1

SHORT-TERM INCENTIVES 2

A. Summary of Short-Term Incentive Program Expenses [FERC Accounts 500, 588, 905, and 3

920/921] 4

SCE forecasts expenses of $133,848 million for Test Year 2018 for: (1) the Short-term Incentive 5

Program (STIP), formerly known as the Results Sharing Program and the Management Incentive 6

Program, and (2) the Executive Incentive Compensation Plan (EIC) costs for those executives who are 7

not officers (less than one percent of the employee population).22 Figure V-5 below shows recorded and 8

adjusted costs for FERC Accounts 500, 588, 905 and 920/921 for the 2011-2015 plan years, plus the 9

forecast for the years 2016 through 2018.23 10

Figure V-5 STIP – All FERC Accounts

Recorded and Adjusted 2011-2015/Forecast 2016-2018 FERC Accounts 500, 588, 905, and 920/921

(Constant 2015 $000)

22 EIC for executive officers is discussed in the next section of this exhibit.

23 Refer to WP SCE-06, Vol. 02 Chapter III-VIII, pp. 01 – 58.

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B. Program Description and Scope 1

STIP is the annual variable pay program that provides employees an opportunity to earn a cash 2

bonus based on achieving Company goals. Exempt employees participating in STIP have their award 3

amounts further adjusted based on individual performance. The design of STIP is established each 4

calendar year by SCE’s senior executive management team. STIP fosters employee focus on activities 5

that have an impact – both direct and indirect – on the Company’s success in delivering services to its 6

customers. STIP provides a variable pay opportunity subject to the achievement of goals related to 7

public and workplace safety, customer service, system reliability, cost control, and productivity. The 8

program highlights what employees can do to contribute to the Company’s successful operations and 9

provides a financial stake for them to achieve Company goals aligned with customer interests. 10

The process for establishing Company goals and determining results under STIP is as follows. In 11

or around the middle of each calendar year, the Company identifies the business priorities for the 12

following calendar year and develops corporate goals accordingly. Progress towards Company goals is 13

reviewed during the year.24 In January and February of the following calendar year, goal achievements 14

for the previous year are reviewed and final performance is determined. OU leaders must approve the 15

performance results being reported by their respective departments before the results can be forwarded 16

onto the Board of Directors for final review. 17

Through 2014, STIP funding focused on the achievement of: (1) Company goals, (2) the 18

Company’s operations and maintenance (O&M) budget, (3) OU goals, and (4) the OU’s O&M budget. 19

In 2015, the basis for STIP funding was changed to three sets of goals: (1) O&M budget, (2) Safety goal 20

(detailed below), and (3) OU goals. The combination of the achievement of these goals and the funding 21

authorized by the 2015 GRC determined the pool of dollars allocated to each OU. For 2015, the separate 22

company-wide safety goal was based upon a Days Away, Restrictions and Transfers (DART) injury rate 23

target, with a no fatalities requirement and affected 10 percent of 2015 STIP funding.25 For exempt STIP 24

and EIC participants, the entire award amount was subject to further adjustment based on individual 25

performance. 26

24 Typically, the individual performance standard or metric is developed for each goal to monitor progress and

to determine final results at the end of the calendar year.

25 Refer to WP SCE-06, Vol. 02 Chapter III – VIII, pp. 62 – 66.

-24-

In 2016, the STIP was revised again to remove the OU goal component from the payout 1

calculation, aligning the STIP and the EIC with the same set of measurable and challenging Company 2

performance goals approved by the Board of Directors.26 The Company goals for 2016 are set forth in 3

Table V-3 below: 4

26 Refer to WP SCE-06, Vol. 02 Chapter III-VIII, pp. 67 - 72.

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Table V-3 Company Goals Included in STIP

2016 Plan Year

This exhibit also includes short-term incentive program costs for executives who are not officers. 1

These non-officer executives are eligible for short-term incentives under EIC, which is discussed in 2

greater detail in Chapter VI below. 3

-26-

C. Ratemaking Policy 1

Our Test Year forecast for the STIP (for all non-executive employees) and EIC (for non-officer 2

executives) – requests recovery from customers of the full costs of the programs. These programs are 3

included in the 2018 Total Compensation Study, which shows that SCE’s total compensation for STIP 4

and EIC participants is at market. These programs remain a critical component of total compensation for 5

current and prospective employees and attract, engage, and retain quality talent to meet operational 6

needs. 7

In SCE’s 2009 GRC, the Commission approved full funding for SCE’s short-term incentive plan, 8

then called “Results Sharing,” based upon the results of the 2009 Total Compensation Study. In its 9

decision, the Commission stated that, while the Total Compensation Study does not address the 10

reasonableness of compensation or who should bear its costs, it establishes the level of compensation 11

required by SCE to attract and retain employees: 12

The Study addresses the narrow issue of whether SCE’s total compensation package is 13 consistent with other similar companies…Although the Study does not address the issue of 14 whether SCE’s compensation is ‘reasonable’ or who should bear the costs of this total 15 compensation, e.g., shareholders or customers, the study does provide a basis for assessing 16 the reasonableness of the compensation offered by SCE in terms of what is necessary to 17 attract and retain qualified employees.27 18

A total compensation study determines how a utility’s compensation compares to the market. If 19

the total compensation is found to be at market levels, it is reasonable and recoverable from customers 20

based on cost-of-service ratemaking principles as the level of compensation needed to attract and retain 21

qualified employees. Where the overall level of total compensation is deemed reasonable, customers 22

should be indifferent regarding the mix of pay and benefits comprising total compensation. 23

There are several reasons customers should continue supporting SCE’s variable pay programs. 24

As variable pay is an important element of an overall total compensation package, provided to 25

employees for services rendered, similar to most other companies in the Total Compensation Study, it is 26

a legitimate business expense that should be recovered in cost-of-service-based rates. Variable pay is an 27

“at-risk” component of total compensation that orients employees’ efforts toward the customer-focused 28

operational priorities of the Company, such as performing work with a focus on public and employee 29

safety, and providing quality customer service. If these customer-facing operational priorities are not 30

27 D.09-03-025, p.127.

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met or exceeded, an employee’s incentive opportunities will be reduced or eliminated, and those dollars 1

allocated for that purpose may flow back to customers or be used to reward high-performing employees 2

who meet or exceed those goals which benefit customers. 3

D. STIP Goals Benefit Customers 4

STIP gives employees a financial stake in achieving SCE’s objectives by focusing employee 5

efforts on achieving operational goals which provide value to the customers. As reflected by Table V-3 6

above, the Company goals are overwhelmingly tied to matters benefiting customers, heavily focusing on 7

customer satisfaction, public and workplace safety, system reliability, infrastructure improvements, rate 8

equity and mitigation efforts, workforce and supplier diversity, and programs to rapidly respond to 9

business disruptions or catastrophic events. The goals related to financial performance, cost control and 10

productivity directly benefit customers since achievement of these goals enhances the value obtained by 11

customers through rates, and allows for greater investment in system reliability and safety. 12

In addition, as STIP is a variable pay component of total compensation, an employee’s STIP 13

award is not taken into account in determining certain pension and benefits costs that are a function of 14

an employee’s base pay. Base pay accrues regardless of employee job performance and any increase in 15

base pay results in a corresponding increase in associated pension and benefit costs. Accordingly, 16

variable pay components, like STIP, benefit customers by adding to reasonable employee compensation 17

in a fashion that avoids those increased costs associated with base pay.28 18

E. Test Year 2018 Request for STIP (FERC Accounts 500, 588, 905, and 920/921) 19

1. Description of Accounts 20

In Test Year 2018, SCE will record costs for STIP in FERC Accounts 500 (for expenses 21

in the general supervision and direction of the operation of steam power generating stations), 588 (for 22

expenses in distribution system operation not provided for elsewhere), 905 (for miscellaneous customer 23

accounts expenses not provided for in other accounts), and 920/921 (for administrative and general 24

salaries and office supplies and expenses). STIP costs are recorded in the Short Term Incentive Plan 25

Memorandum Account (STIPMA) (formerly the Results Sharing Memorandum Account).29 26

28 Refer to WP SCE-06, Vol. 02 Chapter III-VIII, pp. 73-76.

29 See SCE-09, Vol. 1, for additional detail on the operation of the Short Term Incentive Plan Memorandum Account (STIPMA).

-28-

2. Analysis of Recorded Data 1

A combination of factors, including the number of eligible employees, target award levels, labor 2

expense, and Company performance, drives STIP costs. 3

As depicted in Figure V-5 above, STIP costs fluctuated between the recorded years 2011 4

through 2015. Costs increased in 2012, due primarily to a better-than-target performance and funding. 5

Costs decreased slightly in 2013, due to labor reductions, offset by better-than-target performance and 6

funding. Costs increased in 2014, due to substantial above-target performance and funding, and 7

decreased significantly in 2015 due to marginally above-target performance and funding. 8

3. Test Year 2018 Forecast for STIP 9

We have selected an Itemized Forecast methodology, which incorporates the Company’s 10

labor forecast. Our Test Year forecast was determined as follows. First, we obtained the historical STIP 11

program costs for 2015 of $123.013 million. Then, we calculated the expense ratio (stated as a 12

percentage) for the program by dividing the 2015 plan costs by the 2015 recorded non-capital labor 13

expense. Finally, since STIP costs are directly affected by our total labor costs, we then applied the 14

expense ratio to the projected non-capital labor forecast for 2016-2018. A further adjustment was made 15

to reflect anticipated incremental costs (averaged over the period from 2018 to 2020) arising from job 16

classification changes tied the Compensation Design Project referenced in Section I.G above.30 17

As noted in Figure V-5 above, application of the methodology described above results in 18

a Test Year 2018 forecast for FERC Accounts 500, 588, 905 and 920/921 of $133.848 million.31 Unlike 19

the Linear Trending, Averaging, and Last Recorded Year methodologies, the Itemized Forecast 20

methodology is appropriate because it considers changes in the labor forecast. Notably, the resulting 21

2018 forecast using this itemized forecast methodology is lower than the forecast derived by applying 22

the Averaging methodology. 23


31 The historic and forecast labor costs used to derive the STIP forecast do not include labor costs associated with “below the line” work such as lobbying activities. Consequently, the labor costs of certain employees of Local Public Affairs, Corporate Communications and Regulatory Affairs and the entirety of groups, such as Edison Carrier Solutions, Public Affairs – Sacramento, and Community Involvement, are removed (either in whole or in part) and not included in the STIP forecast calculation.

29

VI. 1

EXECUTIVE INCENTIVE COMPENSATION PLAN (EIC) 2

A. Introduction 3

The executive short-term incentive pay program – the Executive Incentive Compensation Plan 4

(EIC) – is part of the market-competitive total compensation package for SCE’s executive workforce.32 5

Executive Officer EIC payments are included in the labor costs in the Executive Officer exhibit.33 Non-6

officer Executive EIC costs are included in SCE’s Short-term Incentive Program (STIP), discussed 7

above. 8

B. Executive Performance Goals Determination 9

At the beginning of each calendar year, the Board of Directors approves the performance goals 10

for the Company, and the Compensation and Executive Personnel Committee (Compensation 11

Committee) of the Board incorporates these goals as measures for determining executive incentives 12

under EIC. These goals identify critical areas of utility performance and set measurable, challenging 13

standards to assess successful attainment by executives. Goals are emphasized at all levels of the 14

Company through the year and focused on performance in areas critical to SCE's business and customer 15

service needs. 16

C. Executive Performance Goals Benefit Customers 17

As discussed in greater detail below, the 2015 goals for EIC are tied largely to customer benefits, 18

as the majority of these executive goals pertain to Operational and Service Excellence, Strategic 19

Initiatives, Safety, and People and Culture.34 These goals include performance metrics for operating in a 20

safe and reliable manner and improved customer satisfaction. They also include goals to modernize our 21

grid to support customer choices. Another portion of the goals is tied to financial performance where 22

executives are accountable for operating in a fiscally prudent manner. Below is a more detailed list of 23

the 2015 EIC performance goals, and explanation of how these goals benefit our customers: 24

32 Refer to WP SCE-06, Vol. 02 Chapter III – VIII, pp. 77 – 81.

33 See SCE-06, Vol. 1, Section III.B.

34 Refer to WP SCE-06, Vol. 02 Chapter III-VIII, pp. 82 - 90.

-30-

Safety – Safety is SCE’s utmost priority. As part of SCE’s effort to achieve an injury-free 1

workplace, the safety goal includes the Days Away Restrictions and Transfers (“DART”) injury rate, 2

which is the injuries that result in restricted duty or at least one day away from work after the date of the 3

injury. This goal further mandates no employee fatalities for achievement. Operating in a safe manner 4

directly contributes to public safety. 5

Operational and Service Excellence – SCE’s Operational and Service Excellence goal includes 6

Generation Reliability, which supports our efforts to provide dependable service to our customers, and a 7

Diverse Business Enterprise spend target, which helps SCE contribute to the success of diverse 8

businesses within our service territory. Controlling our operations and maintenance costs is another part 9

of this goal and achievement translates into tangible savings for our customers. In this GRC, we forecast 10

significant savings of over $85 million from Operational Excellence initiatives in our Test Year O&M 11

expenses.35 Another part of the goal, capital spending targets, focuses on executive decisions for the 12

long-term interests of our customers. The cyber and physical security portion of this goal focuses on 13

protecting SCE’s critical infrastructure from breaches and intrusions, and preparing for emergency 14

incidents to safely restore power to our customers. Finally, the customer satisfaction portion of the goal 15

measures how well SCE is meeting the needs of our residential and business customers.36 16

Strategic Initiatives – The Strategic Initiatives goal includes the Advanced Distribution 17

Resources Plan (DRP) that supports SCE’s achievement of renewable portfolio standards and the State 18

of California’s desire to expand its renewable energy footprint. By advancing the DRP Plan, SCE will 19

comply with the Commission's DRP Proceeding, furthering the goals of the Commission and the 20

renewable energy ambitions of the State of California. This goal also includes SCE’s efforts in this rate 21

case proceeding whereby SCE attains the essential funding needed to efficiently operate and safely and 22

reliably serve our customers. 23

People and Culture – The People and Culture goal is measured by the diversity of our 24

leadership team. The communities in SCE’s service territory are rich in diversity and SCE strives to 25

mirror that diversity in our leadership team. SCE believes that diverse composition provides for a 26

stronger leadership team and enhances decision-making for our customers.37 27

35 See WP SCE-08, Vol. 3 Book A, pp. 235 for information on SCE’s Operational Excellence Initiatives.

36 See SCE-03, Section IX, for more information regarding SCE’s efforts to meet customers’ needs.

37 See SCE-06, Vol. 1, Section II.D, regarding SCE’s efforts to enhance leadership diversity.

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Financial Performance (Core Earnings Target) – Core earnings are the after-tax earnings 1

from SCE’s principal business and exclude non-core income and losses not considered representative of 2

the Company’s ongoing earnings, such as a one-time regulatory assets write-off and income from 3

discontinued business operations. Core earnings are essential to maintain SCE’s financial health and to 4

provide lower cost of capital to finance the capital projects and other essential programs that benefit our 5

customers and support delivery of safe and reliable service. Core earnings impact credit ratings of 6

corporate debt instruments. A better rating results in lower costs of debt to fund essential capital 7

projects. 8

D. Executive Incentive Compensation Determination 9

Following the end of the plan year, an individual modifier is applied to the performance rating of 10

each executive, and a bonus recommendation is made by the officer to whom each executive reports. 11

Concurrently, the Edison International CEO, in consultation with his management committee, and the 12

Compensation Committee review the results for the year and determine Company performance (referred 13

to as the corporate modifier). The executive’s recommended bonus equals his or her target bonus, 14

adjusted for both the individual and corporate modifiers. Awards for executive officers are also 15

reviewed and approved by the Compensation Committee. 16

E. Executive Incentive Compensation Benefits Customers 17

EIC benefits customers by placing a portion of executives’ compensation at risk unless 18

customer-focused goals – including safety, grid reliability, effective customer service, cost control, and 19

efficiency – are met or exceeded. By tying the goals of variable pay for executives to customer benefits, 20

the EIC Plan reflects the importance SCE places on customers and the role they have in our sustained 21

success. 22

Variable pay allows the Company to provide greater rewards to high-performing executives and 23

creates a direct line of sight between employee performance aligned with customer-focused goals and 24

tangible rewards. Incentive/variable pay programs persist as an essential component of the executive 25

compensation package at SCE, as at most other comparable companies. By looking at market data, SCE 26

identifies the median compensation for executive positions and the breakdown of rewards. Specifically, 27

