SCE UPDATE TESTIMONY - Southern California Edison

Application No.:
Exhibit No.:
Witnesses:
A.10-11-015
SCE-84
R. Worden
D. Snow
P. Phelan
A. Riddle
P. Wong
G. Bridges
T. Cameron
(U 338-E)
SCE UPDATE TESTIMONY
Before the
Public Utilities Commission of the State of California
Rosemead, California
October 24, 2011

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SUMMARY OF RECOMMENDATIONS
Update the test year revenue requirement to reflect all of the updates to operational
forecasts in this testimony.
Adjust the test year revenue requirement to reflect that there will be two, not one,
refueling at SONGS.
Update the record to reflect the City of Oxnard’s settlement with SCE.
Update capital expenditures and O&M for Fuel Cells to reflect a reduction in the
number of operating sites.
Update forecast of DMV fees to reflect the most current vehicle license and
registration fees.
Reject DRA’s proposals on the treatment of deferred taxes and NOL from its Tax
Update Testimony.
Update Payroll Taxes to reflect the current FICA wage limit.
Update Property Taxes to reflect 2010 and 2011 property tax rates.
Update the O&M and capital escalation factors used in determining the revenue
requirement.

Southern California Edison Company Update Testimony
Table Of Contents
Section Page Witness
I. INTRODUCTION .............................................................................................1 R. Worden
II. RESULTS OF OPERATION ............................................................................3 D. Snow
III. McGRATH CONSTRUCTION IS NOW UNDERWAY .................................7 P. Phelan
IV. FUEL CELL CAPITAL AND O&M FORECAST.........................................10 M. Nelson
V. VEHICLE LICENSE AND REGISTRATION FEES.....................................11 A. Riddle
A. Background..........................................................................................11
B. Proposed Revision To O&M Direct Testimony For Test
Year 2012.............................................................................................12
VI. INCOME TAX EXPENSES............................................................................15 P. Wong
A. Background..........................................................................................15
B. Providing Benefit Of Bonus Depreciation To Ratepayers
Before SCE Recognizes The Tax Savings...........................................16
1. SCE’s Calculation Of The 2012 GRC Revenue
Requirement Impact Related To The Act Is
Consistent With Commission Precedents And
Practices And Not Based On A “Phantom NOL”
Forecast....................................................................................18
2. SCE’s Revenue Requirement Update Of April 29,
2011 Strictly Follows The Commission’s Seminal
Decision On The Treatment Of Tax Expense – OII
24 (D. 84-05-036, 15 CPUC 2d 42).........................................19
a) DRA’s Reliance On OII 24 To Exclude The
Effect Of NOL’s In The Ratemaking
Process Is Misplaced....................................................19
b) SCE’s April 29 Update Filing Adheres To
The Separate Company Methodology
Established By OII 24..................................................20
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Southern California Edison Company Update Testimony
Table Of Contents (Continued)
Section Page Witness
3. DRA Proposal’s To Immediately Give Ratepayers
The Benefit Of The Non-monetized Portion Of
Bonus Depreciation Violates The IRC
Normalization Rules Resulting In A Significant
Revenue Requirement Detriment To Ratepayers ....................21
4. DRA’s Proposal Does Not Reflect Economic
Reality......................................................................................22
C. DRA’s Proposal To Flow Though IRC Section 199
Manufacturer’s Deduction Despite Tax Code Prohibition
Against Such Deduction Is A Fundamentally Flawed
Ratemaking Approach .........................................................................23
1. There Is No NOL For Ratemaking Taxes................................23
2. SCE Was Able To Take This Deduction Over The
Past Few Years Although It Was Not Recognized In
The Last GRC ..........................................................................24
VII.
PAYROLL TAXES (OASDI/FICA WAGE LIMITATION)..........................27
VIII. PROPERTY TAXES .......................................................................................29 G. Bridges
IX. ESCALATION RATE CHANGES .................................................................30 T. Cameron
A. O&M Labor And Non-Labor Escalation Rates Are Based
On The IHS Global Insight Utility Cost Service Operation
And Maintenance Costs Projection......................................................30
B. Palo Verde And Four Corners Non-Labor Escalation .........................32
C. Capital Escalation Rates Are Based On The IHS Global
Insight Utility Cost Service Projection of Capital
Construction Costs...............................................................................33
D. Adjustment Of Capital Escalation Rates To Reflect Labor
Included In Capital Expenditures.........................................................34
E. Updating Of Escalation Rates For SCE’s Post-Test Year
Ratemaking Mechanism.......................................................................35
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Southern California Edison Company Update Testimony
List Of Tables
Table
Page
Table I-1 Southern California Edison Company Change In 2012-2014 GRC Revenue
Requirement (Thousands of Dollars).....................................................................................................2
Table II-2 Revised Results Of Operations AT Proposed Rated Commission Jurisdictional
(Thousands of Dollars) ..........................................................................................................................4
Table II-3 2012, 2013 And 2014 Revenue Changes Resulting From The 2012 Test Year
And 2013 And 2014 PTYR GRC Request Commission Jurisdictioal (Thousands of
Dollars) ..................................................................................................................................................5
Table VI-4..................................................................................................................................................17
Table VII-5.................................................................................................................................................27
Table VIII-6 Summary Of Property Taxes (nominal $000) ......................................................................29
Table VIII-7 Comparison of 2010-11 Property Tax Rates ........................................................................29
Table IX-8 O&M Labor Price Indexes And Escalation Rates (Based On IHS Global
Insight UCS 2012 Second Quarter Projection)....................................................................................31
Table IX-9 O&M Non-Labor Price Indexes And Escalation Rates (Based Upon IHS
Global Insight UCS 2012 Second Quarter Projection)........................................................................32
Table IX-10 Palo Verde Non-labor Escalation..........................................................................................33
Table IX-11 Four Corners Non-labor Escalation.......................................................................................33
Table IX-12 Capital Price Indexes And Escalation Rates (Based Upon IHS Global Insight
Cost Trends Of Electric Utility Construction 2012 Second Quarter Projection).................................34
Table IX-13 Department Weights For Labor Embedded In Capital Expenditures ...................................35
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I.
INTRODUCTION
This exhibit presents Southern California Edison Company’s (SCE’s) testimony for the
update phase of our Test Year 2012 General Rate Case. The Commission Rate Case Plan,
D.89-01-040, sets forth the update criteria as follows:
A. Known changes in cost of labor based on contract negotiations completed since
the tender of the NOI or known changes that result from updated data using the