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we can see what the market pays for the position in base pay and bonuses, which allows us to offer 1

competitive pay packages. 2

Like STIP, EIC is a variable pay component of total compensation and EIC awards are not 3

factored into determining pension and benefits costs for the subject employee. Unlike variable pay 4

components, base pay serves as the basis for determining pension and certain benefit costs and any 5

increase in base pay results in a corresponding increase in those costs. As such, SCE’s use of variable 6

pay components, like EIC, provides defined, tangible benefits to customers by adding to reasonable 7

executive compensation without increasing pension and benefits costs associated with base pay. 8

33

VII. 1

LONG-TERM INCENTIVES 2

A. Summary of Long Term Incentives Costs [FERC 920/921] 3

SCE forecasts expenses of $13.73 million for costs related to long-term incentives in Test Year 4

2018. The forecast amount pertains to long-term incentives (LTI) paid to executives. Figure VII-6 below 5

shows recorded costs for FERC Accounts 920/921 for the 2011-2015 plan years, plus the forecast for the 6

years 2016 through 2018.38 7

Figure VII-6 Long Term Incentives

Recorded and Adjusted 2011-2015/Forecast 2016-2018 FERC Accounts 920/921

(Constant 2015 $000)

B. Historical Rejection of Rate Recovery for LTI Program 8

SCE acknowledges that the Commission has not viewed with favor past requests for rate 9

recovery of its LTI program and has admonished SCE for continuing to do so. It has never been disputed 10

by the Commission or any intervenor that nearly every investor-owned utility and comparable business 11


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enterprise includes LTI in the total compensation package for executives. Maintaining the power grid 1

infrastructure and meeting customer service expectations comes with its own set of challenges. 2

Customer value from critically evaluating areas of improvement, implementing changes, and 3

transforming SCE to meet the prudent policies set forth by the legislature and the Commission is not a 4

short term effort. It requires sustained, dedicated, knowledgeable executives to lead and steer the 5

organization. To attract the right talent from across the country and retain them to serve California’s 6

future necessitates competitive compensation. 7

The Commission’s refusal to allow rate recovery notwithstanding, SCE has continued to fund the 8

LTI program for a wide range of reasons which benefit customers directly, including better retention of 9

high-performing leaders and lower costs as compared to base pay. SCE has buttressed its showing to 10

reinforce the benefits to customers of funding this essential component of the total market-based 11

compensation package for SCE’s leadership team. SCE hopes that the Commission continues to evaluate 12

SCE’s showing on a case-by-case basis and does not instinctively adhere to recent precedents. 13

C. Program Description and Scope 14

SCE’s LTI is an integral part of the total compensation package for executives, and is provided 15

in the form of non-qualified stock options, restricted stock units, and performance shares. Each year, 16

SCE performs a detailed market assessment, position by position, of its executive workforce to assess 17

each executive’s compensation package, namely, base pay, and short-term and long-term incentives. The 18

LTI target for each executive is determined based upon the market data applicable for his or her 19

position. While LTI is targeted at the market median, the actual grant may vary based on an annual 20

assessment of that individual’s performance. The actual value of the award is determined after the 21

vesting period based upon company performance. The variable feature of LTI is intended to reinforce a 22

performance culture rather than an entitlement culture. 23

LTI has a vesting feature that requires continuous employment with SCE for a multi-year period 24

ranging from 3 to 4 years. Performance shares and restricted stock units have a “cliff” vest, which 25

require three-years of continuous employment with SCE prior to vesting. Stock option grants vest at 25 26

percent per year over a 4-year period. In cases of retirement, some acceleration of LTI vesting occurs. In 27

addition, if an executive is severed without cause (e.g., position elimination), that executive will get one 28

year of additional vesting. 29

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As shown in the 2018 Total Compensation Study, while the Company’s total cash compensation 1

is within the market rate, SCE executives’ total cash compensation is 17.7% below market rate, and 2

long-term incentives are 21.5% below market rate.39 Total cash compensation comprises base pay, short-3

term incentive compensation, and LTI, which in 2015 were 52%, 19% and 28% of SCE executives’ total 4

cash compensation, respectively, on average. 5

D. SCE as a Publicly Traded Company 6

As a publicly traded company, SCE’s access to the equity capital markets helps reduce the cost 7

of debt financing for operations and capital projects which benefits customers. SCE’s inclusion of LTI 8

as part of the total compensation for its executives is aligned with best practices of publicly traded 9

companies. According to a recent WorldatWork and Deloitte Consulting joint survey of incentive pay 10

practices of publicly traded companies, 88 percent of respondents indicated they pay LTI to their 11

executives.40 The top two objectives of the respondents’ LTI programs is to align employee rewards 12

with long-term organization goals, and to create a more competitive compensation package. 13

E. SCE’s LTI Program Benefits Customers 14

As described in Mr. Payne’s testimony in SCE-01, SCE’s executive team provides the essential 15

leadership needed to fulfill strategic goals of safety, reliability, customer satisfaction, future investment 16

in the grid, operational excellence and strong financial performance. Those goals, which are part of the 17

EIC program, and discussed in Chapter VI above, provide direct benefits to our customers. Similarly, 18

SCE’s LTI program benefits our customers in the following ways: 19

o SCE’s use of LTI helps conserve cash resources, which are needed for its operations, 20

maintenance and capital improvements. Unlike the fixed cost of base pay, there is no 21

immediate cash payment to employees for an LTI award due to the multi-year vesting 22

schedule applicable to each form of LTI. Employees who voluntarily leave prior to the 23

full vesting of the LTI award will forfeit all or a substantial portion of the unvested 24

award. Additionally, as a variable pay component of total compensation, LTI awards do 25

not cause increases in an executive’s annual/fixed pension and benefits costs that are a 26

39 See, Table III-2 above. More information is available in SCE-06, Vol. 3, Total Compensation Study.

40 Refer to WP SCE-06, Vol. 02 Chapter III-VIII, pp.107 – 110, “Incentive Pay Practices Survey: Publicly Traded Companies,” February 2014, pp. 29-30. The full report is available at https://www.worldatwork.org/waw/adimLink?id=74763 [as of August 22, 2016].

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function of base pay. In this fashion, SCE’s use of LTI benefits customers helping avoid 1

increases in benefits costs for its executive workforce, while still allowing SCE to 2

provide a market-competitive compensation package. Moreover, conserving cash via the 3

LTI component also helps avoid interest on short-term borrowing which represents a cost 4

of service. 5

o LTI promotes stability of a strong leadership team at SCE as LTI awards and payouts 6

depend on multiple years of continuous employment, strong executive performance, and 7

thriving SCE financial health. LTI supports a performance culture as LTI awards may be 8

adjusted based on SCE’s review of the executive’s performance. Executives who have 9

performance issues risk having future LTI awards reduced. Once awarded, executives 10

must remain with SCE for three to four years after each LTI grant date before the grant 11

becomes fully vested. This feature of LTI incents executives to make a long-term 12

commitment to SCE and fully realize the LTI payout. If SCE were to give such 13

employees an equivalent cash award, they would receive the cash in the present and there 14

would be no retention benefit. Customers benefit from SCE’s retention of high 15

performing executives with a strong and long-term knowledge of its operations and a 16

vested interest in SCE’s delivery of safe and reliable service to sustain long-term 17

operational and financial viability. 18

o Since LTI awards take the form of equity in EIX (whose primary operating subsidiary is 19

SCE) and cash equivalents, those high-performing executives are further incentivized to 20

run SCE in a way that will support its long-term success. While the ultimate value of a 21

fully-vested LTI award for the recipient is a function of the stock price, this price is 22

largely based on the Company’s financial health and successful operation. Those metrics 23

translate directly into SCE’s ability to lower borrowing costs and reasonably obtain funds 24

for capital projects and other programs to maintain, revitalize, and update SCE’s power 25

grid and support reliability of service to customers. In that fashion, LTI awards to high-26

performing executives advances customer interests by aligning them with the strategic 27

goals and initiatives of the Company. 28

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F. Test Year 2018 Request for Long Term Incentives (FERC Accounts 920/921) 1

1. Description of Account 2

In Test Year 2018, SCE will record costs for LTI in FERC Accounts 920/921 for 3

administrative and general salaries and office supplies and expenses. 4

2. Analysis of Recorded Data 5

While costs were relatively stable from 2011 to 2012, stock-related expenses can be 6

volatile, and this is evident over the balance of the recorded history.41 In 2013, costs decreased due to a 7

decline in the Company’s stock price, and a decreased expected payout for performance shares at the 8

end of the year, resulting in lower-recorded expenses for the awards subject to liability accounting, and 9

executive separations resulting in forfeitures of unvested shares. In 2014, there was an increase in stock 10

price, and an increased expected payout for performance shares at the end of the year, resulting in 11

higher-recorded expenses for the awards subject to liability accounting. In 2015, the stock price dropped 12

again, and expected performance share awards decreased, resulting in lower recorded expenses for the 13

awards subject to liability accounting. Additionally, 2015 was the first year where performance shares 14

were granted with payouts to be made in cash only, resulting in a lower recorded expense of equity 15

performance shares. 16

3. Test Year 2018 Forecast for Long Term Incentives FERC Accounts 920/921 17

SCE forecasts expenses of $13.73 million for long-term incentive compensation costs in 18

Test Year 2018.42 The forecast amount pertains to long-term incentives granted to executives. Figure 19

VII-6 above shows recorded costs for FERC Accounts 920/921 for the 2011-2015 recorded years, plus 20

forecast costs for the years 2016 through 2018. 21

The forecast for long-term incentive compensation was derived using the Itemized 22

Forecast methodology. This methodology was chosen because: (1) 2011 through 2015 LTI expense is 23

higher than we anticipate in the Test Year due to a smaller population of employees eligible for LTI; and 24

(2) higher rates of turnover in the executive population occurred over the recorded period as compared 25

to previous periods resulting in a lower number of anticipated executives eligible for LTI in Test Year 26

2018. 27

41 Refer to WP SCE-06, Vol.02 Chapter III-VIII, p. 105.

42 Refer to WP SCE-06, Vol. 02 Chapter III-VIII, p. 104.

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The Itemized Forecast methodology selected for the years 2016-2018 was based on (1) 1

existing grants made in 2014 and 2015; (2) projected grants for 2016 through 2018 based on the 2

assumption that the number of grant recipients will not increase in our forecast years; and (3) expected 3

rates of forfeiture (grants cancelled prior to vesting) based on historical forfeiture rates. 4

Notably, the projected 2018 expense under this Itemized Forecast methodology is 5

significantly lower than the expense otherwise derived by applying either the Linear Trending, 6

Averaging, or Last Recorded Year methodologies. 7

39

VIII. 1

RECOGNITION PROGRAMS 2

A. Introduction 3

SCE’s recognition programs are low-cost tools that reward individual and team achievement. 4

They comprise cash awards, called spot bonuses, and non-cash awards in the form of points through the 5

Awards to Celebrate Excellence (ACE) program. In WorldAtWork’s 2015 Trends in Employee 6

Recognition Survey, 89 percent of respondent organizations indicated having various types of 7

recognition programs in place, and 97 percent of those companies use a portion of their payroll budget 8

for their recognition programs. Further, 80 percent of respondent organizations use at least one result-9

driven recognition program to drive specific results.43 10

B. Policies Underlying Cash Awards 11

Cash awards (“Spot Bonuses”) are an important tool for recognizing and rewarding employees 12

for exceptional performance and outstanding achievement. Spot Bonuses are an integral part of our 13

market-competitive, comprehensive compensation package. This low-cost recognition program 14

recognizes an individual or a team for delivering exceptional, measurable results such as: (1) making 15

significant contributions to public or employee safety; (2) developing a new or innovative program or 16

process that significantly affects efficiency across one or more OUs; and (3) leading a Company-wide 17

team or major project that notably exceeds expectations, within scheduled time frames and under 18

budget. Spot Bonuses are also used to provide real-time rewards for those employees who accept and 19

perform additional responsibilities in an exceptional manner or accept responsibilities or assignments 20

that require extraordinary time commitments. 21

In SCE’s 2003 GRC, the Commission recognized SCE’s Spot Bonus program as having 22

customer value: 23

43 Refer to WP SCE-06, Vol. 02 Chapter III-VIII pp. 111 – 115, “Trends in Employee Recognition,” May 2015,

pp. 12, 21, & 28. The full report is available at https://www.worldatwork.org/adimLink?id=78679 [as of August 22, 2016].

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With regard to the latter point, the record shows that the program is consistent with customer 1 interests, even if the program increases shareholder value. If anything, the evidence suggests 2 that benefits of quickly restoring service during storm conditions, successfully managing 3 T&D automation projects, and providing effective leadership can accrue to customers and 4 shareholders alike. Moreover, since awarding of a spot bonus for outstanding performance 5 gives SCE’s managers an alternative to raising an employee’s base salary, the integrity of 6 SCE’s base salary system is kept intact, and the Company’s long-term salary and wage-based 7 benefit costs are not increased. We note that spot bonuses are widely used by U.S. 8 corporations.44 9

The Commission further observed: 10

If it were shown that the Spot Bonus program does not result in employees receiving 11 above-market total compensation, and that the program does not produce outcomes that are 12 contrary to customer interests, we would be inclined to include the program costs in the 13 authorized revenue requirements.45 14

The Spot Bonus program is effective and tightly managed. Managers or executives submit spot 15

bonus requests, utilizing standards that guide award determination and approval requirements, and spot 16

bonus awards of $500 or greater value presently require a Vice President or higher level approval. Spot 17

bonus costs are forecast across our exhibits for other OUs, with each OU’s labor costs.46 18

C. Policies Underlying Non-Cash Awards 19

Awards to Celebrate Excellence (ACE) is a non-cash recognition program that uses points to 20

award employees for promoting a safe working environment through actions and behaviors and for 21

helping contribute to public safety. All non-executive employees are eligible to participate in this 22

program, because of the program redesign in January 2016. OU-forecast expenses for the ACE program 23

are included in their respective exhibits within non-labor costs. Please refer to the Miscellaneous 24

Benefits Programs testimony (Section IX.H) below for more information on this recognition program. 25

D. SCE Recognition Program Expense 26

In the 2015 GRC decision, the Commission stated, “We agree with SCE that the types of 27

behaviors (e.g., a focus on safety) that these programs reward do further the provision of safe and 28

44 D.04-07-022, p. 212.

45 Ibid.

46 As in the 2012 and 2015 Total Compensation Studies, spot bonuses are not being factored into the 2018 Total Compensation Study since data regarding spot bonuses is generally not available in surveys on a position-by-position basis and wide variances exist in the marketplace. The 2018 Total Compensation Study Final Report will be submitted with the application.

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reliable service at just and reasonable rates. Further, we agree that the costs appear reasonable relative to 1

the benefits. However, we share ORA’s concern (noted previously in D.12-11-051) that SCE’s forecast 2

is not transparent.”47 The Commission further directed SCE to“…present a clear and coordinated 3

showing on its recognition programs including Spot Bonuses and Awards to Celebrate Excellence.”48 4

In response to the Commission’s direction, Table VIII-4 below presents SCE’s recorded 2015 5

expense of $1.337 million and estimated 2018 expense of $1.456 million for its recognition programs. 6

The recognition program forecast was derived by applying SCE’s projected labor costs increase from 7

2016-2018 to the 2015 recorded expenses. 8

Table VIII-4 SCE Recognition Programs

2018 Estimated Expense

Utilizing the projected labor costs increase rate to approximate the forecast of Recognition 9

Programs expense is appropriate, as each OU has limited budget dollars that can be spent on Spot 10

Bonuses and ACE, namely, no more than 0.2 percent of the labor budget. This modest budget mirrors 11

that of the majority of organizations that have recognition programs in place, according to the 12

WorldatWork survey mentioned above.49 The estimated 2018 forecast expense was determined by 13

multiplying the 2015 recorded expense by the projected labor cost increase, which is equivalent to the 14

annual labor escalation rate for the three subsequent years of 2016, 2017, and 2018.50 The 2018 forecast 15

represents a modest increase of $0.119 million over the 2015 recorded expense. 16

47 See D.15-11-021, p. 267.

48 Id. at OP 9d.

49 Refer to WP SCE-06, Vol. 02 Chapter III-VIII, pp. 111 – 115, “Trends in Employee Recognition” at p. 21.

50 Refer to SCE-09, Vol. 1 for information regarding labor escalation rates.

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IX. 1

PENSION AND BENEFITS PROGRAMS 2

A. Introduction 3

This chapter describes SCE’s employee pension and benefits plans and programs and includes 4

expenses related to pension, 401(k), health care, group life insurance, and executive benefit plans. Other 5

employee benefits and programs discussed in this chapter include the electric service discount, employee 6

recognition, commuter programs, educational reimbursement, and other ancillary support activities. For 7

Test Year 2018, SCE forecasts $370,789 million of expenses for the employee pension and benefits 8

plans and programs in this Exhibit. 9

Our pension and benefits plans and programs are one component of the total compensation 10

provided to employees. These programs support the Company’s goal of attracting and retaining a 11

qualified workforce. Our benefits strategies focus on providing the Company, the employees, and our 12

customers with the highest return on dollars expended for benefits, while being mindful of the changing 13

requirements of the workforce, collective bargaining obligations, compliance with regulatory and 14

legislative requirements and the need to manage escalating costs, particularly in the medical program. 15

In designing the overall benefits package, the Company evaluates: 16

• Each component plan’s design. 17

• Benefits delivered by each plan. 18

• Costs to provide the benefits. 19

• Administrative efficiency. 20

• Value to employees and the Company. 21

• Features that are attractive to employees and user-friendly. 22

• How the entire benefits package compares with those offered by companies with whom SCE 23

competes for employees. 24

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Figure IX-751 below depicts total 2011-2015 recorded and 2016-2018 forecast expenses of SCE’s 1

pension and benefits plans and programs: 2

Figure IX-7 Pension & Benefit Plans

Recorded and Adjusted 2015/Forecast 2016-2018 FERC Account 926

(Non-Labor – Constant 2015 $000; Other – Nominal $000)

Table IX-5 Pension and Benefit Plans

Recorded and Adjusted 2015/Forecast 2016-2018- Detailed FERC Account 926

51 See respective sections in this Chapter for individual activities’ historical and forecast costs.

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B. Retirement Income-Related Benefits 1

1. Pension Plan and Expenses 2

a) Summary of Pension Plan Costs [FERC Account 926] 3

For Test Year 2018, SCE forecasts $97.47 million for pension costs.52 The 4

forecast for the two subsequent years is $161.7 million and $162.9 million, respectively. The average 5

contribution for the three-year period 2018, 2019, and 2020 is $140.7 million. Figure IX-853 below 6

shows recorded pension costs for the years 2011 through 2015, plus our forecast for 2016, 2017, and 7

Test Year 2018.54 8

52 Refer to Appendix A hereto, SCE Retirement Plan: Projected Actuarial Valuation Results for Plan Years 2016

through 2020, prepared by AonHewitt, August 10, 2016.