same indexes used in the original presentation during the hearing.
B. Changes in non-labor escalation factors based on the same indexes the party used
in its original presentation during hearings.
C. Known changes due to governmental action such as changes in tax rates, postage
rates, or assessed valuation.
The Rate Case Plan provides that the above items be updated on Day 280. 1 The Scoping
Memo for this proceeding set October 24, 2011 for the service of update testimony. 2
This exhibit updates our request for the following items: (1) capital escalation rates and
O&M labor and non-labor escalation rates; (2) payroll wage limits and property tax rates; (3)
Department of Motor Vehicle (DMV) licensing fees and registration; (4) fuel cell O&M and
capital expenditure forecasts; (5) the addition of one SONGS 2&3 refueling and maintenance
outage bringing the total refueling and maintenance outages to two; and, (6) SCE’s rebuttal to
DRA testimony update on tax expense. 3 These updates are used to produce SCE’s revised 2012
Test Year GRC Results of Operations (RO) also contained herein. 4 Table I-1, below, presents a
summary of the revenue requirement impact of the updates identified in this testimony.
1 D.89-01-040, 30 CPUC 2d 576, 598, 604, 609. D.93-07-030, 50 CPUC 2D 354, 359, 366.
2 2012 GRC-CPUC Scoping Memo and Ruling of Assigned Commissioner, dated March 1, 2011.
3 2012 GRC – CPUC ALJ’s Ruling on Various Matters Related to Update Testimony and Hearings, dated
September 29, 2011, granted SCE permission to provide supplemental update testimony on the impact on
revenue requirement of the Tax Relief Act, pp. 5-6.
4 SCE has committed to updating its solar photovoltaic capital expenditure forecast when the Commission issues
a decision for SCE’s petition to modify D.10-04-028, Ordering Paragraph 4c.
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Table I-1
Southern California Edison Company
Change In 2012-2014 GRC Revenue Requirement
(Thousands of Dollars)
Description
CPUC
2012 2013 2014
1 Rebuttal Revenue Requirement 6,213,879 6,720,810 7,320,927
2 Update for Joint Comparison (117) (77) (274)
3 Joint Comparison Revenue Requirement 6,213,762 6,720,733 7,320,653
4 Update Changes
5 Property Tax Rates 2,551 2,733 2,929
6 O&M Escalation Rates 23,631 25,591 21,479
7 Payroll Tax Wage Limit (1,609) (297) (305)
8 Fuel Cell capital change (3,119) (1,513) (1,470)
9 Net Reduction in vehicle fees (252) (264) (280)
10 Add Refueling Outage 40,957 357 445
11 Capital Escalation 18,356 35,381 56,205
12 Total Revenue Requirement Changes 80,516 61,988 79,004
13 Update Revenue Requirement 6,294,278 6,782,720 7,399,657
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This exhibit is organized as follows: Chapter II sets forth SCE’s requested 2012 GRC
revenue requirement as well as the Post-Test year revenue requirements for 2013 and 2014.
Chapter Chapter III updates the record to reflect the City of Oxnard’s approval of a settlement
with SCE regarding the McGrath Peaker plant. Chapter IV describes the change in the Fuel Cell
O&M and capital expenditure forecasts resulting from SCE’s decision of not going forward with
fuel cell installation at California State University Long Beach. Chapter V describes the net
decrease resulting from changes in DMV licensing fees and registration. Chapter VI provides
SCE’s rebuttal testimony to the DRA’s update testimony on tax expenses. Chapter VII describes
updates to payroll taxes due to the impact of the change in the 2012 Federal Old-Age Survivors
Disability Insurance (OASDI) wage limitation. Chapter VIII describes the changes to reflect
actual property tax rates for 2010-2011 as reflected in the tax bills received by the counties.
Chapter IX provides SCE’s update testimony regarding the calculation of escalation rates used to
project O&M (including A&G) and capital expenses for the years 2010 through 2014.
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II.
RESULTS OF OPERATION
This chapter presents our revised 2012 Test Year Results of Operations (RO) based on
the updated information presented in Chapters III through VIII. We request that the Commission
adopt a 2012 revenue requirement of $6.294 billion. Table II-2presents our revised Results of
Operations for Test Year 2012 and Post-Test Years 2013 and 2014.
This requested revenue requirement includes two SONGS Refueling and Maintenance
outages as currently forecast for calendar year 2012. The first RFO is scheduled to begin
January 2012 and the second is scheduled to begin October 2012. SCE has added an additional
refueling and maintenance outage to its 2012 GRC revenue requirement pursuant to the “Flexible
Refueling and Maintenance Outage” section of its Base Revenue Requirement Balancing
Account (BRRBA) preliminary statement.
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Table II-2
Revised Results Of Operations AT Proposed Rated
Commission Jurisdictional
(Thousands of Dollars)
Line
GRC-CPUC
No. Item 2012 2013 2014
1. TOTAL OPERATING REVENUES 6,294,278 6,782,720 7,399,657
2. OPERATING EXPENSES:
3. Production
4. Steam 63,284 62,840 62,840
5. Nuclear 431,737 395,753 395,753
6. Hydro 57,610 57,610 57,610
7. Other 135,572 135,572 135,572
8. Subtotal Production 688,203 651,775 651,775
9. Transmission 94,501 94,501 94,501
10. Distribution 497,422 486,332 486,332
11. Customer Accounts 213,822 193,452 193,452
12. Uncollectibles 14,414 15,532 16,945
13. Customer Service & Information 50,069 53,356 53,356
14. Administrative & General 967,215 971,159 982,477
15. Franchise Requirements 57,039 61,465 67,056
16. Revenue Credits (151,304) (157,067) (159,248)
17. Subtotal 2,431,382 2,370,505 2,386,646
18. Escalation 201,950 273,509 339,237
19. Depreciation 1,433,862 1,687,747 1,957,273
20. Taxes Other Than On Income - Property 175,884 191,382 210,028
21. Taxes Other Than On Income - Payroll 90,272 91,925 94,646
22. Taxes Based On Income 541,308 569,351 668,306
23. Total Taxes 807,465 852,658 972,980
24. TOTAL OPERATING EXPENSES 4,874,659 5,184,419 5,656,135
25. NET OPERATING REVENUE 1,419,619 1,598,301 1,743,522
26. RATE BASE 16,224,212 18,266,299 19,925,959
27. RATE OF RETURN 8.75% 8.75% 8.75%
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The revenue change attributable to this proceeding is $824 million as identified in
Table II-3. This revenue change takes into account an Authorized Base Revenue Requirement
(ABRR) increase of $895 million, offset by forecast CPUC-jurisdiction base-related revenue
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growth of $72 million. 5 Table II-3 also identifies the requested ABRR and CPUC-jurisdictional
base-related revenue changes estimated for the Post-Test Years 2013 and 2014.
Table II-3
2012, 2013 And 2014 Revenue Changes Resulting From
The 2012 Test Year And 2013 And 2014 PTYR GRC Request
Commission Jurisdictional
(Thousands of Dollars)
2012 2013 2014 Cumulative
1. Proposed GRC Base Revenue Requirement 6,294,278 6,782,720 7,399,657
2. Estimated Present Revenue Requirement 5,398,840 6,294,278 6,782,720
3. Add: Edison SmartConnect Deployment PRR 0 251,303 0
4. Subtotal Estimated Present Revenue Requirement 5,398,840 6,545,581 6,782,720
5. GRC ABRR Change 895,437 237,140 616,937
6. Less: GRC Revenue Growth GWhs
7. 2011 GRC PRR 84,729 5,113,095
8. 2012 GRC PRR 85,920 5,184,968
9. 2012 GRC PRR 85,920 5,184,968
10. 2013 GRC PRR 87,593 5,285,928
11. 2013 GRC PRR 87,593 5,285,928
12. 2014 GRC PRR 89,006 5,371,197
13. GRC Revenue Growth 71,873 100,960 85,270
14. GRC Revenue Change 823,565 136,180 531,667
15. Percent Revenue Change 15.25% 2.08% 7.84% 25.17%
16. Total System PRR 11,464,632 11,666,018 11,839,008
17. Percent Revenue Change 7.18% 1.17% 4.49% 12.84%
5 SCE’s estimated revenue requirement has been revised to include two SONGS 2&3 Refueling and Maintenance
outages in 2012
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ATTACHMENT A
To Chapter II
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III.
McGRATH CONSTRUCTION IS NOW UNDERWAY
The Rate Case Plan (D.89-01-040) provides for the submission of update testimony
addressing known changes due to governmental action. On October 24, 2011, the City of Oxnard
(City), acting pursuant to authorization from the Oxnard City Council, effected a “government
action” by entering into a Settlement Agreement with SCE, which fully and finally resolves all
remaining disputes between the parties regarding the McGrath Peaker Plant (McGrath). The
Mayor of Oxnard signed the Settlement Agreement on behalf of the City, and it is attached
hereto as Appendix A.
SCE justified the $20 million in forecast expenditures and approximately $1.1 million in
forecast O&M expenses related to McGrath in Exhibits SCE-02, Vol. 9, and SCE-17, Vol. 9.
DRA and TURN opposed including these McGrath-related costs in this proceeding, because in
their view the City’s refusal to grant the project’s ministerial construction permits made
construction and operation of McGrath in this rate case cycle uncertain. Specifically, DRA
argued that “[w]hile SCE claims that it is negotiating with the City and believes construction
permits will be granted prior to [January 2012], this seems improbable given the City’s
longstanding resistance to the McGrath Peaker being sited in the City.” 6 TURN argued that
“SCE has not shown the permit process is moving forward on a reliable timeline,” and therefore
McGrath-related costs should be excluded from this proceeding. 7
The City’s previous denial of these ministerial permits was the only remaining obstacle
preventing McGrath’s immediate construction, as SCE already has all of the discretionary
approvals from this Commission and the California courts to proceed. 8 The City’s execution of
the Settlement Agreement is a “known change” that fully and finally resolves this one remaining
issue, as the Settlement Agreement provides for the issuance of the remaining ministerial permits
necessary for SCE to begin immediate construction. SCE expects to begin construction
6 DRA Opening Brief at p. 34.
7 TURN Opening Brief at p. 21 (citing the Commission decision from SCE’s 2009 GRC).
8 Both DRA and TURN appear to agree with this. See TURN Reply Brief at p. 13 (“The utility’s inability to
satisfy the City of Oxnard’s requirements for a construction permit is a separate matter, and it is that inability
that is the barrier to initiating construction.”); DRA Opening Brief at p. 34 (“Given the uncertainty over the
final resolution of the City’s challenge, it would be imprudent to include McGrath-related costs in Test Year
forecasts.”)
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immediately and estimates that McGrath will be on-line in the Summer of 2012, which is
consistent with the forecast included in our rebuttal testimony. Further, no party has otherwise
challenged the reasonableness of McGrath’s forecast costs. 9 Accordingly, SCE’s McGrathrelated
capital expenditure and O&M expense forecasts should be approved in total.
9 TURN has challenged SCE’s forecasted dispatch-related O&M costs, some small fraction of which are related
to McGrath.
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APPENDIX A
To Chapter III
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IV.
FUEL CELL CAPITAL AND O&M FORECAST
This chapter presents SCE’s update to its Fuel Cell capital expenditure and expense
forecasts. In Chapter III of Exhibit SCE-02, Volume 10, SCE provided its forecast for operation
and maintenance (O&M) expenses and capital expenditures for three fuel cell installations that
SCE would own, operate, and maintain at the University of California Santa Barbara (UC Santa
Barbara), California State University San Bernardino (CSU San Bernardino), and California
State University Long Beach (CSU Long Beach). 10 SCE’s capital forecast was as follows: $6.3
million (2010), $12.8 million (2011), and $0 million (2012). SCE’s 2012 O&M forecast was
$105,000 in labor expenses and $785,000 in non-labor expenses. 11
Subsequent to SCE submitting its direct testimony, SCE determined that it would not be
going forward with the fuel cell installation at CSU Long Beach. In SCE’s Reply Brief and in
data request responses to TURN, SCE indicated that appropriate rate base adjustments for the
Fuel Cell program would be made during the update hearing phase of the GRC. Therefore, in this
update testimony; SCE has included the forecast of fuel cell capital expenditures for only the UC
Santa Barbara and CSU San Bernardino installations in its revenue requirement. Since SCE will
not be going forward with the fuel cell installation at CSU Long Beach, SCE’s revised capital
forecast is as follows: $208,119 (2010), $6.6 million (2011), and $3.8 million (2012). Further,
SCE’s revised 2012 test year O&M forecast is $90,000 for labor and $393,333 for nonlabor. The
$90,000 forecasted for 2012 O&M labor expenses and the $393,333 forecasted for 2012 O&M
nonlabor expenses represents an average of forecasted O&M expenses over
2012–2014. 12
10 Pursuant to page B26 of the Commission’s rate case plan (D. 89-01-040), other than electric rate design
changes, update testimony is limited to changes in the cost of labor based on contract negotiations, changes in
non-labor escalation factors, and known changes due to governmental actions. While the fuel cell update
testimony does not fit within the boundaries of page B26 of Decision No. 89-01-040, we assume that the other
parties will not object to this testimony, which would result in a decrease in SCE’s 2012 O&M and capital
forecasts.
11 All O&M expenses are in constant 2009 dollars.
12 Fuel Cell Program O&M labor forecast of $90,000 is the average of $50,000 in 2012, $110,000 in 2013, and
$110,000 in 2014, forecasted labor. Fuel Cell Program O&M non-labor forecast of $393,333 is the average of
$200,000 in 2012, $490,000 in 2013, and $490,000 in 2014, forecasted non-labor.
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V.
VEHICLE LICENSE AND REGISTRATION FEES
This chapter presents SCE’s update testimony on Vehicle License and Registration Fees.
SCE initially sought a test year increase of $1.2 million for vehicle licensing and registration fees
in test year 2012. The incremental increase is primarily driven by the change in SCE’s fleet mix
to heavier, newer, and more costly vehicles. Operations Support applied vehicle licensing and
registration fees that took effect as of May 2009. 13 SCE’s forecast was supported by information
provided in SCE’s Vehicle Replacement 14 and Vehicle Addition 15 plans.
A. Background
SCE originally identified a 77 percent increase in vehicle license fees 16 as one reason for
estimating an increase in vehicle licensing and other fees in 2012. SCE cited a California
Department of Motor Vehicle (DMV) memorandum 17 that explained the vehicle license fees
changed from 0.65 percent and went up to 1.15 percent for on-road vehicles with a Gross
Vehicle Weight Rating under 10,000 pounds.
Subsequently, as of July 1, 2011, the California Legislature allowed this decreased rate
for calculating the vehicle license fees to expire, and the DMV adopted an increase to annual
vehicle registration fees. 18 SCE pointed out in data request responses that there was additional
legislation pending to restore the higher license fees as of January 1, 2012. 19
TURN filed a motion that sought to establish in advance what the vehicle license and
registration fee factors should be. SCE suggested that TURN’s motion incorrectly asked the
Commission to decide in advance “what the state of the law will be when the update testimony is
13 Exhibit SCE-09, Vol. 2, p. 158.
14 Exhibit SCE-09, Vol. 2, p. 154, Table IX-9.
15 Exhibit SCE-09, Vol. 2, p. 156, Table IX-10.
16 Exhibit SCE-09, Vol. 2, p. 150, lines 10-15.
17 DMV Vehicle Industry News memorandum #VIN 2009-05, available at www.dmv.ca.gov [as of October 24,
2011], under Publications.
18 See Attachment to TURN’s Motion to Clarify Scope of Update Testimony (TURN’s Update Testimony
Motion), filed August 30, 2011. Please also refer to http://dmv.ca.gov/vr/fees/basic_reg_fees.htm.
19 See Administrative Law Judge’s Ruling on Various Matters Related to Update Testimony and Hearings
(Ruling), issued September 29, 2011, at p. 2.
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filed on October 24.” 20 SCE made it clear that, should the law in effect at the time of the update
testimony dictate a change in the vehicle fee calculations, SCE would provide a recalculation