53 Refer to WP SCE-06, Vol. 02 Chapter IX Book A, pp. 1 - 14.

54 Post-June 7, 2013 service-related San Onofre Nuclear Generating Station (SONGS) costs have been removed from all recorded (2013–2015) and forecast costs.

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Figure IX-8 Pension Costs

Recorded and Adjusted 2011-2015/Forecast 2016-2018 FERC Account 926

(Nominal $000)

SCE’s authorized rate recovery for the 2015 to 2017 rate case cycle was an annual 1

amount of $88.326 million. Figure IX-8 above shows an expected average pension cost for these three 2

years of $91.3 million. The actuarial forecast of pension costs for Test Year 2018 of $97.54 million55 is 3

larger than forecast cost for the current cycle. SCE’s requested rate recovery, which is based on a 4

pension cost forecast prepared by its actuaries Aon Hewitt, is for the following authorized amounts: 5

$97.5 million in 2018, $161.7 million in 2019 and $162.9 million in 2020. 6

Forecast pension costs are higher than in prior years due to weak capital markets, 7

which lowered 2015 trust fund investment performance, and certain features of current statutory 8

minimum funding laws, discussed below, that will gradually lower the discount interest rates reflected in 9

future plan liabilities, even if prevailing interest rates hold steady or increase slightly. These lower 10

55 Refer to Appendix A hereto.

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discount rates, which are entirely outside of the SCE’s control, will increase plan liabilities through 2020 1

and weaken the plan’s reported funded status. 2

The forecast increase in pension cost highlights the unpredictability and potential 3

volatility of pension costs, and the continuing criticality of the existing two-way balancing account 4

treatment. 5

b) Summary Description of SCE’s Pension Plan 6

The SCE Retirement Plan56 contributes to an orderly transition from the 7

workforce by providing eligible employees with income after employment has ended. Since the 8

Retirement Plan is qualified by the IRS, participants avoid current taxable income as funds accumulate 9

during their employment. In 1999, significant changes were made to the Retirement Plan in cash balance 10

plan features to reduce its long-term cost structure and make it easier to understand and more portable. 11

These changes eventually applied to all SCE employees, after lengthy benefit negotiations with IBEW 12

Local 47, UWUA Local 246 and SOFA. Starting December 31, 2017, SCE shall change the Retirement 13

Plan to reduce its long-term cost structure by eliminating the pension/cash balance plan for employees 14

hired on or after that date. For those employees, SCE will make non-elective contributions into the 15

401(k) accounts of affected individuals. This change will apply to all eligible employees, represented 16

and non-represented.57 17

The Cash Balance Account, the benefit formula added to the Retirement Plan in 18

1999, established a more even and consistent benefit buildup over employees’ working years and 19

facilitated communicating the current value of accrued benefits to participants. We recognized that 20

employees later in their working careers might be negatively affected by the pension formula change. 21

Therefore, employees at least age 50 or who had at least 60 “points” (“points” equal age plus service) as 22

of the effective date of the change were “grandfathered” when this feature was introduced. 23

Grandfathered employees have their retirement benefits calculated under both the historical final 24

average pay formula and the Cash Balance Account formula to determine the benefit most advantageous 25

to them, so long-term employees do not receive less than expected. The number of employees who are 26

grandfathered is a relatively small and continually decreasing group, representing only about six percent 27

56 Refer to WP SCE-06, Vol. 02 Chapter IX Book A, pp. 35 – 64.

57 SCE and IBEW Local 47 agreed to the foregoing term. UWUA Local 246 was not part of this agreement as they are not expected to have new employees on or after that date.

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of eligible participants as of December 31, 2015. The remaining participants, and those hired until 1

December 30, 2017, are eligible only for the lower cost Cash Balance Account. 2

The Cash Balance Account grows through credits made to the account. There are 3

three types of credits: 4

1. Pay Credits: From 3 to 9 percent of the employee’s base pay, depending on age 5

and service. SCE provides pay credits for each month that the employee is 6

credited with service. 7

2. Interest Credits: The employee’s account is credited monthly with interest 8

equivalent to the third segment of the IRS published corporate bond yield curve 9

(as specified under Internal Revenue Code Section 417(e)). The interest rate for 10

2016 is 4.98% percent. These procedures conform to the 2006 Pension Protection 11

Act requirements. 12

3. Retiree Health Care Credits: SCE contributes $150 per month to the Cash 13

Balance Account of all benefit-eligible employees. This nominal monthly credit, 14

which was negotiated with IBEW Local 47, UWUA Local 246 and SOFA, was 15

established with our 2009 retiree health care program changes and resulted in a 16

significant overall reduction in the Company’s retiree health care financial 17

obligations. 18

Regardless of age, employees may elect distribution of their pension benefit as a 19

lump sum or an annuity when they terminate employment. Eligible employees vest (i.e., earn non-20

forfeitable rights) in their Retirement Plan benefit at a rate of 20 percent per year for the first two years, 21

and are fully vested (100 percent) after three years, as required by the Pension Protection Act. The 22

current program provides improved beneficiary protection since employee accounts are automatically 23

100 percent vested at death. The resulting benefit is then available to their survivors. 24

By making the plan simpler, adding portability features, offering a three-year 25

vesting provision, and changing to a more even build-up in the benefit accrual that is less costly in the 26

long term, SCE redesigned the Retirement Plan to meet employees’ needs for adequate retirement 27

income at a reasonable cost to the Company and its customers. Our future changes for employees hired 28

on or after December 31, 2017, continue to benefit customers by further reducing the long-term cost 29

structure of the Retirement Plan, while still providing employees the opportunity to accrue adequate 30

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levels of retirement income. In lieu of the cash balance pension feature (i.e., the pay credits, interest 1

credits and retiree healthcare credits discussed above), employees hired on or after that date will receive 2

a non-elective Company contribution to their 401(k) accounts – whether or not they decide to 3

participate. The contribution varies depending on whether an employee is represented or non-4

represented, as discussed later in this exhibit, under the Edison 401(k) Savings Plan section. 5

c) Longer-Term Perspective on Financial Market Returns and SCE Pension Fund 6

Returns 7

Financial market performance and SCE pension fund returns over the last 15 8

years are summarized in Table IX-6 below.58 9

58 Sources for Table IX-6: Russell Investments and BNY Mellon. SCE pension fund returns are shown net of

investment management fees.

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Table IX-6 U.S. Stocks, U.S. Bonds and SCE Pension Fund Rates of Return

2001 – 2015

Table IX-6 above shows that financial market performance, particularly the U.S. 1

stock market, was volatile over the 2001-2015 period. Poor performance in 2001 and 2002 was followed 2

by good performance from 2003 through 2007. Performance in 2008 was the worst single year since the 3

1930s, but this was followed by strong returns over most of the next six years. Investment performance 4

was again poor in 2015. The 15-year return for U.S. stocks from 2001-2015 was 5.0 percent, 5

approximately 5.0 percent below the 1926-2015 average annual return for stocks of 10.0 percent. 6

Similarly, the last 10 years have also produced below average equity returns. 7

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Investment returns and ongoing SCE contributions are the Retirement Plan’s only 1

funding sources. When investment returns are lower than expected, additional contributions must be 2

made to maintain a financially sound plan. SCE’s pension fund performance over the last 15 years was 3

below expectations, but compared favorably to market benchmarks. Weak capital markets, such as those 4

in 2008 and 2015, and the resulting investment returns, negatively affected funded status. Lower than 5

expected stock market returns in 2015, and falling discount interest rates, under current statutory 6

requirements outside of SCE’s control, are the primary drivers of the forecast increase in pension costs 7

for the 2018 to 2020 rate cycle, notwithstanding some level of pension contribution relief granted by 8

Congress. 9

d) Pension Cost Ratemaking Background and Recent History 10

SCE’s pension costs are based on the results of actuarial valuations, performed by 11

the Plan actuary, Aon Hewitt, which determines the present value of expected future pension benefit 12

payments and, for statutory minimum funding purposes, the value of pension benefits accrued to date 13

and expected to be accrued during the upcoming year. Plan liabilities grow with interest and ongoing 14

benefit accruals, but also fluctuate over time with changes in prevailing interest rates and under statutory 15

requirements. All actuarial assumptions not mandated by law represent the actuary’s best estimate of 16

future plan experience. 17

The actuary compares plan liabilities to the value of plan assets, which are 18

initially measured at market value, but are then subject to asset smoothing techniques, which help 19

mitigate the impact of short term capital market fluctuations. Despite these smoothing techniques, stock 20

market downturns, such as those in 2008 and 2015, can significantly increase reported, unfunded 21

liabilities. Poor or negative investment returns will inevitably increase plan cost and associated rate 22

recovery. 23

Pension funding policy has been contested in SCE’s last five GRCs. In each one, 24

SCE has advocated for continuation of its historical funding policy while, in all but the most recent 25

GRC, ORA has advocated for, at most, only the minimum legally required funding. Since 2006, SCE 26

has sought and received two-way balancing account treatment of pension costs, sometimes over ORA 27

objections. In the 2012 and 2015 GRCs, ORA proposed only one–way balancing account treatment, 28

which SCE vigorously opposed. After careful consideration in both cases, the Commission upheld 29

continued two-way balancing account treatment. 30

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SCE’s historical funding policy, which has been in effect since the 1980s, seeks to 1

limit short-term contribution fluctuations and, instead, provides systematic, long-term funding and rate 2

recovery calculated to remain level as a percentage of payroll over the life of the plan. This policy has 3

always been bounded by the legally required minimum contribution and the annual maximum tax 4

deductible amount. 5

Since 2008, minimum pension plan funding requirements have been governed by 6

the Pension Protection Act of 2006 (PPA). Unlike prior ERISA funding rules, which stressed stable 7

long-term funding and benefit security, PPA rules focus on short-term funding adequacy with required 8

discount rates tied to two year average corporate bond yields. Asset smoothing is permitted under the 9

PPA, but only over a two-year period. 10

There have been several legislative changes made since 2006, the most recent of 11

which was the 2015 Bipartisan Budget Act (BBA), which added a discount rate floor tied to 25-year 12

moving average of corporate bond yields. The short-term result of this legislation has been higher 13

legally required discount rates, which have helped to reduce unfunded pension liabilities, minimum 14

required annual funding, and funding volatility. 15

Throughout the current pension cost forecast period, the BBA discount interest 16

rate floor is equal to 90% of a 25-year rolling average of corporate bond interest rates. Since bond rates 17

are much lower now than they were 25 years ago, these moving average discount rates will fall for the 18

rest of the decade, as more current years of relatively low interest rates are added to the average, and 19

more past years of high interest rates drop off. The result will likely increase minimum required 20

contributions, even if prevailing interest rates rise. 21

None of the funding legislation since PPA has addressed the maximum two-year 22

asset smoothing period, and this remains a source of significant contribution volatility. 23

SCE has been authorized to continue making pension contributions under its 24

historical funding policy even in years when ERISA and, later, PPA minimum funding rules required no 25

contributions. Under PPA rules, these contributions over minimum required amounts build up a cushion 26

(a “credit” or “funding” balance) that can generally offset minimum required contributions in future 27

years. The existing “credit balance,” attributable to 2015 contributions over minimum requirements, is 28

projected to help cushion future minimum funding requirements through 2018. As discussed further in 29

section (e) below, there was similar cushioning in the years following the 2008 stock market decline. 30

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In the 2003, 2006, 2009, 2012, and 2015 GRCs, the Commission held that 1

contributions should be sufficiently conservative to avoid jeopardizing Retirement Plan beneficiaries or 2

future generations of customers. In the 2003, 2009, 2012, and 2015 GRCs, the Commission approved 3

rate recovery under SCE’s historical funding policy. In 2006, the minimum contribution amount was 4

approved, but only because the Commission concluded that the difference between the two amounts was 5

“not substantial” and the “minimum calculation could therefore be considered sufficiently 6

conservative.”59 In 2009, the Commission found: “In the past, we have adopted SCE’s forecast if a 7

substantial difference exists between the minimum contribution and its forecast. We see no compelling 8

reason to depart from that policy here.”60 9

Continuing use of SCE’s long-standing pension funding method for rate making 10

purposes is producing a much more stable funding pattern than would PPA minimum funding alone. 11

e) Analysis of Recorded and Forecast Pension Costs 12

Figure IX-961 below shows pension costs under SCE’s historical funding policy 13

and PPA minimum funding requirements, for the years 2009 through 2015. Recorded costs for all these 14

years were the greater of these two amounts. All years shown are after the 2008 financial market 15

downturn. In the years before and including 2008, minimum required contributions were zero, and the 16

continuing contributions made in those years under the historical funding policy built up a credit balance 17

of roughly $203 million, which kept the minimum contributions in the years 2009, 2010, and 2011 18

below funding policy contributions. By 2012, the credit balance was exhausted and contributions rose 19

dramatically. 20

Statutorily required discount rates have been declining since 2012 (and are 21

projected to continue to do so through 2020, even if prevailing rates rise somewhat in the interim). This 22

decline has put upward pressure on Plan liabilities, but excellent investment returns in 2012 and 2013 23

59 See D.06-05-016, pp. 172-173. This decision cites the policy expressed in the 2003 GRC decision stating: “If

sound actuarial practice indicates a funding level above ERISA minimum funding requirements, we favor a conservative policy of authorizing expenses for that larger funding level to avoid potential under-funding that could jeopardize the interests of either retirement system beneficiaries or future generations of customers. In light of this policy, the issue in this GRC turns on whether ORA’s approach is sufficiently conservative and in line with actuarial practice. (D.04-07-022, pp. 219-220)

60 See D.09-03-025, p. 142.

61 Refer to WP SCE-06, Vol. 02 Chapter IX Book A, pp. 22.

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more than compensated for this effect, leading to a gradual improvement in funded status, until the 1

minimum required contribution once again fell to zero in 2015. 2


Funding Policy versus ERISA/PPA Minimum 2009-2015

Figure IX-1062 below shows forecast pension costs for the years 2016 through 3

2020. Investment returns in 2015 were almost zero, and this, combined with a continuing decline in 4

statutory discount rates, has weakened, and is expected to continue to weaken, the plan’s funded status. 5

Fortunately, the contributions made in 2015 under the historical funding method have once again built 6

up a credit balance, which is projected to keep minimum required contributions at zero, or at least 7

relatively low, in 2016, 2017, and 2018. By 2019, the credit balance will likely be exhausted, and 8

minimum required contributions are then projected to increase dramatically. 9

62 Refer to WP SCE-06, Vol. 02 Chapter IX Book A, pp. 25 - 34.

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Forecast Funding Policy and Minimum Required Amounts 2016-2020