when the update testimony is due. 21
In ruling upon TURN’s Update Testimony Motion, ALJ Darling stated that:
I agree that changes to vehicle license and registration fees are examples of the type
of changes due to governmental action which are contemplated for inclusion in the
update testimony pursuant to the Rate Case Plan. As a result of the foregoing, SCE
should determine after October 9, 2011 what vehicle license and registration fees will
be applicable for TY 2012 and include a revised forecast in its update testimony if
different fees were used in the direct testimony. 22
Accordingly, SCE sets forth below revised figures for the vehicle license and registration
fees. SCE’s updated testimony below takes into account the lower vehicle license fees that took
effect on July 1, 2011, and also accounts for the increased vehicle registration fees that took
effect on that same date.
B. Proposed Revision To O&M Direct Testimony For Test Year 2012
Reduction Due To Lower Vehicle License Fee
$70,502,750 Estimated Value 23 of On-Road Vehicles, Less Than 10,000 Pounds
$ 810,782 1.15 Percent, VLF
$ 458,268 0.65 Percent, VLF
$ 352,514 Adjustment (minus) to VLF portion of DMV fees
Increase Due To Higher Registration Fee
4,500 Number of On-Road Vehicles 24
$ x 12 Increase in Annual Registration Fee
$ 54,000 Adjustment (increase) to Annual Registration portion of DMV fees
Net Change To O&M Direct Testimony
$ -352,514 Adjustment (minus) to VLF portion of DMV fees
20 SCE’s Response to TURN’s Update Testimony Motion, p. 2. See also Ruling at p. 3.
21 SCE’s Response to TURN Update Testimony Motion, p. 2.
22 Ruling, p. 3.
23 Lease Balance of SCE’s On-Road Vehicles, less than 10,000 pounds Gross Vehicle Weight Rating. See
Attachment A below.
24 Exhibit SCE-09, Vol. 2, p. 158, line 26.
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$ +54,000 Adjustment (increase) to Annual Registration portion of DMV fees
$ -298,514 Net Adjustment to DMV Fees in Direct Testimony for TY 2012
Attachment A below sets forth the forecast purchase cost of additions and replacements,
with estimated depreciation for VLF calculation, for Test Year 2012. SCE used the vehicle fleet
replacement and fleet addition plans from the prepared testimony. 25 The calculations produce an
estimated VLF delta in comparison to SCE’s original O&M Test Year forecast.
25 See Exhibit SCE-09, Vol. 2, pp. 152-158.
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ATTACHMENT A
To Chapter V
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VI.
INCOME TAX EXPENSES
This chapter provides SCE’s rebuttal testimony to DRA’s update testimony on tax
expenses, which was served on September 2, 2011. Separately, SCE is providing rebuttal from
James I. Warren, a tax partner with the firm of Winston & Strawn LLP, who offers his expert
opinions on DRA’s update testimony.
A. Background
On November 23, 2010, SCE filed its application for this proceeding. The application
reflected the applicable federal income tax laws effective as of that date. On April 29, 2011, SCE
submitted update testimony (Exhibit SCE-15) to reflect, inter alia, the implications of additional
bonus depreciation provided by the Tax Relief Act (“Act”) that was enacted after SCE had filed
its November 23, 2010 application. Using previously submitted data, SCE calculated a net
revenue requirement reduction of $280 million for 2012 – 2014 as a result of applying the bonus
depreciation provision included in the Act. 26 DRA served its testimony in this proceeding on
May 11, 2011, followed by intervenor testimony on June 1 and rebuttal testimony on July 5. No
party’s prepared testimony raised any issues about the updates SCE made to reflect the Act.
Evidentiary hearings were held on July 25–26 and from August 8–26 with only one brief series
of questions regarding the tax expense and deferred tax calculations SCE submitted to reflect the
Act.
One week after the close of evidentiary hearings, DRA served its “Update Testimony Tax
Expenses” (Update), which provided its position relative to the impact of the Act and raised
some issues regarding the updated tax expense estimates SCE provided in its April 29, 2011
testimony. DRA summarized its two recommendations as follows:
DRA recommends the deferred tax be recognized and flowed through as a rate base
adjustment in the year in which the book depreciation is recognized and the tax
deduction associated with the depreciation is available.
DRA recommends that any deductions lost by adhering to SCE’s methodology
resulting in a net operating loss (NOL) be applied in the year available. 27
26 Exhibit SCE-15, p. 1, Table I-1, line 3.
27 DRA Update Testimony, p. 1, line 18 to p. 2, line 3.
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DRA’s first recommendation would require SCE to give ratepayers the benefit of bonus
depreciation (via lower ratebase) before SCE is able to realize the tax savings associated with
claiming the bonus depreciation. As discussed below, DRA’s proposal:
Is premised on unspecified and undefined allegations of “phantom NOL” 28 forecasts,
Expressly contravenes long-standing Commission policies,
Is inconsistent with the Internal Revenue Code (IRC) and Internal Revenue Service
(IRS) regulations on tax normalization that subjects SCE to the risks of extreme
adverse tax and ratemaking implications associated with violating the normalization
requirements, and
Does not reflect economic reality.
DRA’s second recommendation would “flow through” in regulated rates a tax benefit that
SCE will never realize. Specifically, DRA recommends the continued flow-through of the
Section 199 manufacturer’s deduction even though the Internal Revenue Code would deny this
deduction.
B. Providing Benefit Of Bonus Depreciation To Ratepayers Before SCE Recognizes
The Tax Savings
In its April update testimony, SCE incorporated into its ratemaking model the additional
tax depreciation deduction provided by the Act. SCE’s April update testimony included an
explanation of the bonus depreciation provisions. What the Act essentially did was permit SCE
to fully deduct a significant portion of its capital additions placed in service between September
9, 2010 and December 31, 2011. The Act also permitted SCE to deduct 50 percent of capital
additions completed in 2012 and 50 percent of certain long production period capital additions
completed in 2013. As a direct result of the bonus depreciation provisions of the Act, SCE (on a
stand-alone basis and as determined in the Results of Operations model) will generate a taxable
loss or NOL in 2011 and 2012.
As agreed during pre-hearing conference, SCE updated its 2012 GRC revenue
requirement to reflect the Act. SCE’s revised revenue requirement simply adjusts the 2012 GRC
revenue requirements, previously provided to the Commission, by taking into account the effect
28 Id. p. 3, line 15.
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of the Act’s bonus depreciation provisions. 29 In short, SCE adjusted its Results of Operations
(R/O) model by the additional depreciation deductions provided for by the Act. Incorporation of
the Act in the 2012 GRC R/O model resulted in a negative current income tax expense for 2011
and 2012 as noted in the following table (all amounts in millions) 30 :
Table VI-4
Federaltaxableincome
2010 2011 2012 2013 2014
perNov2010application 137
1,143
1,335
1,554
1,875
perApril2011update 84 (301) (424)
1,308
2,170
CurrentFedera lIncomeTaxExpense
perNov2010application 48
400
467
544
656
perApril2011update 29 (105) (148)
458
760
5
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9
10
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13
For 2012, the taxable loss (or NOL) results in a negative current tax expense of $148
million ($424M x 35%). However, the $148 million of negative current tax expense related to
bonus depreciation will not reduce federal tax payments in 2012. The $148 million will reduce
SCE’s tax payments in a future year when SCE generates taxable income against which the NOL
can be offset. Because SCE will not receive cash (i.e., the $148 million was not “monetized”) in
the form of reduced federal income tax for $148 million in 2012, it would not be appropriate to
treat the $148 million as if such a savings were to be realized in 2012. Consequently, SCE will
not include the $148 million of deferred taxes in rate base until SCE receives the associated cash
savings in 2013.
29 We note that DRA has not questioned the calculation of additional depreciation expense.
30 November 2010 application amounts per Exhibit SCE-10, Vol 2, Ch. III, workpaper p. 3, lines 10 & 12; April
2011 update amounts per corresponding lines in R/O model submitted to DRA as part of Exhibit SCE-15. Table
shows the “negative” tax expense for 2011 and 2012 solely for illustrative purposes of reconciling to the GRC
R/O model results. From a cash perspective, the negative portion of the current income tax expense cannot be
immediately monetized and must be carried back or forward to another tax year.
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1. SCE’s Calculation Of The 2012 GRC Revenue Requirement Impact Related
To The Act Is Consistent With Commission Precedents And Practices And
Not Based On A “Phantom NOL” Forecast.
The tax calculation and R/O model used throughout this proceeding, including the
April 29, 2011 update, is internally consistent (from application to the April update) and
consistent with Commission practices. SCE’s R/O Model was used to compute the revenue
requirement reduction of $280 million associated with the Act. DRA apparently now takes issue
with what it terms either a “modeling effort” or “forecast” 31 with both terms left undefined and
used interchangeably.
To be clear, SCE has used the same R/O Model throughout this proceeding,
including the April 29 update testimony. DRA apparently objects to the R/O Model, but it offers
no support for this objection other than, “This forecast results in an inequitable treatment to
ratepayers by delaying the benefits based on an uncertain premise.” 32
Contrary to DRA comments, there is no delay in the benefits realized in the test
year due to the Act as computed under the R/O model. DRA’s claim of a “modeling effort”
obfuscates the underlying issue. As DRA points out, the very nature of test year forecasting is
“predictive,” not certain. Nonetheless, such forecasting is a required step in the ratemaking
process when a future test year is used. The predictive results are based on the R/O model used
and relied on throughout this proceeding and therefore should continue to be relied on in
determining the revenue requirement impact of the additional bonus depreciation deduction.
It is, in fact, SCE who would be subject to an inequity if DRA’s proposal was to
be adopted. Inclusion of the $148 million deferred tax liability in rate base effectively establishes
a revenue requirement that assumes SCE is able to immediately monetize the entire bonus
depreciation amount. The purpose of including accumulated deferred taxes in the rate base
calculation is to reflect the cash financing that such accelerated tax deductions provide to utility
operations. In other words, it reflects the financing from the government and the fact that
ratepayers should only pay a return for the portion of rate base that is not financed by the
government. In this case, $148 million of bonus depreciation related deferred taxes did not
31 DRA Update Testimony, p. 3, line 15.
32 Id., p. 2, lines 27 – 28.
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provide financing in 2012 but rather, in 2013. Accordingly, it would be inequitable and
inappropriate to include unutilized bonus depreciation in SCE’s rate base calculation in 2012.
In Decision 88-12-033 the Commission held that:
Deferred taxes are booked for ratemaking purposes only when two conditions are
met:
1. There is a tax savings associated with the use of accelerated versus straightline
depreciation, and
2. The taxes have been collected from ratepayers. 33
There cannot be a tax savings unless and until the 2012 NOL is applied to reduce
SCE’s taxable income. Only at that time should the $148 million in deferred taxes be included in
rate base.
2. SCE’s Revenue Requirement Update Of April 29, 2011 Strictly Follows The
Commission’s Seminal Decision On The Treatment Of Tax Expense – OII 24
(D. 84-05-036, 15 CPUC 2d 42)
a) DRA’s Reliance On OII 24 To Exclude The Effect Of NOL’s In The
Ratemaking Process Is Misplaced.
DRA contends that SCE’s proposal is inconsistent with the guidance of Decision
(D.) 84-05-036, which “excludes the effects of NOL carry backs and carry forwards.” 34 DRA’s
statement misrepresents the scope and intent of OII 24.
The specific issue under consideration in OII 24 was the “[e]ffect of net operating
loss carry backs and carry forwards and investment tax credit carry backs and carry forwards on
income taxes actually paid.” 35 The Commission noted that its practice has been that, “Neither
carry backs nor carry forwards have been considered in calculating the appropriate test-year tax
expense.” (Emphasis added). 36 The Commission concluded that, “the practice of excluding carry
33 D. 88-12-033, (mimeo) p. 25.
34 DRA Update Testimony, p. 3, line 5.
35 D.84-05-036, (mimeo) p. 5, Issue No. 9.
36 D.84-05-036, (mimeo) p. 51, Finding of Fact No. 26.
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backs and carry forwards from the test-year calculation of income taxes is well-founded and
should continue.” 37
Consistent with the Commission’s holding in OII 24, SCE did not include the
impact of any carry back or carry forward NOLs in computing tax expense in its cost of service
calculation. What SCE did, however, was to exclude from the rate base calculation the nonmonetized
portion of deferred taxes until it has been monetized. As discussed above, such
exclusion is required under D.88-12-033. OII 24 does not address the treatment of deferred taxes
related to NOL’s in the rate base calculation. The linchpin of the carry back and carry forward
NOL issue in OII 24 was ensuring that a tax loss is included only once in the cost-of-service
calculation. The point of treating deferred taxes as a rate base offset is to give effect to the
financing (tax savings) associated with a particular expense in this case bonus depreciation.
SCE is in compliance with OII 24 in that carry back or carry forward NOLs are excluded in the
cost-of-service calculation.
Finally, DRA’s proposed “fix” to remove the NOL adjustment from rate base was
done incorrectly. 38 Instead of simply removing the NOL adjustment from the rate base
computation, DRA moved the entire Accumulated Deferred Income Tax adjustment from rate
base that was computed by SCE based on a 13 month pro-rated weighted average in accordance
with IRS Treasury Regulation 1.167(l)-(1)(h)(6)(ii) and long standing Commission practice, and
replaced it with an Accumulated Deferred Income Tax adjustment that was computed based on a
simple average which is inconsistent with IRS guidance and would result in the violation of the
IRC normalization rules.
b) SCE’s April 29 Update Filing Adheres To The Separate Company
Methodology Established By OII 24.
As previously explained, SCE prepared its forecasts with the same R/O model
used throughout this proceeding and in accordance with long standing CPUC practices and
guidelines (e.g. OII 24 and prior GRC’s). The Commission has consistently held that the
“separate return method is the more reasonable basis for calculating test-year income tax
expense.” 39 Notwithstanding the Commission’s clear direction regarding the separate return
37 D.84-05-036, (mimeo) p. 36.
38 Footnote to Issue DRA 296 (page 691) of the Joint Comparison Schedule.
39 D.84-05-036, (mimeo) p. 53, Conclusion of Law No. 3.
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method, DRA argues that EIX’s overall operations should be factored into SCE’s R/O forecast. 40
Despite the Commission’s directive that ratemaking be based solely on SCE’s activities (i.e.,
separate return method), DRA criticizes SCE for not “presenting evidence that an NOL will be
generated at the corporate level for EIX.” 41
DRA also suggests that SCE has not provided any evidence that the NOL is the
result of bonus depreciation instead of the operations of EIX. 42 Here DRA again disregards the
propriety of the separate return method and also ignores the R/O model illustrating that SCE’s