The forecast amounts in Figure IX-10 above are based on Aon Hewitt’s 2015 1

actuarial valuation results and plan asset information reflected in December 31, 2015 financial statement 2

disclosure information. The underlying data and actuarial assumptions include: active and retiree census 3

data measured as of January 1, 2015, assumed spot effective discount interest rates of 4.50 percent for 4

all months after December 31, 2015, other actuarial assumptions from the January 1, 2015 actuarial 5

valuation, with the expectation that the IRS will update the mortality assumptions for minimum funding 6

starting with the January 1, 2017 actuarial valuation, and projected future rates of assumed investment 7

return of 7.00 percent per year after 2015. 8

Under the terms of the most recent collective bargaining agreement, which have 9

now been extended, with some adjustments, to all employees of SCE, no employees hired after 2017 are 10

assumed to be eligible for the Plan. Instead, they will receive additional non-elective company 11

contributions into their 401(k) accounts ranging from 4-6 percent of base pay, if represented, and 6 12

percent of pay, if non-represented. Also, pension plan accruals for employees with disabilities will be 13

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affected if their employment is terminated. Effective January 1, 2016, SCE began an interactive process 1

after an employee has been on disabled status for two years (including years prior to 2016). When such 2

an employee’s doctor indicates the employee can never return to work, SCE will proceed with 3

termination, which will also terminate the employee’s pension accrual. These changes are expected to 4

reduce total pension costs for the 2018-2020 period by $25 to $30 million, while increasing 401(k) 5

company contribution costs by about $15 million. Additional savings are forecast for later years. 6

Projected average annual pension costs for the 2018-2020 period are $140.70 million. 7

While statutory interest rates under current law are expected to decline only 8

gradually through 2020, the above analysis shows the extreme volatility of year to year investment 9

returns. Investment return volatility translates into pension funding volatility. Figure IX-11 and Figure 10

IX-1263 below show the projected change in pension funding for the period 2017 to 2020 if actual future 11

trust fund investment returns were 2.50 percent higher or lower than the 7.00 percent assumed for 12

projection purposes. The results are average 2018 through 2020 pension costs of $95.8 million and 13

$167.9 million, respectively, under the two scenarios. 14


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Forecast Funding Policy and Minimum Required Amounts 2016-2020 Assuming 2.5 Percent Higher Future Investment Returns

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Forecast Funding Policy and Minimum Required Amounts 2016-2020 Assuming 2.50 Percent Lower Future Investment Returns

f) Pensions Cost Balancing Account 1

The historical volatility of pension costs in Figure IX-9 above and the wide range 2

of potential 2016 through 2020 pension costs (shown in Figure IX-10 through Figure IX-12 above) 3

demonstrate the critical need for ongoing two-way (symmetrical) balancing account treatment. In this 4

GRC, SCE proposes that the Commission continue using the Pensions Cost Balancing Account adopted 5

in the 2006, 2009, 2012, and 2015 GRC decisions.64 Under this procedure, the difference between 6

authorized pension amounts and actual pension costs under the existing funding policy (which reflects 7

the PPA minimum required contribution, when necessary) in 2018, 2019 and 2020 will be amortized. 8

64 See D.06-05-016, OP 22; D.09-03-025, OP 17; and D.12-11-051, OP 775; D.15-11-021, p. 269 & COL 99.

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Any accumulated balances have interest applied at the commercial paper rate, consistent with treatment 1

of interest accruals for other SCE balancing accounts.65 2

Figure IX-1366 below shows actual pension costs and authorized amounts for the 3

years 2009-2015. This history, like the cost projections in Figure IX-10 through Figure IX-12 illustrates 4

the need for ongoing two-way balancing account treatment. 5

Figure IX-13 Pension Costs ($000)

Actual versus Authorized 2009-2015

Actual pension costs for 2009, 2010, and 2011 were much higher than authorized, 6

as the impact of the 2008 global financial crisis increased the required funding, and the result was 7

undercollection in the Pensions Cost Balancing Account. Actual costs for 2012, 2013, and 2014 were 8

less than authorized due to a combination of statutory funding relief and excellent 2012 and 2013 9

investment performance. As a result, $41.6 million was returned to customers over this three year 10

period. Actual pension cost in 2015 was close to the authorized amount. 11

65 Refer to SCE-09, Vol. 1, for additional detail on the operation of the Pensions Cost Balancing Account.


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SCE continues to strongly believe that the two-way (symmetrical) Pensions Cost 1

Balancing Account benefits both customers and shareholders. SCE’s pension trust has an investment 2

policy with a significant allocation to equities.67 As an investment, equities are expected to provide 3

higher returns over the long term, but are also subject to significant annual volatility (see Table IX-6 4

above of actual returns for the past 15 years). Because of the higher expected returns, significant equity 5

exposure will lower the long-term costs of funding the Retirement Plan. However, the volatility inherent 6

in equity investments will also result in significant volatility in pension asset returns, as experienced in 7

the last several years and as shown above in Table IX-6. The actuaries’ use of asset smoothing methods 8

(under SCE’s long-standing method, and to a lesser degree under the PPA rules) mitigates some of this 9

volatility. 10

Without the two-way Pensions Cost Balancing Account, there would inevitably 11

be windfalls and/or shortfalls to customers and shareholders. If the Pensions Cost Balancing Account 12

functioned only to reduce, but never to increase customer costs (i.e., as a “one-way” (asymmetrical) 13

balancing account), the result would penalize shareholders for undercollections and make this important 14

retirement benefit difficult to sustain. This benefit remains a key component of overall compensation. 15

SCE therefore urges, in the strongest possible terms, continuation of the existing two-way balancing 16

account. 17

2. Edison 401(k) Savings Plan 18

a) Summary of Edison 401(k) Savings Plan Costs [FERC Account 926] 19

For Test Year 2018, SCE forecasts $79.190 million for 401(k) savings plan costs. 20

Figure IX-14,68 below, shows recorded 401(k) savings plan costs for the years 2011 through 2015, plus 21

our forecast costs for 2016, 2017, and the Test Year 2018. 22

67 The current overall investment policy targets are 60 percent equities, 40 percent fixed income.

68 Refer to WP SCE-06, Vol. 02 Chapter IX Book C, pp. 01 - 13.

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Figure IX-14 401(k) Savings Plan Costs


(Nominal $000)

b) Summary Description of SCE’s 401(k) Savings Plan 1

The Edison 401(k) Savings Plan is a defined contribution plan.69 As an integral 2

part of SCE’s total compensation package, it provides employees an opportunity to defer current 3

income, potentially reducing their current taxable income, and save for their future financial needs. 4

Employees choose how to invest the deferred income, plus Company matching contributions, and if 5

employees defer on a pre-tax basis, all the monies avoid current income taxes until distributed. 6

Employees may elect to defer from 1 to 84 percent of their base pay to the 401(k) 7

Savings Plan, subject to annual maximum dollar limits determined by the Internal Revenue Service. The 8

Company matches $1.00 for each $1.00 deferred, up to six percent of the employee’s base pay.70 To 9

provide greater flexibility, the 401(k) Savings Plan also allows participants to defer income on a post-tax 10


70 The Company match amount is the subject of negotiations for employees represented by a union. This match amount is currently in place for all SCE employees, but was effective on different dates, based on the respective collective bargaining agreements.

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basis into a separate Roth account. These deferrals have the advantage of avoiding income tax on 1

investment returns of the participant’s deferrals when ultimately distributed, if specific legal 2

requirements are met. 3

The Edison 401(k) Savings Plan offers participants a wide range of investments 4

including ten time-based, target-date funds, seven core funds ranging from conservative to higher-risk 5

investment choices, the EIX stock fund, and a brokerage account intended for more advanced investors. 6

These funds can help facilitate prudent investment diversification. Employees select the investment 7

options for their own deferrals, both pre-tax and Roth, and for the Company’s matching contributions. 8

Other Edison 401(k) Savings Plan features include: immediate eligibility upon 9

hire, daily valuation of participant accounts, unlimited access to those accounts through either website or 10

phone representatives, and daily processing of loans, withdrawals, and distributions. Plan participants 11

also have access to financial planning software, provided by Financial Engines, to model future 12

investment and savings strategies. Alternatively, participants can elect to have Financial Engines 13

manage their accounts, with the costs of such management borne entirely by those participants and not 14

charged to customers. 15

For employees hired on or after December 31, 2017, the SCE Retirement Plan 16

will no longer be offered. In lieu of participating in that plan, SCE and IBEW Local 47 jointly agreed 17

through negotiations that eligible employees of that union who receive no Cash Balance Account will 18

receive additional company contributions to the Edison 401(k) Savings Plan, from 4 to 6 percent of the 19

employee’s base pay, depending on age and service, and without regard to any matching requirement. 20

SCE agreed that all other eligible employees hired on or after December 31, 2017, who receive no Cash 21

Balance Account will receive additional company contributions to the Edison 401(k) Savings Plan of 6 22

percent of the employee’s base pay, without regard to any matching requirement. Employees hired on or 23

prior to December 30, 2017, will continue to participate in the SCE Retirement Plan and will not be 24

eligible for this additional company non-elective contribution to the 401(k) Savings Plan. 25

c) Test Year 2018 Request for the Edison 401(k) Savings Plan (FERC Account 926) 26

(1) Description of Account 27

In Test Year 2018, SCE will record costs for the Edison 401(k) Savings 28

Plan in FERC Account 926. 29

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(2) Analysis of Recorded Data 1

Changes in the size of SCE’s workforce, employees’ base pay, and plan 2

participation rates are the primary drivers of recorded costs in the Edison 401(k) Savings Plan. As 3

shown in Figure IX-14 above, costs remained relatively stable between 2011 and 2015. However, costs 4

decreased in 2013 due to decrease in the number of participants arising from Operational Excellence-5

related workforce reductions. 6

(3) Test Year 2018 Forecast for the Edison 401(k) Savings Plan 7

SCE forecasts $79.190 million for Edison 401(k) Savings Plan costs.71 8

The costs for the Plan have a direct relationship to the pay employees receive since SCE’s costs are for 9

matching each employee’s contribution for each dollar the employee defers, up to six percent of base 10

pay. A ‘projection factor’ was developed that reflects the relationship in 2015 between the Company’s 11

cost for the plan and the total dollars spent for employees’ pay (i.e., labor dollars). Since all projections 12

for labor dollars in the General Rate Case are provided in constant 2015 dollars while the Test Year 13

2018 benefit plan costs are stated in nominal 2015 dollars, the projection factor was adjusted for labor 14

escalation in 2016, 2017 and 2018, using the standard escalation rates developed in SCE-09, Volume 1, 15

Cost Escalation. The resulting adjusted projection factor was applied to the 2018 expected total labor 16

dollars to develop an estimate of Plan costs for 2018. The steps are further detailed below: 17

• The projection factor was developed by dividing the recorded 2015 18

401(k) total plan costs by the 2015 total labor dollars. 19

• The resulting projection factor was then escalated by the standard 20

labor escalation rates for the 2016, 2017 and 2018 years. The 21

cumulative result is the adjusted projection factor. 22

• The 2018 forecast labor dollars (stated in 2015 constant dollars) were 23

obtained from all SCE OUs and totaled. 24

• The adjusted projection factor was applied to the total 2018 forecast 25

labor dollars to calculate the expected 2018 401(k) plan costs. 26

71 Refer to WP SCE-06, Vol. 02 Chapter IX Book C, p. 14.

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Unlike the Linear Trending, Averaging, and Last Recorded Year 1

methodologies, the Itemized Forecast methodology described above is appropriate because it considers 2

the labor forecast. 3

C. Medical Programs 4

1. Summary of Medical Programs Costs [FERC Account 926] 5

For Test Year 2018, SCE forecasts $110,719 million for medical programs costs, which 6

includes costs for the Company’s medical programs for active employees, the Preventive Health 7

Account, and Employee Assistance Program. Figure IX-1572 below, shows recorded medical programs 8

costs for the years 2011 through 2015, plus our forecast costs for 2016, 2017, and Test Year 2018. 9

Figure IX-15 Medical Programs Costs


(Nominal $000)

2. Summary Description of SCE’s Medical Programs 10

SCE’s medical programs, including pharmacy benefits, provide eligible enrolled 11

employees and their covered dependents with comprehensive coverage designed to help prevent illness 12

72 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 01 - 20.

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and provide care and treatment when illness or injury occurs.73 The Company’s desire to provide 1

comprehensive programs must be balanced with effective cost control strategies since health insurance 2

premiums in California continue to significantly outpace the rate of general inflation, as shown in the 3

following chart prepared by the California HealthCare Foundation.74 4

Figure IX-16 California Healthcare Foundation

To provide medical coverage at reasonable costs for plan participants and for our 5

customers, the Company’s health care delivery strategy relies on a cost-effective plan design using 6

outsourced plan administration and significant cost-sharing by employees. Our philosophy requires 7

those employees and dependents who use more or higher cost medical services to pay a greater share of 8

the total cost for those services than those who do not. This is primarily achieved through co-insurance 9

and copays that vary depending on the services being delivered. 10

73 See Section IX.F., below, for information regarding the Company’s retiree health care program, which

includes medical, dental, and vision benefits.

74 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 109 – 118, “California Employer Health Benefits: Workers Pay the Price,” California Healthcare Foundation, California Healthcare Almanac, June 2016, p. 10. Full report available at http://www.chcf.org/%7E/media/MEDIA%20LIBRARY%20Files/PDF/PDF%20E/PDF%20EmployerHealthBenefits2016.pdf [as of August 22, 2016].

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Over the years, SCE has taken several steps to control its medical insurance costs. 1

Starting in 2006, SCE substantially increased the amount plan members pay as services are received. 2

This was followed in 2008 with a major change in how the Company’s contribution toward medical 3

coverage was determined. Other changes were made to increase the age and service required to receive 4

higher levels of company subsidy toward retiree medical coverage, reducing SCE’s future retiree health 5

care liability. In 2010, the medical plans were redesigned to emphasize preventive services, provide 6

alternatives to meet the diverse needs of the population, and update the plan features to more closely 7

align with standard practices thereby improving plan member usability and the plans’ administrative 8

functions. These changes are discussed in more detail below. 9

a) Medical Plans 10

Under SCE’s medical program, three types of medical coverage may be available 11

based on an employee’s geographic location: Preferred Provider Organization (PPO), Health 12

Maintenance Organization (HMO) and an Exclusive Provider Organization (EPO).75 SCE’s PPO, HMO 13

and EPO plans offer comprehensive medical coverage for employees and their dependents, including 14

preventive care, outpatient and inpatient hospital services, physician services, diagnostic laboratory, x-15

ray and imaging services, mental health and substance abuse services, and therapeutic treatments such as 16

chemotherapy and physical therapy. Each of the medical plan options offers complete coverage for all 17

preventive care services within guidelines for the patient’s age and gender. Each medical plan meets the 18

coverage requirements specified under the Patient Protection and Affordable Care Act and the Health 19

Care and Education Reconciliation Act of 2010 (ACA). Besides covering medical services, SCE also 20

includes prescription drug coverage in each medical plan. Depending on the plan elected, pharmacy 21

coverage is provided through a centralized pharmacy benefits manager or the medical plan’s own 22

pharmacy plan. Employees and their families may use a Preventive Health Account and the Employee 23

Assistance Program to address specific needs and concerns (for a description of these benefits, see parts 24

b) and c) of this section). Eligible employees may enroll in medical plan coverage effective on the date 25

of hire. 26

The PPO plan features three options that allow employees to select the cost-27

sharing they will have through differences in payroll contributions, the annual deductible and the level 28


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of co-insurance. The PPO plan offers members the ability to go to any health care provider, including 1

specialists, without a referral. If in-network contracted providers are used, a higher percentage of 2

benefits is paid. Higher patient cost-sharing is required if out-of-network providers are selected. The 3

three PPO options each have different annual deductible limits, out-of-pocket limits and coinsurance 4

requirements, which lower the patient’s share of these components requiring higher payroll 5

contributions. Conversely, the higher the patient’s share for these components the lower the payroll 6

contribution required. 7

HMOs provide the participant with access to a full spectrum of care within a 8

specific, coordinated delivery system. Care is typically accessed through the selected primary care 9

physician. Cost sharing during service is in fixed dollar copays. All care, except that which is received in 10

emergency situations, must be coordinated through the HMO if it is to be covered. Residence in the 11

selected HMO service area is required, as plan availability depends upon the employee’s home location. 12

An EPO is similar to an HMO in that all care must be received through a closed 13

network of health care providers, except for emergency services. The patient’s cost sharing is based on 14

fixed co-payments that vary by the service. This option is only available for employees who reside in 15

states other than California. 16

SCE has changed its medical programs to address the continuing escalations in 17

medical costs. In 2006, SCE increased participant cost-sharing for medical services. Continued 18

adjustments in copays, deductibles and out-of-pocket limits, and the amounts patients pay as care is 19

received, have occurred in each subsequent year, except for 2015.76 In 2009, a shift in patient cost-20

sharing for prescription benefits from a flat dollar co-payment per prescription to a percentage of the 21

drug cost was made, enhancing patient awareness of prescription expenses and encouraging the selection 22

of alternative, lower-cost prescriptions, such as generic medications. 23

In 2008, SCE’s medical contribution approach changed dramatically. Beginning 24

that year, SCE’s contribution toward the cost of medical coverage for all employees, except those 25

represented by UWUA Local 246 and SOFA, was calculated based on the medical plan SCE offers in an 26

employee’s home geographic area that carries the lowest-total-cost for that year (UWUA, Local 246 27

76 SCE did not reach agreement with the unions on that year’s adjustments. SCE has since reached agreement

with our unions for negotiated adjustments from 2016 through 2019.