2010 NOL is, in fact, the result of bonus depreciation. DRA’s misapplication of the
Commission’s separate return tax methodology and unspecified criticisms of SCE’s forecast do
not support its proposals to reduce rate base by non-monetized bonus depreciation deferred taxes.
Refer to supplemental testimony sponsored by James I. Warren for a further
discussion of the application of OII 24 in this case.
3. DRA Proposal’s To Immediately Give Ratepayers The Benefit Of The Nonmonetized
Portion Of Bonus Depreciation Violates The IRC Normalization
Rules Resulting In A Significant Revenue Requirement Detriment To
Ratepayers
Ironically, the implementation of DRA’s proposal would have the direct effect of
eliminating the entire $280 million revenue requirement decrease resulting from bonus
depreciation as it would create a “normalization violation” under Regulations 1.167(l)-1(h). A
normalization violation would preclude the use of accelerated tax depreciation 43 until SCE is
once again permitted to use normalized accounting for accelerated tax deprecation for purposes
of establishing its revenue requirement. This will occur only after SCE has cured the cause for
the normalization violation.
In its update testimony, SCE discussed the tax risk associated with violating the
normalization requirements if SCE did not reduce its accumulated deferred Federal income tax
liability by the non-monetized portion of tax associated with the net operating loss. DRA does
not address the applicability of the normalization rules except to repeat SCE’s caution regarding
40 DRA Update Testimony, p. 4, lines 3 to 11.
41 Id. p. 4, line 18.
42 Id. p. 4, line 21.
43 IRC Section 168(f).
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the normalization rules, concluding: that it: “understands the intent of SCE’s approach and the
related Internal Revenue Service (IRS) guidelines.” 44 DRA does not specifically address the
statutory, regulatory and administrative authorities cited by SCE. Nor does DRA explain how the
rules it “understands” apply to the facts in the case and that utilities are subject to tax
normalization rules. Mr. Warren addresses the normalization rules and their application to SCE’s
case in his testimony.
4. DRA’s Proposal Does Not Reflect Economic Reality
DRA’s proposal to reduce rate base by the full amount of deferred taxes related to
bonus depreciation does not reflect true economics. The Act permits taxpayers to depreciate,
over a single year, most of their capital additions which results in a taxable loss. To the extent
bonus depreciation deductions were able to reduce taxable income to zero, the related deferred
taxes were monetized. However, to the extent bonus depreciation causes a NOL, there would not
be any tax savings unless and until the resulting NOL is applied to reduce taxable income. In this
case, the deferred tax liability will reflect the entire effect of bonus (i.e. the portion of bonus
which reduces taxable income to zero, the monetized portion, and the portion of bonus
depreciation embedded in an NOL carry forward, the non-monetized portion). The purpose of
including deferred taxes in rate base is to recognize the effect of non-shareholder interest-free
loans supporting utility operations. To the extent a tax deduction results in an NOL, however,
that deduction does not provide funds to support utility operations until and unless such NOL is
used to reduce taxable income (i.e. monetized). This is precisely why the Commission, along
with other state regulatory bodies, ruled that deferred taxes are included in rate base when and
only when there is a tax savings associated with accelerated depreciation. DRA’s proposal
ignores the economic reality that there will be no funds provided by the bonus depreciation
embedded in the NOL unless and until such NOL is used to reduce taxable income. In contrast,
SCE’s proposal reflects the actual economic situation by reducing rate base only when bonus
depreciation provides funds from the government for utility operations.
44 DRA Update Testimony, p. 6, lines 22 – 23.
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C. DRA’s Proposal To Flow Though IRC Section 199 Manufacturer’s Deduction
Despite Tax Code Prohibition Against Such Deduction Is A Fundamentally Flawed
Ratemaking Approach
In its Update Testimony, DRA recognizes that applicable federal tax law and IRS
guidelines “would prohibit the recognition of [the IRC Sec. 199 Manufacturer’s Deduction] if no
taxable income (i.e., NOL) exists for 2012.” 45 As noted above, SCE projects that it will incur an
NOL for tax purposes in 2012. The loss does not result from an NOL carry forward or carry
back, but instead is the result of SCE’s 2012 activities. Such projected loss would prevent SCE
from taking a 2012 IRC Sec. 199 Manufacturer’s deduction in 2012 or any other taxable year.
Nonetheless, DRA claims that, “despite the manner in which income taxes are estimated,
the rationale guiding the estimation, or any IRS guidelines, ratepayers should receive the benefit
[of the Section 199 deduction].” 46 DRA’s arguments for this position are:
1. There is no NOL for ratemaking taxes and this deduction should be recognized and
2. SCE was able to take this deduction over the past few years although it was not
recognized in the last GRC. 47
As discussed below, each of these arguments reflects a misapplication of authority and a
misunderstanding of the relevant facts and a fundamentally flawed ratemaking approach.
1. There Is No NOL For Ratemaking Taxes
DRA’s statement that there is no NOL for ratemaking taxes ignores the
long-standing ratemaking principle that a utility’s taxes should be considered on a separate return
method, and disregards SCE’s testimony regarding its projected operations. As illustrated in the
table above, the company in fact does project a tax loss for the year 2012. DRA appears to
suggest that despite SCE’s projected loss, the CPUC should consider the possibility that SCE’s
affiliates will be sufficiently profitable to create an overall positive federal taxable income for the
consolidated group.
The issue of determining a utility’s separate company tax liability for ratemaking
purposes when such utility files a consolidated federal income tax return has been considered in
many contexts by the CPUC. The Commission’s long-standing policy in this area is that, “[t]he
45 Id. p. 7, line 13.
46 Id., p. 7, lines 14 – 16.
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separate return method is the more reasonable basis for calculating test-year income tax
expense.” 48 DRA’s apparent suggestion that the CPUC considers the consolidated group’s
federal taxable income contradicts longstanding Commission policy.
Additionally, DRA’s argument regarding the EIX consolidated group’s ability to
claim an IRC Sec. 199 deduction is moot since the group is also expected to be in a net operating
loss position for 2011 and 2012. 49
2. SCE Was Able To Take This Deduction Over The Past Few Years Although
It Was Not Recognized In The Last GRC
DRA’s recitation of historical facts is inaccurate.
In the 2009 GRC, ratepayers were given the benefit for what SCE forecasted
would be its deduction under IRC Sec. 199. This deduction was included in the computation of
income tax expense for the purpose of determining SCE’s cost of service. See Attachment A for
excerpts from SCE’s 2009 GRC Application (D.07-11-011).
The irony of DRA’s current complaint regarding IRC Sec. 199 is that while
ratepayers were given the benefit for this deduction in the 2009 GRC, the company was (and will
not) be able to claim this deduction for 2009 – 2011. Consequently, the only inequity associated
with the flow-through of the IRC 199 deduction was suffered by SCE, not by ratepayers.
SCE is projected to recognize a tax loss for the year 2012 on its utility operations
included in this GRC. Because SCE will be prohibited from claiming an IRC Sec. 199 deduction
in 2012, DRA’s proposal that such deduction nonetheless be recognized and flowed through to
ratepayers should be rejected.
Continued from the previous page
47 Id., p. 7 lines 16 – 18.
48 D.84-05-036, (mimeo) p. 53, Conclusion of Law No. 3.
49 SCE, Wong, Tr. 22/3694, lines 25-28.
24