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adopted this change in 2014). If an employee selects the lowest cost option, they pay a 15 percent 1

contribution for themselves and 20 percent for their dependents of the lowest-cost plan’s price. If an 2

employee selects a higher cost plan, they pay that cost, plus 100% of the additional cost differential 3

between the lowest-cost plan and the plan they select. The lowest cost plan available to each employee is 4

typically an HMO plan. 5

Tools and support services help employees estimate their medical costs and make 6

more informed healthcare decisions. Besides significant communications comparing the features of one 7

type of plan to another, each carrier has customized special websites which provides in-depth 8

information on what their plans offer. Another example is SCE’s partnership with Health Advocate, a 9

company that helps employees identify the plan features that are most important to them and their 10

families’ health conditions, to allow for more informed plan elections by employees. 11

b) Preventive Health Account 12

To help and encourage employees and their families to improve their health, SCE 13

offers the Preventive Health Account, which reimburses employees up to $400 per year for costs of 14

lifestyle improvement activities, e.g., weight management, nutrition counseling, smoking cessation, and 15

other health promotion programs not covered by SCE-sponsored medical plans. To encourage greater 16

physical activity and fitness by employees and their family members, employees may use their 17

Preventive Health Account to help cover the costs of organized fitness programs, exercise classes and 18

other physical activities that improve or maintain participants’ overall health. To increase employee 19

awareness of health risks such as asthma, diabetes, heart disease, hypertension and tobacco use and what 20

actions can be taken to improve health status, employees must complete an online health risk assessment 21

before any costs are reimbursed through the Preventive Health Account. 22

c) Employee Assistance Program 23

The Employee Assistance Program (EAP) provides confidential, short-term 24

counseling services to employees, retirees and dependents without charge to the participant. EAP 25

professionals provide counseling for problems such as marital and family tensions, emotional issues, 26

financial strains, dealing with change, job or personal stress, bereavement, or substance abuse. 27

Employees need not be enrolled in a medical plan to use EAP services. Since the incidences of retirees 28

using EAP was small, beginning in 2012, SCE negotiated a new structure with its EAP vendor. 29

Historically, the cost of the program was charged to SCE on a per-participant basis for everyone, 30

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including retirees. Going forward, coverage provided to retirees is charged to SCE at hourly rates only 1

when services are used, instead of on a per-participant basis. This reduced costs by approximately 2

$50,000 annually, from historical levels. 3

3. Test Year 2018 Request for Medical Programs Costs (FERC Account 926) 4

a) Description of Account 5

In Test Year 2018, SCE will record Medical Programs costs in FERC Account 6

926. 7

b) Analysis of Recorded Data 8

A combination of factors, including changes in the number and demographics of 9

employees enrolled in the plans, plan design changes, utilization experience and medical inflation rates, 10

drive medical program costs. As illustrated above in Figure IX-15, medical program costs remained 11

relatively stable from 2011 to 2013. Costs decreased in 2014, attributable to the decrease in the 12

employee population and the exhaustion of extended health benefits provided to former employees as 13

part of the EIX severance plan. In 2015, costs decreased due to further workforce reductions. 14

c) Test Year 2018 Forecast for Medical Programs Costs 15

For Test Year 2018, SCE forecasts $110,719 million for medical programs costs. 16

Unlike the Linear Trending, Averaging, and Last Recorded Year methodologies, the Itemized Forecast 17

methodology described below is appropriate because it considers the labor forecast. 18

Costs were forecast by multiplying the projected number of eligible employees by 19

the projected per-eligible-employee cost. The projected number of eligible employees was derived by 20

dividing the forecast labor cost for 2018 (expressed in 2015 dollars) by the 2015 average per-employee 21

labor cost. Projected 2018 per-eligible-employee costs were determined by calculating the cost per 22

employee for 2015 then applying a forecast trend rate for each year.77 23

There are multiple factors affecting the cost of medical care and the trend rates 24

into the future. Some of the bigger drivers cited in literature include: 25

• Higher costs for medical services 26

• Higher costs for pharmacy services 27


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• Legislation 1

• New technologies 2

• Lifestyle choices 3

• Aging of the population 4

d) Higher Costs For Medical Services 5

According to the 2014 survey of the Health Care Cost Institute (HCCI), an 6

organization that promotes independent, nonpartisan research and analysis on the causes of the rise in 7

U.S. health spending, per capita health care spending of active employees, under the age of 65 covered 8

by employer sponsored medical insurance plans across the nation, grew by 3.4%. This increase in 9

spending was “largely driven by increased spending” and was “not offset by declining service 10

utilization.” The report indicated that increased costs, despite lower utilization, was observed across 11

categories of services, genders, and age groups.78 12

These estimates may be understated, however. In April 2015, the medical care 13

index maintained by the Bureau of Labor Statistics (BLS) rose 0.7 percent, “its largest increase since 14

January 2007,” the BLS wrote in a report.79 The BLS report also revealed that the broad subset of 15

medical care services grew by 0.9 percent. Medical care services, which is the largest component of the 16

medical care index, includes the prices of professional services, hospital and related services and health 17

insurance. According to the BLS, hospital services rose 1.9 percent for the month which, if maintained, 18

would equal a nearly 24 percent annual rate of hospital services inflation.80 19

One reason costs for medical services may increase at a rate higher than general 20

inflation is the practice of defensive medicine. It is not possible to determine the full impact of medical 21

malpractice suits on the cost of healthcare, but tests and various medical procedures are sometimes 22

78 Refer to WP SCE-06, Vol. 02, Chapter IX, Book B, pp. 119 – 120, “2014 Health Care Cost and Utilization

Report,” October 2015, p. 10. The full report is available online at http://www.healthcostinstitute.org/files/2014%20HCCUR%2010.29.15.pdf [as of August 22, 2016].

79 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 121 – 122, “CPI Detailed Report,” April 2015, p. 2. The full report is available online at http://www.bls.gov/cpi/cpid1504.pdf [as of August 22, 2016].

80 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 123 – 126, D. Mangan, “Medical cost inflation: Highest level in 8+ years,” CNBC.com, May 22, 2015. The article is available online at http://www.cnbc.com/2015/05/22/medical-cost-inflation-highest-level-in-8-years.html [as of August 22, 2016].

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ordered so that, if medical staff are later sued, they can document they provided proper care. While the 1

cost of defensive medical practice is unknown, PricewaterhouseCoopers LLP estimated in a 2006 study 2

that 10 percent of the cost of medical care results from malpractice lawsuits and defensive healthcare. In 3

addition, premiums for medical malpractice insurance are often as high as a quarter of a million dollars a 4

year, which further adds to the cost of healthcare. Jury Verdict Research recently found that the average 5

jury award in a medical malpractice case is now about $3.5 million, a threefold jump since 1994.81 Fifty-6

two percent of medical malpractice awards now top $1 million, with some lawyers receiving close to 60 7

percent of that for contingency fees and expenses. 8

e) Higher Costs for Pharmacy Services 9

According to the Kaiser Family Foundation, pharmacy costs account for about 10 10

percent of all healthcare spending in the United States and this is one of the key areas accounting for the 11

increases in medical spending, especially in specialty drugs. Future spending on pharmaceuticals is 12

projected to grow at a rate larger than other medical spending. Express Scripts and the IMS Institute for 13

Healthcare Informatics estimated that overall spending on prescription drugs grew by 13.1% in 2014 to 14

$373.9 billion—the largest year-over-year increase since 2001. According to a CMS report issued in 15

2015, prescription drug costs ballooned by 12.6 percent last year.82 The agency projects this year’s 16

increase at 7.6 percent and 5.5 percent by 2018. 17

The component of pharmaceutical spending putting the most pressure on 18

prescription drug cost escalation is specialty drugs, and this impact can be seen in the Express Scripts 19

2014 Drug Trend Report. While spending for traditional medications (non-specialty) grew by just 6.4 20

percent, spending on specialty drugs increased by over 30 percent.83 21

81 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 127 – 128, “Why Do Healthcare Costs Keep Rising,”

McGrath Insurance Group. The article is available online at http://www.mcgrathinsurance.com/node/50 [as of August 22, 2016].

82 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 129 – 138, AHIP Issue Brief, “Specialty Drugs: Issues and Challenges – Advancing Effective Strategies to Address Soaring Drug Costs While Ensuring Access to Effective Treatments and Promoting Continued Medical Innovation,” July 8, 2015, p. 3. The full report is available online at https://www.ahip.org/issue-brief-specialty-drugs-issues-and-challenges/ [as of August 22, 2016].

83 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 139 – 225, “The 2014 Drug Trend Report,” The Express Scripts Lab, March 2015, p. 11. The full report is available online at http://lab.express-scripts.com/~/media/PDFs/Drug%20Trend%20Report/ExpressScripts_DrugTrendReport.ashx [as of August 22, 2016].

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Figure IX-17

One reason for the dramatic increase in drug costs may be due to the expensive 1

approval process required to bring a new drug to market, which a study in Health Affairs estimated from 2

$500 million to $2 billion.84 Those costs must be borne by the consumers who use them. 3

Many of the highest cost specialty drugs are a unique subset known as biologics. 4

Unlike traditional medications made from chemical compounds, biologics are complex molecules 5

derived from living or biological sources. Biologics can include vaccines, gene therapies, recombinant 6

protein products, antibodies, and hormones. Advances in the understanding of how these medications 7

work and their potential to help treat and cure disease have led to dramatic growth in the biologic 8

84 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 226 – 231, C. Adams and V. Brantner, “Estimating

The Cost Of New Drug Development: Is It Really $802 Million?” Health Affairs, Vol. 25, No. 2, March 2006, pp. 420-428. Article available online at http://content.healthaffairs.org/content/25/2/420.full [as of August 22, 2016].

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market. By 2016, eight of the top 10 selling drugs are estimated to be biologics, as compared to only one 1

biologic being in the top 10 only a decade ago. These drugs come to market with a significant price tag. 2

Some biologics can be 22 times more expensive than traditional medications.85 Unlike traditional 3

medications, spending on specialty drugs has shown no signs of moderation. An increase of 16% each 4

year is forecast from 2015 to 2018. According to the Express Scripts 2014 Drug Trend Report, published 5

in March 2015, specialty drugs accounted for 32 percent of overall pharmacy spending in 2014, but only 6

accounted for one percent of total prescriptions written.86 The biggest driver was the introduction of 7

Sovaldi to treat hepatitis C. A full course of the drug treatment typically runs $84,000.87 8

f) Legislation 9

As we have noted in our prior filing, one of the most significant legislative 10

impacts to the cost of health care occurred with the passage of the ACA. Beginning January 1, 2014, 11

health insurance changed significantly for individuals buying coverage on their own. A report from 12

Milliman, Inc.,88 published in 2013, examined in comprehensive detail the factors that could lead to 13

changes in premiums, including: 14

• Expanding who is covered – Millions of new people are getting coverage 15

for the first time. Many may have higher health care costs than individuals 16

who have coverage. For the first time ever, individuals with pre-existing 17

conditions who do not have employer sponsored coverage can purchase 18

coverage. 19

85 Refer to WP SCE-06, Vol. 02 Chapter IX Book B pp. 232 – 233, H. Kramer, “Why Biologics Remain

Expensive,” Forbes.com, December 4, 2009. Article available online at http://www.forbes.com/2009/12/03/kramer-health-care-intelligent-investing-pharmaceuticals.html [as of August 22, 2016].

86 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 139 – 225, “The 2014 Drug Trend Report,” supra, p. 11.

87 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 234 – 238, D. Armstrong, “At $84,000 Gilead Hepatitis C Drug Sets Off Payer Revolt,” Bloomberg.com, January 27, 2014. Article available online at http://www.bloomberg.com/news/articles/2014-01-27/at-84-000-gilead-hepatitis-c-drug-sets-off-payer-revolt [as of August 22, 2016].

88 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 239 – 265, J. O’Connor, “Comprehensive Assessment of ACA Factors That Will Affect Individual Market Premiums In 2014,” Milliman, April 25, 2013.

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• Mandated minimum coverages – Health plans must provide coverage 1

for an essential health benefits (EHB) package that includes a broad range 2

of mandated benefits, some of which typically are not included in current 3

individual and small group policies. Plans will have to cover a minimum 4

percentage of health care costs for an average beneficiary (known as 5

actuarial value). 6

• New regulations – There are several new changes to the way health 7

insurance is regulated. New regulations include restrictions on age rating 8

and no longer allowing premiums to differ based on health status or 9

gender. The law allows for differences of premiums based only on four 10

criteria: age, location, family size, and smoking. 11

• New taxes and fees – Several new taxes and fees will increase premiums. 12

This includes a new $100 billion health insurance tax which increases 13

costs for individuals, families, and employers. There is also a new “user 14

fee” for health plans operating in the federal Exchange; state-based 15

exchanges may impose user fees as well. 16

• Financial assistance – Premium tax credits and lower cost sharing will be 17

provided to millions of individuals. While this financial assistance makes 18

coverage more affordable, Milliman, Inc. indicated that it does nothing to 19

lower the cost of health care. 20

• Other factors cited in the Milliman, Inc. report include competition in the 21

Exchanges, benefit design, the transitional reinsurance program, and pent 22

up demand from individuals having coverage for the first time. 23

Since the ACA is just taking effect, its impact on controlling costs should be 24

evaluated over a longer term, as shorter term benefits may not be indicative of ultimate trends. Joseph 25

Antos, a health care finance expert at the American Enterprise Institute, observes that most of the 26

spending reductions associated with the ACA are from cuts in payments to providers and insurers rather 27

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than from payment reform initiatives. “The administration’s priority was to expand coverage first,” Mr. 1

Antos said. “Now we have to do something about spending.”89 2

While the ultimate results of ACA cannot be estimated, healthcare cost show an 3

increasing trend in the short term due to some of the new restrictions, mandates and taxes imposed on 4

the healthcare system, as mentioned above. 5

g) New Technologies 6

A Forbes article reported a consensus among experts that technology is the most 7

important driver of healthcare spending increases over time. Health care economists estimate that 40–50 8

percent of annual cost increases can be traced to new technologies or the intensified use of old ones. 9

Many healthcare groups and individual doctors are installing and implementing electronic health record 10

systems. However, this technology can be as much as $25,000 per doctor, which does not include 11

implementation costs and subscription fees.90 These technological advances are key contributors to 12

improving health and increasing longevity, but unnecessary utilization of new technology – especially 13

where a less costly treatment would be equally effective – drives health care spending.91 A key 14

challenge to the effective use of advancing technology is assessing its effectiveness in improving patient 15

outcomes. In the United States, many patients associate the use of more advanced technology, more 16

tests, and more procedures with better care – even if clinical evidence demonstrates these additional 17

treatments do not improve patient health outcomes.92 In our increasingly complex health care delivery 18

89 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 266 – 268, P. Demko, “Healthcare Spending Again

Accelerating,” Politico.com, July 28, 2015. Article available online at http://www.politico.com/story/2015/07/health-care-spending-hike-prediction-120740 [as of August 22, 2016].

90 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 269 – 271, L. Goodman & T. Norbeck, “Who’s To Blame For Our Rising Healthcare Costs?” Forbes.com, April 3, 2013. Article available online at http://www.forbes.com/sites/realspin/2013/04/03/whos-to-blame-for-our-rising-healthcare-costs/#389c3e052a93 [as of August 22, 2016].

91 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 272 – 293, L. Adler & G. Hoagland, “What is Driving U.S. Healthcare Spending? – America’s Unsustainable Healthcare Cost Growth,” Bipartisan Policy Center, September 20, 2012, p. 13. Report available online at http://bipartisanpolicy.org/library/what-driving-us-health-care-spending-americas-unsustainable-health-care-cost-growth/ [as of August 22, 2016].

92 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 294 – 297, E. Emanuel & V. Fuchs, “The Perfect Storm of Overutilization,” The Journal of the American Medical Association, Vol. 299, No. 23, June 18, 2008, at p. 2790. Full article available online at http://fnadoc.techtrefoil.com/Health/weil_plus/healthcare/perfect_storm.pdf [as of August 22, 2016].