ATTACHMENT A
To Chapter VI
25

ATTACHMENT B
To Chapter VI
26

DRA
Division of Ratepayer Advocates
California Public Utilities Commission
State of California
DRA DATA REQUEST RESPONSE
Southern California Edison Company Test Year 2012 GRC
A.10-11-015
Origination Date: October 5, 2011
Due Date: October 19, 2011
Response Date: October 19, 2011
To:
From:
Russ Worden
Russell.Worden@sce.com
(626) 302-4177
Clayton Tang, Project Coordinator
Donna-Fay Bower, Assistant Project Coordinator
Division of Ratepayer Advocates
505 Van Ness Avenue, Room 4205
San Francisco, CA 94102
Response by: Mark Waterworth
Phone: (916) 928-2275
Email:
lmw@cpuc.ca.gov
Data Request No: SCE-DRA-LMW-050
Exhibit Reference:
Subject:
Updated Tax Expenses Testimony
The following is DRA’s response to SCE’s data request. If you have any
questions, please contact the responder at the phone number and/or email
address shown above.
Q.1:
A.1:
Do you agree that all of the items of income and expense for test year 2012 are
forecasts
Yes.
Ratepayer Advocates in the Gas, Electric, Telecommunications and Water Industries

Q.2:
A.2:
Do you agree that all forecasts are uncertain
It depends. In the majority of instances, this is the case. However in some
instances, involving Commission proceedings, a party may have access to
recorded data for a time frame in which a forecast is being prepared which may
result in a forecast being more certain.
Q.3:
A.3:
Q.4:
A.4:
Please provide supporting documentation for your conclusion that "disregarding
the NOL would have no negative effect on shareholders" (page 3, lines 2, 28 –
29).
The actual tax expense or related benefit affecting shareholders is calculated at a
corporate level, and is not analogous to ratemaking taxes. At the rate case level
to which the conclusion applies, the rate of return utilized in DRA’s R/O Model
incorporates the Commission authorized rate of return and makes no changes to
this currently authorized rate. The authorized TY 2012 GRC will be calculated to
provide SCE the opportunity to earn its authorized rate of return.
Is DRA aware of any relevant IRS authority which requires the immediate flow
through of the full effect of bonus depreciation benefits (page 3, line 17), If so,
what is that authority
No.
Q.5:
A.5:
Explain in detail what is meant by the phrase "phantom forecast" (page 4, line
28- 29).
SCE derived a calculation of forecast taxes in the test year and beyond for a
stand-alone utility which does not pay taxes. Given that taxes are paid at the
corporate EIX (holding company) level, this calculation made by SCE is a
phantom forecast because the stand alone utility does not pay taxes.
Q.6a: Please explain or provide the “related Internal Revenue Service (IRS) guidelines
referred to on page 6, lines 22-23.
A.6a: The sentence was commentary and the IRS guidelines relate to those that SCE
identified in its quote included on that same page of the testimony.
Q.6b: Please explain how these guidelines should be applied in SCE’s general rate
case.
A.6b: See response to 6a above.
2 of 3