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system, academic estimates are that up to one-third of the annual costs are unnecessary, with billions of 1

dollars spent on “unnecessary hospitalizations; unneeded and often redundant tests; unproven 2

treatments; over-priced, cutting-edge drugs; devices no better than the less expensive products they 3

replaced; and end-of-life care that brings neither comfort nor cure.”93 4

h) Lifestyle Choices 5

People may live longer, but they are not always living healthier. Fast food, stress, 6

smoking and drinking continue to be lifestyle choices for many Americans. About half of the cost of 7

treating chronic diseases, such as heart diseases, are attributable to obesity, smoking and other bad 8

habits. Chronic diseases account for 75 percent of all healthcare costs, according to The Atlantic.94 9

i) Aging of the Population 10

The average American today has a life expectancy of 77.7 years, according to the 11

National Center for Health Statistics. In the early part of the 20th century, the average life expectancy 12

was in the 50s. Even as recently as the early 70s, life expectancy was under 70 for all groups except 13

white females. Longer life expectancy comes with a cost. Nearly a third of the Medicare budget, which 14

is approaching a half trillion dollars a year, is spent on patients in the last year of their lives, according to 15

Philip K. Howard of The Atlantic. 16

j) Summary Conclusion Regarding Medical Program Forecast for 2018. 17

The National Health Care Trend Survey, compiled by Buck Consultants from the 18

responses of 123 insurers or administrators covering approximately 109 million people, indicates that 19

the health care trends are expected to be 9.7 percent for PPO plans and 9.3 percent for HMO plans.95 20

The 2013 Segal Health Plan Cost Trend Survey conducted by the Segal Company based on 95 responses 21

from insurers or administrators indicates a health trend of 8.8 percent for PPO plans and 7.9 percent for 22

93 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 298 – 300, M. Mahar, “The State of the Nation’s

Health,” Dartmouth Medicine, Spring 2007, at p. 5. Article available online at http://dartmed.dartmouth.edu/spring07/html/atlas.php [as of August 22, 2016].

94 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp.127 – 128, “Why Do Healthcare Costs Keep Rising,” McGrath Insurance Group, supra.

95 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 301 - 303, “Improved Diagnosis: Health Care Costs Projected to Increase More Slowly,” Xerox Corp., December 17, 2012. Article available online at http://news.xerox.com/news/Buck-Consultants-A-Xerox-Company-Survey-on-Health-Care-Trends [as of August 22, 2016].

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HMO plans.96 The PricewaterhouseCoopers LLP, annual medical cost trend survey of 1,400 employers 1

from 30 industries reports an overall trend rate of 7.5 percent.97 Other studies conclude different 2

projections based on widely differing assumptions, such as the inclusion/exclusion of pharmacy drug 3

costs, the age of the population studied and other impacts. Therefore, to assist in determining what cost 4

escalation rate to use to project the costs of our medical plans, we contacted the administrators of the 5

medical plans and asked them to provide their current underwriting projections. The letters we received 6

indicated that, depending on the plan, expected future escalation rates ranged from 8.9 to 9.9 percent for 7

2017 through 2021.98 Those estimates are more representative of SCE’s population than broad surveys 8

of employers that represent average health care increases nationwide, since the health care 9

administrators are most familiar with SCE’s cost profile and are considering age and health factors that 10

are specific to SCE in preparing their cost increase projections. 11

After reviewing SCE’s actual medical plan trends, the trend rates provided by the 12

administrators of SCE’s medical plans, outside consulting firm projections of trends, 99 and considering 13

the significant pressures on medical plan costs discussed above (particularly the continuing upward cost 14

pressures from the drivers of healthcare cost inflation), we have projected a trend rate of zero percent for 15

2016 and 7.0 percent for 2017 and 2018. 16

k) Medical Programs Balancing Account 17

The medical cost trends and additional factors discussed above affecting future 18

health care costs demonstrate the critical need for ongoing two-way (symmetrical) balancing account 19

treatment. In this GRC, SCE proposes that the Commission continue using the Balancing Account for 20

medical programs adopted in the 2009, 2012, and 2015 GRC decisions.100 21

96 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 304 - 309, 2013 Segal Health Plan Cost Trend Survey,

Segal Consulting, September 2012, at p. 1. Report available online at: http://archive.segalco.com/publications/surveysandstudies/2013trendsurvey.pdf [as of August 22, 2016].

97 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp. 310 – 336, Medical Cost Trend: Behind the Numbers 2013, PWC Health Research Institute, May 2012, at pp. 2-4. Report available online at: http://pwchealth.com/cgi-local/hregister.cgi/reg/medical-cost-trend-behind-the-numbers-2013.pdf [as of August 22, 2016] (free registration required to download the report).


99 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, p. 40.

100 Refer to SCE-09, Vol. 1, for additional detail on the operation of the Medical Programs Balancing Account.

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4. Discussion of Post-Test Year Medical Cost Escalation 1

The factors increasing the expected costs of medical care for 2018 will continue to impact 2

2019 and 2020. None of the significant cost drivers contributing to health care cost escalation show any 3

tendency to diminish or lose their upward pressure on the overall cost picture. Further, it is still unclear 4

what cost impacts the ACA may have on the overall market. 5

The challenges with cost escalation are further compounded by the lack of readily 6

available solutions. Historically, increased enrollment in HMOs, where care was more tightly managed, 7

was an effective means of reducing cost increases. The trend in California is away from HMOs with 8

reimbursement of physician groups primarily based on capitation (which creates incentives for providers 9

to deliver more efficient services), to physicians modifying their practice patterns to take advantage of 10

the return to fee-for-service reimbursement where doing more is financially rewarded.101 Although 11

employers have seen reductions in the health care trend in the last few years, this typically has resulted 12

from increasing the share of the premiums employees must pay, by adopting plan provisions that require 13

greater cost sharing as services are used through higher deductibles and copayments, or by changing the 14

method of cost sharing to a percentage of the charge which increases the participants’ awareness of the 15

cost of services. In the recent past, SCE has adopted each of these plan design changes and employees 16

and their families are paying a much greater share of the medical program expenses now than 17

experienced in past years. However, this has not addressed the systemic issues within a health care 18

system that continues to react and adapt to find new ways to generate revenue. 19

Based on these major factors and the volatility being experienced in the health care 20

system, the medical cost escalation is projected to be seven percent for the post-test years 2019 and 21

2020. SCE considered the numerous factors influencing medical costs and the estimated impact of these 22

factors for its covered population based on underwriting projections for its own medical plans. 23

101 Refer to WP SCE-06, Vol. 02 Chapter IX Book B, pp.337 - 344. P. Ginsburg, et al., “Shifting Ground:

Erosion of the Delegated Model In California,” California Healthcare Foundation, California Health Care Almanac, Regional Markets Issue Brief, December 2009, at pp. 2-3. Report available online at http://www.chcf.org/~/media/MEDIA%20LIBRARY%20Files/PDF/PDF%20S/PDF%20ShiftingGroundErosionDelegatedModel.pdf [as of August 22, 2016].

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D. Dental Plans 1

1. Summary of Dental Plans Costs [FERC Account 926] 2

For Test Year 2018, SCE forecasts $15.04 million for dental plans costs. Figure IX-18102 3

below, shows recorded dental plans costs for the years 2011 through 2015, plus our forecast costs for 4

2016, 2017, and Test Year 2018. 5

Figure IX-18 Dental Plans Costs


(Nominal $000)

2. Summary Description of SCE’s Dental Plans 6

Eligible enrolled employees and their covered dependents can choose from three dental 7

plans: Delta Dental, Blue Cross Dental Net, and Safeguard.103 Delta Dental is a self-funded plan 8

administered by Delta Dental of California. Under this plan, SCE pays Delta an administrative fee plus 9

the actual services rendered. Blue Cross Dental Net and Safeguard are dental maintenance organizations 10

102 Refer to WP SCE-06, Vol. 02 Chapter IX Book C, pp. 54 – 68.


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for which SCE pays a fixed monthly fee to cover dental services for each enrolled member. All three 1

dental plans provide 100 percent coverage for preventive services, while requiring various levels of cost 2

sharing for other dental services. For each dental option, the Company’s contribution is 85 percent of the 3

cost for the employee’s coverage and 80 percent of the cost for the dependent’s coverage. Employees 4

may elect to waive dental coverage. 5

3. Test Year 2018 Request for Dental Plans Costs (FERC Account 926) 6


In Test Year 2018, SCE will record Dental Plans costs in FERC Account 926. 8


Costs remained relatively stable from 2011 through 2013. In 2014, plan costs 10

decreased, attributable to the decrease in the employee population and the exhaustion of extended health 11

benefits provided to former employees as part of the EIX severance plan. Costs remained stable from 12

2014 to 2015. 13

c) Test Year 2018 Forecast for Dental Plans Costs 14

For Test Year 2018, SCE forecasts $15.04 million for dental plan costs. Costs 15

were forecast by multiplying the projected number of eligible employees by the projected per-eligible-16

employee cost. The projected number of eligible employees was derived by dividing the forecast labor 17

cost for 2018 (expressed in 2015 dollars) by the 2015 average per-employee labor cost. Projected per-18

eligible-employee costs were determined by increasing the 2015 per-eligible-employee cost by zero 19

percent for 2016 and 4.2 percent for 2017 and 2018. The dental forecast trend rate was calculated using 20

the weighted average (based on enrollment) of the projections provided by the three dental plans.104 21

Unlike the Linear Trending, Averaging, and Last Recorded Year methodologies, 22

the Itemized Forecast methodology described above is appropriate because it considers the labor 23

forecast and plans cost escalation. 24


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E. Vision Service Plan (VSP) 1

1. Summary of Vision Service Plan (VSP) Costs [FERC Account 926] 2

For Test Year 2018, SCE forecasts $3.44 million for VSP costs. Figure IX-19,105 below, 3

shows recorded VSP costs for the years 2011 through 2015, plus our forecast costs for 2016, 2017, and 4

Test Year 2018. 5

Figure IX-19 Vision Service Plan Costs


(Nominal $000)

2. Summary Description of SCE’s VSP 6

Vision care benefits are available for eligible enrolled employees and their covered 7

dependents. At SCE, vision care is provided through a self-funded plan administered by VSP. SCE pays 8

an administrative fee to use VSP’s network of vision care providers and claims processing services, plus 9

the cost of the actual services rendered. 10

Vision benefits include annual eye exams with a $20 co-payment, corrective lenses and 11

frames or contact lenses, each with limits on how frequently they may be dispensed, and a corrective eye 12

surgery benefit. The surgery benefit is available for only one covered family member and has a lifetime 13


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maximum of $2,000. To receive this benefit, pre-approval is required and usually a VSP network 1

provider must be used.106 2

3. Test Year 2018 Request for VSP Costs (FERC Account 926) 3


In Test Year 2018, SCE will record VSP Program costs in FERC Account 926. 5


VSP costs comprise two components, claims experience and administration. 7

Annual changes in claim experience normally have a direct correlation to fluctuations in the employee 8

population and utilization of the benefits. Utilization of vision services is cyclical since replacements of 9

glasses are restricted to once every 24 months, with a similar limit applied to contact lenses obtained in 10

lieu of glasses. As seen in Figure IX-19 above, the costs between 2011 and 2013 remained relatively 11

stable, with a decrease in costs in 2014, attributable to the decrease in the employee population and the 12

exhaustion of extended health benefits provided to former employees as part of the EIX severance plan. 13

Costs remained stable in 2015. 14

c) Test Year 2018 Forecast for VSP Costs 15

For Test Year 2018, SCE forecasts $3.44 million for VSP costs. Unlike the Linear 16

Trending, Averaging, and Last Recorded Year methodologies, the Itemized Forecast methodology 17

described below is appropriate because it considers the labor forecast and plan cost escalation 18



dividing the forecast labor cost for 2018 (expressed in 2015 dollars) by the 2015 average per-employee 21

labor cost. Projected per-eligible-employee costs were determined by applying the forecast vision trend 22

rate of 5.3 percent for 2016 (which reflects our actual experience) and 3.0 percent for 2017 and 2018 to 23

the 2015 per-eligible-employee cost. The vision trend rates were based on projections provided by VSP, 24

the vision plan administrator.107 25



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F. Retiree Health Care and Life Insurance (Post-Retirement Benefits Other Than Pensions) 1

1. Summary of PBOP Costs [FERC Account 926] 2

For the Test Year 2018, SCE forecasts $36.82 million for Post-Retirement Benefits Other 3

Than Pensions (PBOP) costs, which covers all forecast PBOP trust contributions, tax deductible net 4

PBOP claims payments for certain retirees, and actuarial fees. Figure IX-20108 below shows recorded 5

PBOP costs for the years 2011 through 2015 and our forecast costs for the years 2016, 2017 and Test 6

Year 2018.109 7

Figure IX-20 PBOP Costs


(Non-Labor – Constant 2015 $000; Other – Nominal $000)

108 Refer to WP SCE-06, Vol. 02 Chapter IV Book A, pp. 65 – 80.

109 Post-June 7, 2013, service-related San Onofre Nuclear Generating Station (SONGS) costs have been removed from all recorded (2013–2015) and forecast costs.

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2. Summary Description of Post-Retirement Benefits Other than Pensions (PBOP) 1

SCE offers other post-retirement benefits besides pension benefits. These benefits include 2

post-retirement medical, dental, vision, Medicare Part B premium reimbursement, and term life 3

insurance.110 According to ASC 715-60 (formerly FAS 106), SCE must accrue a liability for the costs of 4

these retiree benefits.111 5

SCE has offered these benefits as an important part of its employee benefits package to 6

attract and retain a qualified work force, and to facilitate an orderly transition from the work force. 7

Retirees and their dependents who are not Medicare-eligible participate in the same medical, dental, 8

vision, and EAP programs as active employees, although some plan features differ. The differences in 9

the benefits provided retirees are highlighted below. SCE offers two classes of retiree coverage: “Flex” 10

coverage for employees who retired after December 31, 1990, and “PrimeCare” coverage for those 11

retired before then. 12

a) Flex Retirees 13

“Flex” retirees are employees who retired after December 31, 1990. If they are 14

not Medicare-eligible, they and their dependents choose from the same general health plans and features 15

as active employees. Employees must retire at age 55 or older with at least ten years of service to be 16

eligible. 17

To address the continuing cost escalation in the health care arena, significant 18

changes to the SCE retiree medical program have been made. Employees who had shorter careers with 19

SCE now pay a much greater portion of their retiree medical plan costs. For those who did not meet 20

certain criteria by the end of 2008, the Company’s contribution toward their retiree medical plan costs is 21

subject to an overall limit or cap, established based upon the costs of the medical plans in 2008 and 22

adjusted by factors tied to the rate of general (not medical) inflation. On December 31, 2017, SCE will 23

take another step in reducing its retiree medical program cost structure when it discontinues offering its 24

retiree healthcare plan to employees hired on or after that date. Instead, SCE will provide eligible 25

employees who do not receive retiree healthcare with access to a reduced cost Health Reimbursement 26

110 Refer to WP SCE-06, Vol. 02 Chapter IV Book A, pp. 131 – 139.

111 SCE also offers Employee Assistance Program (EAP) benefits to its retirees. See Section IX.C.2., above, for more information.

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Account that can offset private healthcare insurance if certain age and service requirements are met. 1

Each of these major modifications were negotiated with the unions representing SCE employees, so they 2

apply to both represented and non-represented employees. 3

These cost reduction changes to the Company’s retiree healthcare liabilities are in 4

addition to those which began in 2006, with increases in the patient’s costs during service, including a 5

doubling of patient copayment amounts and new higher deductibles and out-of-pocket stop loss 6

amounts. Patient cost sharing is not fixed year-after-year, but adjusts to higher dollar amounts with each 7

new calendar year. To provide greater awareness of cost, retiree prescription cost sharing was moved 8

from flat dollar copayments to a co-insurance design where the plan pays 80 percent and the patient pays 9

20 percent of a prescription’s cost. To further encourage patient involvement in the choice of 10

prescription medications, in 2010, the plan benefit for generic prescriptions was increased to 90 percent, 11

with the patient’s share 10 percent. Because generic medications have consistently lower costs, with 12

each one percent increase in using generics, the program has experienced a 2.5 percent reduction in 13

medication costs. 14

Consistent with the major changes made in the medical program for active 15

employees, commencing in 2008, SCE’s contribution toward retiree medical coverage was reduced to 16

reflect the lowest cost medical plan option offered in each retiree’s geographic area. Retirees selecting a 17

higher cost option pay 15 percent of the lowest cost option’s price tag for their coverage (20 percent of 18

that cost for dependent coverage) plus the entire difference in cost between the lowest cost option and 19

the option they select. A change that will continue to have far-reaching impact on medical costs for 20

those hired until December 30, 2017, is the implementation of limits on the amount the Company 21

contributes toward retiree medical coverage beginning for most employees who retired in 2009 and 22

thereafter. (Employees who became retirement eligible by December 31, 2008, or who had completed at 23

least 25 years of service by then were “grandfathered” and exempt from these limits.) For those retirees 24

who were not grandfathered, costs are limited to what the Company would have paid for retiree 25

coverage under the lowest cost option available in each retiree’s geographic area in 2008, indexed based 26

on the greater of the annual increase in the Consumer Price Index (CPI), or 50 percent of the annual 27

increase in cost of the lowest cost medical option, subject to a maximum annual percentage increase 28

above the CPI of 2 percent. 29

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Those non-grandfathered retirees pay still more for coverage if they retire before 1

age 60 and/or with less than 15 years of service. For retirees not meeting this age and service 2

requirement, 50 percent retiree contributions are applicable instead of the 15 percent contributions that 3

all other Flex retirees pay (and similarly apply, instead of the 20 percent contributions they pay for 4

dependent coverage). 5

As noted earlier in this Chapter, in Section C, Medical Programs, new medical 6

options were implemented for the employee population effective January 1, 2010. These same medical 7

options were provided to the Flex retirees who were not Medicare-eligible. For Flex retirees and their 8

spouses covered by Medicare, medical options designed specifically to work with Medicare coverage 9

were introduced. Once retirees or their spouses become Medicare eligible, their primary source of 10

medical benefits is through their Medicare coverage. The benefits from the SCE sponsored medical 11

plans are secondary to Medicare’s benefits. 12

To provide a range of medical benefit options with a variety of both plan designs 13

and contribution levels, the following medical options were offered: Medicare-Coordinated Preferred 14

Provider Organizations, a Medicare-Coordinated Exclusive Provider Organization, Medicare Advantage 15

Health Maintenance Organizations, and two Medicare Supplement Plans. The latter two plans require a 16

comparatively smaller contribution from the retiree. They provide benefits when the patient utilizes 17

medical providers who ‘accept’ Medicare, a situation which results in much smaller amounts due after 18

Medicare’s payments. 19

b) PrimeCare 20

PrimeCare is the retiree healthcare coverage available only to employees who 21

retired before January 1, 1991, and their dependents. The number of subscribers (retirees or surviving 22

spouses) as of December 2015 was 2,333, with 65 percent between the ages of 80 to 89 and 70 percent 23

between the ages of 81 to 90. Medicare coverage is the primary source of benefits for this retiree group. 24

As the secondary coverage, the PrimeCare plan design requires no deductible and pays 100 percent of 25

covered expenses when care is received through contracted network providers. When the patient 26

accesses out-of-network providers, the benefit is 90 percent of the fee, subject to the reasonable and 27

customary limitation. The changes for Flex retirees described above do not apply to PrimeCare retirees. 28

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c) Medicare Part B Premiums 1

Employees who retired before January 1, 1989, receive full Medicare Part B 2

premium reimbursement. Employees who retired between January 1, 1989 and December 31, 1992, 3

receive premium reimbursement frozen at the December 31, 1992, level. Employees who retired on or 4

after January 1, 1993, receive no Medicare Part B premium reimbursement. 5

d) Dental and Vision Coverage 6

The Company provides dental and vision coverage for retirees using the same 7

plans as for employees. SCE’s contribution towards these plans for retirees who retired in 1991 or later 8

was reduced to 50 percent in 2008. Also, to reduce adverse selection, retirees must be continuously 9

enrolled in these programs. If they drop coverage, they cannot re-enroll in any subsequent year. 10

e) Retiree Life Insurance 11

SCE first provided retiree life insurance in 1978. The Company provides a modest 12

amount of retiree life insurance ($2,500 or $5,000) for employees who retire under the SCE Retirement 13

Plan. For non-represented employees who retire on or after January 1, 2017, retiree life insurance will be 14

discontinued. Retiree life insurance was discontinued for represented employees who retired on or after 15

January 1, 2016. 16

3. Ratemaking Background 17

The existing requirements for PBOP rate recovery date back to the 1990 Order Instituting 18

Investigation (I.90 07 037) into the ratemaking treatment of PBOPs and to the subsequent Phase II 19

Decision of the OII, (D.92-12-015). The existing two-way balancing account treatment was authorized 20

in the 2006 GRC Decision (D.06-05-016). Balancing account treatment continued in the 2009, 2012, and 21

2015 GRC Decisions (D. 09-03-025, D. 12-11-051, and D. 15-11-021). Applying the Phase II Decision 22

criteria and the 2006, 2009, 2012, and 2015 GRC balancing account treatment, PBOP rate recovery for 23

Test Year 2018 is based on the following: 24

a. SCE continues to fund all recovered costs through paid health claims or in 25

independent trusts dedicated solely to PBOP; 26

b. PBOP costs are reasonable and necessary to meet funding requirements and are based 27

on fair actuarial assumptions, contributions, and investments; 28

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c. Rate recovery that exceeds the lesser of tax deductible paid claims/contributions or 1

ASC 715-60 (formerly FAS 106) expense is subject to refund to customers; and 2

d. PBOP costs are subject to a two-way (symmetrical) balancing account. 3

Each of these conditions is discussed below. 4

a) Tax Deductible Current Funding of PBOP Costs 5

SCE has established the following funding vehicles for its PBOP obligation: 6

• A Voluntary Employee Beneficiary Association (VEBA)112 Trust to fund 7

PBOP benefits except life insurance for all represented employees, retired 8

represented employees, and their spouses and dependents (Represented 9

Employee VEBA Trust). 10

• A VEBA trust to fund post-retirement life insurance benefits for all active 11

employees and retirees (Life Insurance VEBA Trust). 12

• Two VEBA trusts to fund a portion of non-life insurance PBOP for 13

Management and Administrative (M&A) employees retiring after December 14

31, 1992, and their spouses and dependents (1992 and 1999 M&A VEBA 15

Trusts). 16

• A 401(h)113 sub-account of the Retirement Plan Trust that covers non-life 17

insurance PBOP benefits for the M&A group over the amounts covered by the 18

1992 and 1999 M&A VEBA Trusts. 19

SCE contributes on a tax-deductible basis to these trusts, and invests the trust 20

assets to fund the PBOP obligation. The trusts periodically reimburse SCE for retiree PBOP benefits 21

payable from the trusts, but paid by SCE. At the end of 2015, PBOP trust fund assets were $2.04 billion. 22

Also included in SCE’s PBOP cost amounts are tax-deductible costs associated 23

with Management and Administrative employees who retired before January 1, 1993 (the adoption date 24

112 Established pursuant to Section 501(c) (9) of the Internal Revenue Code of 1986, contributions to VEBA

trusts are tax-deductible. Investment returns are exempt from tax for the Represented Employee and Life Insurance VEBA trusts. The M&A VEBA investment returns are taxable.

113 Established pursuant to Section 401(h) of the Internal Revenue Code of 1986. Contributions to the 401(h) account are tax-deductible, and investment returns are exempt from taxes.

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of FAS 106) and their spouses and dependents. This latter group is also called the “pay-as-you-go” 1

group. PBOP costs for this group are tax-deductible, but are not funded through PBOP trusts. In its 2003 2

GRC Decision, the Commission stated that “Even though these costs are not paid out of a trust, they are 3

nevertheless valid tax-deductible PBOP costs for which customer funding is appropriate and 4

reasonable.”114 5

b) PBOP Costs Are Reasonable And Necessary To Meet Funding Requirements 6

Based On Fair Actuarial Assumptions, Contributions, And Investments 7

Since SCE adopted ASC 715-60 (formerly FAS 106), SCE’s PBOP actuary, Aon 8

Hewitt, has prepared annual valuations of the projected costs of PBOP benefits. SCE’s Test Year 2018 9

request for PBOP costs is based on estimates for the years 2018 through 2020 prepared by the actuary, 10

which are attached as Appendix B. The actuary must make several assumptions in calculating PBOP 11

costs. As discussed in the annual, actuarial valuation reports, these assumptions are reasonable, both 12

individually and collectively. 13

c) Rate Recovery That Exceeds the Lesser Of Tax Deductible Contributions Or ASC 14

715-60 Expense Is Subject To Refund 15

Since the adoption of ASC 715-60 (formerly FAS 106), SCE has made tax-16

deductible PBOP trust contributions, which, when added to tax-deductible claims payments for pre-1993 17

Management and Administrative Group retirees/spouses/dependents, have been equal to the annual rate 18

recoverable ASC 715-60 expense amount calculated by Aon Hewitt. SCE will continue to do so. 19

d) PBOP Cost Balancing Account 20

In the 2006 GRC, SCE proposed a PBOP balancing account to record the 21

difference between authorized and recorded PBOP costs. SCE’s proposal was uncontested. Because the 22

2006 GRC decision was silent on this uncontested proposal, SCE established a two-way (symmetrical) 23

PBOP Cost Balancing Account in 2006.115 In the 2009 GRC, SCE proposed continuation of the PBOP 24

Balancing Account. Again, this proposal was uncontested, and balancing account treatment was 25

114 D.04-07-022, p. 227.

115 D.06-05-016, p. 8: “As a general matter, with respect to individual uncontested issues in this proceeding, we find that SCE has made a prima facie just and reasonable showing, unless otherwise stated in this opinion.”

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explicitly authorized in the 2009 GRC decision.116 Two-way (symmetrical) PBOP Cost Balancing 1

Account treatment was contested in 2012 but was again explicitly authorized in the GRC decision. Two-2

way balancing account treatment was uncontested in 2015. In Section 5 below, SCE reiterates its request 3

for continuation of the existing two-way PBOP Cost Balancing Account in this GRC.117 4

4. Test Year 2018 Request for PBOP Costs (FERC Account 926) 5

a) PBOP Costs 6


In Test Year 2018, SCE will record PBOP costs in FERC Account 926. 8

(2) Analysis of Recorded Data 9

Figure IX-21 below shows actual PBOP costs and authorized amounts for 10

the years 2009 through 2015. 11

116 See D.09-03-025, OP 17.

117 Refer to Exhibit SCE-09, Vol. 1, for additional detail on the PBOP Cost balancing account.

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Figure IX-21 PBOP Costs

Authorized versus Actual 2009-2015

As shown in Figure IX-21 above, PBOP costs have declined significantly 1

since 2009. Costs had been relatively high in 2009 due primarily to the erosion of plan assets and funded 2

status stemming from the global financial crisis of 2008. 3

The decline in PBOP costs in 2010 and 2011 was due primarily to 4

favorable investment and claims experience, which more than offset the effects of declining corporate 5

bond (i.e., discount) interest rates. Costs increased in 2012, due to further declines in discount rates and 6

unfavorable investment experience in 2011. Costs again declined after 2012, due in part to the 7

introduction in 2013 of a new cost-saving prescription drug benefit delivery arrangement for Medicare-8

eligible retirees, spouses, and dependents known as an Employer Group Waiver Plan, or “EGWP.” The 9

plan’s overall claims experience and trust fund investment performance were favorable in 2012, 2013, 10

and 2014, helping to offset the impacts of lower discount interest rates after 2012, and updated mortality 11

assumptions in 2014, which increased life expectancy. 12

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For the three-year period 2009-2011, recorded costs were below 1

authorized, and $14.5 million (revenue requirement basis) was returned to customers in 2012 under the 2

two-way PBOP Balancing Account. Recorded costs for 2012 through 2014 were significantly below 3

authorized, and $38.3 million was returned to customers in 2015. PBOP cost in 2015 was also lower 4

than authorized by $11.4 million and this amount will also be returned to customers. 5

(3) Test Year 2018 Forecast for PBOP Costs 6

SCE’s Test Year 2018 request of $36.41 million for PBOP costs is based 7

on estimates prepared by SCE’s PBOP actuary, Aon Hewitt. As shown in Appendix B, Aon Hewitt 8

projects Net Periodic Postretirement Benefit Costs (PBOP Costs or ASC 715-60 Expense) of $37.079 9

million for 2018, $36.361 million for 2019, and $35.779 million for 2020, or a three-year average of 10

$36.406 million for the 2018-2020 forecast period. This amount is $7.75 million lower than the $44.156 11

million authorized in the 2015 GRC. Aon Hewitt projected these costs on a total utility basis in nominal 12

dollars. The estimates were prepared under generally accepted actuarial principles and in accordance 13

with ASC 715-60 (formerly FAS 106). 14

Under the most recent collective bargaining agreements, which have now 15

been extended to all employees of SCE, no employees hired after 2017 are assumed to be eligible for 16

PBOP, instead receiving annual notional healthcare reimbursement account (HRA) credits while in 17

service. The 2018 changes are expected to reduce total PBOP costs for the 2018-2020 period by $5 to 18

$10 million. Larger savings are forecast for later years, as more new hires receive only HRA credits. 19

Projected PBOP costs are based on actuarial assumptions which reflect the 20

actuary’s best judgment of future events affecting the post-retirement benefits being valued. Each 21

individual assumption should be reasonable on its own merits and consistent with the other assumptions 22

used. Projected 2018-2020 PBOP costs were based on Aon Hewitt’s 2015 actuarial valuation results 23

reflected in December 31, 2015, financial statement disclosure information. The underlying data and 24

actuarial assumptions Aon Hewitt used include: active and retiree census data measured as of January 1, 25

2015, post-retirement health claims information for 2014 and prior years, a 4.55 percent discount rate, a 26

5.5 percent expected long-term rate of return on assets,118 PBOP trend rates, and other actuarial 27

assumptions. 28

118 The 5.5 percent was assumed for assets in trusts exempt from taxation; after-tax returns are assumed for assets

in the 1992 and 1999 M&A VEBA trusts, which are subject to unrelated business income tax.

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b) PBOP Actuarial Fees 1


In Test Year 2018, SCE will record PBOP Actuarial Fee costs in FERC 3

Account 926. 4

(2) Test Year 2018 Forecast for PBOP Actuarial Fees 5

SCE also requests $0.42 million in Test Year 2018 for PBOP-related 6

actuarial fees that are not chargeable to the PBOP trusts. These fees cover the costs associated with 7

General Rate Case support, ongoing actuarial valuations, and other projects. The forecast is based upon 8

an estimate from SCE’s PBOP actuary. This request reflects a zero percent increase over the previous 9

rate case request. 10

5. PBOP Balancing Account 11

As discussed in Section 3d) above, per the 2006, 2009, 2012, and 2015 GRCs, SCE 12

established a two-way (symmetrical) balancing account for PBOP costs. The PBOP Balancing Account 13

records the difference between authorized rate recovery for tax-deductible PBOP trust funding 14

(including the pre-1993 “pay-as-you-go” group costs) and actual PBOP costs. PBOP actuarial fees are 15

excluded from the Balancing Account. The revenue requirement associated with any overcollection or 16

undercollection is amortized, and any accumulated balances receive interest at the commercial paper 17

rate, consistent with treatment of interest accruals for other SCE balancing accounts.119 18

As discussed above in Section 4, for the 2009 through 2011 period and the 2012 through 19

2014 periods, $14.5 million and $38.3 million, respectively, have already been returned to customers 20

through the two-way PBOP Balancing Account. Annual PBOP costs, determined under ASC715-60 21

(formerly FAS106), can be volatile, depending on several key factors including past investment 22

performance, health claims and other experience, plan changes, and discount interest rates. As a result, 23

Balancing Account debits/credits varied significantly from year to year. This history illustrates the need 24

for ongoing two-way PBOP Balancing Account treatment. 25

119 Refer to Exhibit SCE-09, Vol. 1, for additional discussion on the ratemaking treatment of the PBOP

Balancing Account.

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The existing two-way PBOP Balancing Account benefits both customers and 1

shareholders. Like pension costs, PBOP costs can vary significantly with changes in prevailing interest 2

(i.e., discount) rates and with favorable or unfavorable investment performance. Similar to SCE’s 3

pension fund, the PBOP trusts investment policy includes a significant equity allocation.120 This equity 4

exposure will lower the long-term costs of funding PBOP benefits, but, as with pensions, will also result 5

in significant volatility in PBOP asset returns, as experienced in, and since 2008. 6

Although PBOPs are not subject to legally required minimum funding standards – which 7

have so dramatically increased pension contributions and rate recovery in some years – other factors 8

unique to PBOP also contribute to cost volatility. SCE does not use an asset smoothing method in PBOP 9

actuarial calculations, which magnifies the cost impact of both favorable and unfavorable investment 10

performance. PBOP liabilities are subject to unpredictable, and sometimes very significant increases in 11

healthcare costs, especially as the population of SCE retirees increases. The cost volatility stemming 12

from these factors, which are outside of SCE’s control, makes two-way balancing account treatment 13

important for PBOP. 14

Under the authorized PBOP Balancing Account procedure, the Commission will continue 15

to review SCE’s PBOP costs in general rate cases and approve the forecast amounts it determines to be 16

reasonable. SCE will continue to target tax-deductible PBOP funding amounts at the ASC 715-60 17

expense levels calculated by its PBOP actuaries each year. The Balancing Account will protect both 18

customers and shareholders from the volatility associated with PBOP costs. 19

G. Group Life Insurance 20

1. Summary of Group Life Insurance Plan Costs [FERC Account 926] 21

For Test Year 2018, SCE forecasts $1.43 million for Group Life Insurance plan costs. 22

Figure IX-22121 below shows recorded Group Life Insurance plan costs for the years 2011 through 2015, 23

plus our forecast costs for 2016, 2017, and Test Year 2018. 24

120 The current PBOP investment policy is 63 percent equities, 37 percent fixed income for all PBOP Trusts

except the Represented Trust


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Figure IX-22 Group Life Insurance Costs


(Nominal $000)

2. Summary Description of SCE’s Group Life Insurance Plans 1

Group Life Insurance includes expenses for five separate types of coverage. Each is 2

discussed below.122 3

a) Employee Life Insurance 4

There are two components of the Employee Life Insurance program: 5

Company-provided life insurance, and supplemental insurance. The cost of each option is based on the 6

employee's eligible salary as of September 1 and age as of December 31 of the prior year. 7

Company-paid coverage is one times the employee’s base pay up to $50,000. 8

Besides the Company-paid coverage, during the annual enrollment process, employees may elect 9

supplemental insurance coverage, paid for by the employee, from one-to-eight times base pay. 10


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b) Dependent Life Insurance 1

Multiple dependent life insurance coverage options are available to employees. 2

There was, and continues to be, no Company contribution toward this coverage. The employee’s cost 3

depends upon whom the employee covers and the option selected. 4

Employees may purchase coverage for spouses in flat amounts of $5,000, 5

$15,000, $25,000, or $50,000. Employees may also purchase spouse life from one-to-four times the 6

employee’s base pay (up to 100 percent of the employee’s total life insurance coverage, company-7

provided and any supplemental coverage, as negotiated with our unions effective January 1, 2016) to a 8

maximum of $300,000. The options available for children are flat amounts of $2,000, $5,000, $10,000, 9

$15,000 or $25,000. 10

c) Accidental Death & Dismemberment (AD&D) Insurance 11

The Company provides eligible employees with $50,000 of AD&D coverage. In 12

addition, employees may elect, at their own expense, additional coverage of two, four, six, eight, or ten 13

times base pay (to a maximum of $2 million). Employees may elect to pay for coverage for their spouse 14

and/or children. If spousal coverage is selected by the employee, it is 50 percent of the employee’s 15

coverage (up to 100 percent of the employee’s total AD&D insurance coverage, company-provided and 16

any supplemental coverage, effective January 1, 2016), and if child coverage is selected by the 17

employee, that is 10 percent of the employee’s coverage (to a maximum of $50,000). The cost is based 18

on the employee’s eligible base pay as of September 1 of the prior year and the option chosen. 19

d) Business Travel Accident Insurance 20

Business Travel Accident Insurance provides employees with coverage equal to 21

two times the employee’s base pay up to maximum of $300,000. SCE executives are provided $350,000 22

in coverage, or $450,000 if they are elected officers. This coverage is paid for by the Company and no 23

employee contributions are required. 24

3. Test Year 2018 Request for Group Life Insurance Plan Costs (FERC Account 926) 25


In Test Year 2018, SCE will record Group Life Insurance costs in FERC Account 27

926. 28

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In 2011, long-term rate renewals were negotiated, which kept basic rates stable 2

for 2011 through 2013. Cost decreased in 2014, attributable to the decrease in the employee population 3

and the exhaustion of extended health benefits provided to former employees as part of the EIX 4

severance plan. Costs remained stable in 2015. 5

c) Test Year 2018 Forecast for Group Life Insurance Plan Costs 6

For Test Year 2018 SCE forecasts $1.43 million for Group Life Insurance plan 7

costs. Unlike the Linear Trending, Averaging, and Last Recorded Year methodologies, the Itemized 8

Forecast methodology described below is appropriate because it considers the labor forecast. 9



dividing the forecast labor cost for 2018 (expressed in 2015 dollars) by the 2015 average per employee 12

labor cost. Projected per-eligible-employee costs were determined by applying a forecast life insurance 13

trend rate of 0 percent for 2016 through 2018.123 14

H. Miscellaneous Benefit Programs 15

1. Summary of Miscellaneous Benefit Programs Costs [FERC Account 926] 16

For Test Year 2018, SCE forecasts $5.59 million for miscellaneous benefit programs 17

costs. Figure IX-23124 below, shows recorded miscellaneous benefit programs costs for the years 2011 18

through 2015, plus SCE’s forecast costs for 2016, 2017, and Test Year 2018. 19



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Figure IX-23 Miscellaneous Benefit Programs Costs


(Nominal $000)

2. Summary Description of SCE’s Miscellaneous Benefit Programs 1

Miscellaneous benefit programs consist primarily of the Electric Service Discount 2

Reimbursement, Awards to Celebrate Excellence, Commuter Programs, and Educational 3

Reimbursement.125 4

a) Electric Service Discount Reimbursement 5

The Electric Service Discount (SCE’s Rate Schedule DE) provides a 25 percent 6

discount on domestic electric service for full-time employees who live in SCE's service territory and 7

have completed six months of service with the Company. Retirees are also eligible for this rate. 8

Employees whose work assignment precludes them from living in SCE’s service territory are eligible to 9

receive a comparable 25 percent reimbursement for their electric service. 10

The expenses associated with the 25 percent reimbursement for those eligible 11

employees whose work assignments preclude them from living in SCE’s service territory are included in 12


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this Test Year request. The expenses associated with the 25 percent discount for employees (and 1

retirees) within SCE’s service territory are addressed in rate design. 2

b) Awards to Celebrate Excellence (ACE) 3

ACE is a non-cash safety recognition program that uses points to award 4

employees for their commitment to working injury free.126 ACE awards are given to select full-time or 5

part-time, non-executive employees. In D.09-03-025, the Commission directed SCE to explain why it 6

records amounts for Awards to Celebrate Excellence under Miscellaneous Benefit Programs in FERC 7

Account 926.127 8

According to the Code of Federal Regulations, FERC Account 926 – Employee 9

Pensions and Benefits includes pensions, annuities, and health benefits. The regulation also states: 10

Include, also, expenses incurred in medical, educational or recreational 11 activities for the benefit for employees and administrative expenses in 12 connection with employee pensions and benefits.128 13

SCE records costs associated with the ACE program under Miscellaneous 14

Benefits Programs in FERC Account 926 and in various non-labor accounts across all exhibits, based on 15

its interpretation of the FERC regulations. Individual OUs record costs associated with the ACE 16

program in their respective non-labor costs. A more detailed description of ACE and a forecast of total 17

OU ACE program costs is provided above in Chapter VIII. 18

c) Commuter Programs 19

SCE has historically offered several commuter programs to encourage employees 20

to use public transit or high-occupancy commuting vans. Participation in the commuter programs is 21

voluntary. To support use of those programs, the Company allows eligible employees to pay eligible 22

commuter expenses (as defined in the IRS Code) through pretax payroll deductions, up to limits 23

established by Section 132(f) of the Internal Revenue Code, which for 2015 was $250 per month. In 24

addition, SCE provides a 25 percent subsidy toward an employee’s transit costs, up to the IRS dollar 25

limit (resulting in a maximum subsidy of $62 per month for 2015). The pre-tax deduction and subsidy 26

126 Prior to 2012, the ACE program included awards for other exemplary efforts, including productivity,

operational improvements, customer service, and superior team or project results.

127 D.09-03-025, p. 146.

128 18 C.F.R Part 101 (2007).

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are available to employees who travel to and from work by public transit (rail, train, or bus) or are 1

members of a qualified vanpool. 2

d) Educational Reimbursement Program 3

SCE sponsors an Educational Reimbursement Program that encourages and 4

assists employees in developing their work-related skills. Employees may be reimbursed up to $5,250 5

per calendar year for tuition and books when enrolled in a pre-approved degree, certificate, or 6

correspondence program at an approved institution. This is the amount specified in Section 127 of the 7

Internal Revenue Code. The educational program must benefit SCE and relate to the employee’s present 8

job, development plan, career path, or rehabilitation plan. All approved institutions must meet U.S. 9

Department of Education eligibility requirements. 10

3. Test Year 2018 Request for Miscellaneous Benefit Programs Costs (FERC Account 11

926) 12


In Test Year 2018, SCE will record these Miscellaneous Benefit Programs costs 14

in FERC Account 926. 15


Employee population and program usage changes are the primary drivers of the 17

miscellaneous benefit costs. As shown in Figure IX-23 above, the costs of miscellaneous benefits have 18

remained relatively stable over the recorded period, though costs decreased in 2012 primarily due to 19

ACE program changes implemented that year. 20

c) Test Year 2018 Forecast for Miscellaneous Benefit Programs Costs 21

For Test Year 2018, SCE forecasts $5.59 million for miscellaneous benefit 22

programs costs. Unlike the Linear Trending, Averaging, and Last Recorded Year methodologies, the 23

Itemized Forecast methodology described below is appropriate because it considers the labor forecast. 24


the projected per-eligible-employee composite cost. The projected number of eligible employees was 26

derived by dividing the forecast labor cost for 2018 (expressed in 2015 dollars) by the 2015 average per 27

employee labor cost. Projected per-eligible-employee costs for these programs were assumed to increase 28

at the non-labor escalation rate (as developed in SCE-09, Volume 1, Cost Escalation) through 2018. 29

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I. Executive Benefits 1

1. Summary of Executive Benefits Costs [FERC Account 926] 2

For Test Year 2018, SCE forecasts $21.09 million for executive benefits costs. Figure IX-3

24129 below, shows recorded executive benefits costs for the years 2011 through 2015, plus our forecast 4

costs for 2016, 2017 and Test Year 2018. 5

Figure IX-24 Executive Benefits Costs


(Nominal $000)

2. Summary Description of Executive Benefits 6

The Executive Benefits package is a key part of SCE’s total compensation offered to 7

attract and retain well-qualified executives. Since SCE competes for executive talent from both utilities 8

and companies in other industries, that package must be market competitive. The benefits provided 9

include the Executive Retirement Plan and other benefits not included in the rate request due to their 10

negligible cost to SCE.130 11



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The Executive Retirement Plan is a non-qualified pension plan that provides benefits that 1

executives cannot receive in the qualified SCE Retirement Plan due to compensation and payout limits 2

imposed by the Internal Revenue Code (IRC) on that plan. The compensation recognized for plan 3

purposes is base pay, except for elected officers, where compensation is base pay plus bonus. 4

The Executive Retirement Plan calculates benefits based on one of SCE’s final average 5

pay pension formulas in existence when the Company adopted the Cash Balance Account formula in 6

1999. This formula provides no vesting until five years of service is completed, significant reductions in 7

value if a covered executive terminates employment prior to early retirement eligibility (age 55 with at 8

least five years of service), and graded reductions in value for early retirement at ages from 55 but prior 9

to 61. These features were preserved in the Executive Retirement Plan because of their value in retaining 10

needed executives to older ages. 11

Once the Executive Retirement Plan benefit is determined for an executive, the benefit 12

that executive earned under the qualified SCE Retirement Plan is subtracted, in addition to up to 40 13

percent of the executive’s Social Security benefit. Only the residual is paid from the Executive 14

Retirement Plan. In addition to the lump-sum and annuity-payment options of the SCE Retirement Plan, 15

the Executive Retirement Plan offers monthly or annual payments over periods of up to 15 years. 16

Enhanced retirement benefits are available under the Executive Retirement Plan if an 17

executive is involuntarily severed not for cause. If this occurs, one additional year of age and service is 18

added to the Executive Retirement Plan calculation. The median lump sum value of retirement 19

severance benefits for executives calculated as if they had been severed as of December 31, 2015, is 20

approximately $73,000. The retirement severance benefit for senior officers who lose their positions 21

with a change in control of the holding company would be two additional years of age and service, or, 22

for SCE’s President, three additional years of age and service. The severance benefit also immediately 23

vests the benefit for executives not otherwise vested (i.e., if they have less than 5 years of service at 24

termination). For these executives, severance gives them more than the one year age and service 25

enhancement (i.e., their entire Executive Retirement Plan benefit will be attributable to the severance 26

benefit). 27

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a) Upcoming Changes to the Executive Retirement Plan 1

As we indicated earlier, in 2015, the Company performed a comprehensive 2

review of the total compensation provided to employees and executives. Because of that review, several 3

changes will be made to the Executive Benefits package as described below: 4

Formula Changes – Executives hired or promoted by December 30, 2017, will 5

continue to participate in the Executive Retirement Plan. However, beginning in 2018, the formula will 6

be reduced to recognize one percent of final average pay for up to 30 years of service and one-half 7

percent of final average pay for service over 30 years. (The current formula uses 1.75 percent and one 8

percent, respectively.) Executives hired after that date, will no longer participate in the Executive 9

Retirement Plan. Instead, they will receive additional non-elective contributions into their 401(k) 10

accounts and the Executive Retirement Account as described earlier in this volume or below, 11

respectively. 12

Executive Retirement Account (ERA) – The ERA is a new executive benefit 13

offered starting in 2018. The Company will credit the following to an executive’s ERA: (1) 12 percent 14

of their annual short-term incentive compensation under the Executive Incentive Compensation (EIC) 15

Plan; (2) 12 percent of their base pay that exceeds the IRS limit; and (3) interest credits. The 16

combination of the ERA benefit and the revised Executive Retirement Plan formula cannot result in a 17

greater benefit than the executive would have received under the pre-2018 Executive Retirement Plan 18

formula. 19

Sick Time Balance Payout – When an executive retires, he or she is paid 20 20

percent of the value of his or her accrued, unused sick time, either from the qualified pension plan (only 21

if he or she is also considered “grandfathered” for pension benefits) or the Executive Retirement Plan. If 22

an executive retires in 2017 or later, their sick time payout will be based on the lesser of the accrued, 23

unused sick time balance on either (a) December 31, 2016, or (b) their retirement date, if later. Further, 24

new executives hired or promoted on or after December 31, 2016, will not receive a payout of unused 25

sick time balances from the Executive Retirement Plan. For employees promoted to an executive 26

position on or after December 31, 2016, and who are also grandfathered in the qualified pension plan, 27

sick time payouts will be capped. When those executives retire, the qualified pension plan payout of 20 28

percent of the value of accrued, unused sick time will be based on the lesser of their sick time balance on 29

either (a) the date of promotion, or (b) the retirement date, if later. 30

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Executive Retirement Plan expenses are based on an annual actuarial valuation 1

using the methodology prescribed by Financial Accounting Standard 87 and calculated by the actuarial 2

division of Aon Hewitt. 3

3. Test Year 2018 Request for Executive Benefits Costs (FERC Account 926) 4


In Test Year 2018, SCE will record Executive Benefits costs in FERC Account 6

926. 7


The annual costs are determined by actuaries131 based on salary and bonuses, 9

length of service, expected retirement age, expected mortality, and interest rate assumptions. Executive 10

benefit expense fluctuates over time because of variations in bonus levels and turnover among 11

executives. In addition, the discount rate used to measure pension benefit obligations has fluctuated over 12

the last few years, contributing to fluctuation in annual costs over the recorded history. Expenses for the 13

Executive Retirement Plan increased between 2011 and 2012 due to a special accounting treatment 14

(settlement accounting) for accelerated loss recognition triggered by the significant lump sum 15

distributions for plan benefits to departing executives during 2012. Costs fluctuated in 2013 and 2014, 16

due to changes in the discount rate each year. In 2015, costs increased due to a drop in the discount rate, 17

and differences in pay and demographic experience (including new executives who entered the plan). 18

c) Test Year 2018 Forecast for Executive Benefits Costs 19

For Test Year 2018, SCE forecasts $21.09 million for executive benefit costs. 20

Unlike the Linear Trending, Averaging, and Last Recorded Year methodologies, the Itemized Forecast 21

methodology described below is appropriate because it considers the labor forecast. 22

Expenses were forecast by multiplying the average executive benefit cost per 23

employee in 2015 by the projected number of employees in 2018 with no escalation factor applied. The 24

projected number of employees in 2018 was derived by dividing the forecast labor cost for 2018 (stated 25

in 2015 constant dollars) by the 2015 average per-employee labor cost. Changes in executive benefit 26

expenses that would otherwise result from expected increases in the salaries and age of current 27

131 Refer to WP SCE-06, Vol. 02 Chapter IX Book C, p. 283.

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participants and possible changes in the number of executives are expected to be offset as younger 1

senior officers with reduced executive retirement and survivor benefits replace retiring officers who are 2

grandfathered under prior provisions. 3

Documents

2018 General Rate Case · F. Test Year 2018 Request for Long Term Incentives (FERC ... Recent History .....50 e) Analysis of Recorded and Forecast Pension Costs ... 1. Summary of