Q.7:
If SCE’s utility operation that is included in this general rate case produces a
NOL carryforward (page 4, line 6), please explain how the full benefit of bonus
depreciation deductions are available to shareholders in the year generated
(page 6, line 33-34).
A.7: SCE’s utility operation “in this GRC” does not produce a NOL carry-forward. All
R/O Model runs estimate federal income tax liability. The purported NOL carryforward
is produced through a separate tax calculation that SCE has imputed for
a stand alone utility. However, taxes are paid at the corporate/holding company
level. SCE has provided no evidence that a NOL carry forward will exist at the
corporate/EIX/holding company level or that it will be unable to utilize the entirety
of bonus depreciation deductions in the year generated. Further, SCE has the
ability to amend its tax return, and the actual corporate return can be vastly
different whereby a NOL does not occur. A NOL forecast based on a stand
alone utility does not change the fact that the bonus depreciation is available to
the corporation/holding company.
Q.8:
A.8:
Q.9:
A.9:
Please provide the deferred tax calculation that supports the statement "the rate
base impact is at least $250 million in 2012." (page 7, line 5)
This number was an initial estimate of the impact based upon a review of figures
in SCE’s R/O Model.
Please elaborate on why the ratepayers should receive the benefit of the Section
199 Manufacturer's deduction in 2012 when SCE will not be able to claim this
deduction. (Page 7, line 16).
SCE has no proof it will not be able to take the deduction; it is a forecast, which
may or may not be reality. Further, SCE has the ability to amend its return, and
the actual corporate return can be vastly different whereby a NOL does not
occur, thereby allowing SCE to take the deduction. Thus, without proof and
SCE's ability to amend returns, the TY 2012 forecast should reflect the benefit of
the deduction. On a ratemaking basis, this deduction is available and is able to
be claimed.
______________________________________________________________________
Please provide electronic responses if possible, and set of hard copy responses with
your submittal to the SCE Case Manager and the data request originator. All data
responses need to have each page numbered, referenced, and indexed so worksheets
can be followed. If any number is calculated, include a copy of all electronic files so the
formula and their sources can be reviewed.
If you have any questions regarding this DR, please call originator at above phone #.
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VII.
PAYROLL TAXES (OASDI/FICA WAGE LIMITATION)
This chapter provides SCE’s update testimony regarding the impact of the change in the
2012 Federal Old-Age Survivors Disability Insurance (OASDI) wage limitation.
SCE’s calculation of the employer’s portion of wages subject to OASDI tax reflected in
its Application filed on November 23, 2010 for the test year 2012 was based on the most recent
estimates available at the time. The estimates were extracted from the 2009 Annual Report of the
Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance
Trust Funds. The estimated wage limitation subject to OASDI tax for the 2012 test year used in
the Application was $114,900.
In Rebuttal Testimony dated July 5, 2011 and during the evidentiary hearings, SCE
agreed to update the 2012 test year OASDI limitation if the 2012 final wage limitation amount is
made available on or before October 24, 2011. Based on the Social Security Administration
News Release (Attachment A to this chapter) published on October 19, 2011, the OASDI wage
base limitation for 2012 is $110,100. SCE has incorporated this update in its R/O Model. The
impact of this change results in a decrease to payroll tax expense of $1.475 million, which is
shown in the following table (all figures in thousands):
Table VII-5
(nominal $000)
2012
Tax - OASDI (Per Application)
Tax - OASDI (Per Update Filing)
Difference - Increase/(Decrease)
112,592
110,225
(2,367)
Capitalization Rate 37.7%
Amount Capitalized
Amount Expensed - Increase/(Decrease) to Payroll Taxes - OASDI
892
(1,475)
27

ATTACHMENT A
To Chapter VII
28

Wednesday, October 19, 2011
Press Office
For Immediate Release 410-965-8904
press.office@ssa.gov
News Release
SOCIAL SECURITY
Social Security Announces 3.6 Percent Benefit Increase for 2012
Cost-of-Living Adjustment is First Since 2009
Monthly Social Security and Supplemental Security Income (SSI) benefits for more than 60 million Americans
will increase 3.6 percent in 2012, the Social Security Administration announced today.
The 3.6 percent cost-of-living adjustment (COLA) will begin with benefits that nearly 55 million Social Security
beneficiaries receive in January 2012. Increased payments to more than 8 million SSI beneficiaries will begin on
December 30, 2011.
Some other changes that take effect in January of each year are based on the increase in average wages. Based on
that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase
to $110,100 from $106,800. Of the estimated 161 million workers who will pay Social Security taxes in 2012,
about 10 million will pay higher taxes as a result of the increase in the taxable maximum.
Information about Medicare changes for 2012, when announced, will be available at www.Medicare.gov. For
some beneficiaries, their Social Security increase may be partially or completely offset by increases in Medicare
premiums.
The Social Security Act provides for how the COLA is calculated. To read more, please visit
www.socialsecurity.gov/cola.
NOTE TO CORRESPONDENTS: A fact sheet showing the effect of the various automatic adjustments is
attached.
# # #
SSA Press Office 440 Altmeyer Building 6401 Security Blvd. Baltimore, MD 21235 410-965-8904 FAX 410-966-9973

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VIII.
PROPERTY TAXES
This chapter provides SCE’s update testimony on property tax expenses. The property tax
expense data has been revised to reflect actual property tax rates for 2010-2011 as reflected in
the tax bills received from the counties in which SCE has property. The forecasted property tax
rates for 2010-2011 and subsequent years were based upon trended rates from the previous five
years. A comparison of the current property tax rates versus previous rates is shown in Table
VIII-7. The methodology for deriving property tax expense is as described in SCE-10, Volume 2.
Table VIII-6
Summary Of Property Taxes
(nominal $000)
Recorded
Estimated
Line
No. Item 2009 2010 2011 2012 2013 2014
1. California 147,696 156,320 172,432 191,356 218,371 245,129
2. Arizona 7,501 7,559 7,717 7,729 7,981 8,101
3. Nevada 500 525 545 549 532 506
4. New Mexico 6,434 6,296 6,324 6,315 5,645 5,496
5. Washington D.C 0 0 0 0 0 0
6. Total 162,131 170,700 187,018 205,949 232,529 259,232
Table VIII-7
Comparison of 2010-11 Property Tax Rates
Recorded
Estimated
Line
No. Item 2009 2010 2011 2012 2013 2014
1. California 147,696 155,569 170,743 189,076 214,962 240,327
2. Arizona 7,501 6,897 6,416 6,426 6,633 6,730
3. Nevada 500 527 548 552 536 510
4. New Mexico 6,434 6,290 6,313 6,305 5,646 5,496
5. Washington D.C 0 0 0 0 0 0
6. Total 162,131 169,283 184,020 202,359 227,777 253,063
7.
Change from
Joint Comparison
to Update 0 1,417 2,998 3,590 4,752 6,169
29

ATTACHMENT A
To Chapter VIII

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IX.
ESCALATION RATE CHANGES
This chapter provides SCE’s update testimony regarding the calculation of escalation
rates used to project O&M (including A&G) and capital expenses for the years 2010 through
2014. The escalation rates shown for 2013 and 2014 are revised projections of the escalation
rates that will be used in SCE’s proposed Post-Test Year ratemaking mechanism for 2013 and
2014 if it is adopted by the Commission.
A. O&M Labor And Non-Labor Escalation Rates Are Based On The IHS Global
Insight Utility Cost Service Operation And Maintenance Costs Projection
The labor and non-labor escalation rates presented in Table IX-8 and Table IX-9 below
are based on the IHS Global Insight Utility Cost Service (UCS) Operation and Maintenance
Costs projection for the second quarter of 2011. 50 The labor escalation rates incorporate wage
increases determined for SCE’s represented employees through 2011 and SCE’s non-represented
employees through 2010. The labor and non-labor escalation methodology is explained in the
following testimony.
50 IHS Global Insight Utility Cost Service Second Quarter 2011 Forecast - Operation and Maintenance Costs.
30

Table IX-8
O&M Labor Price Indexes And Escalation Rates
(Based On IHS Global Insight UCS 2012 Second Quarter Projection)
31

Table IX-9
O&M Non-Labor Price Indexes And Escalation Rates
(Based Upon IHS Global Insight UCS 2012 Second Quarter Projection)
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2
3
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5
B. Palo Verde And Four Corners Non-Labor Escalation
The following tables present updated non-labor escalation rates for Palo Verde and Four
Corners generating stations. As explained in SCE’s direct testimony on escalation, these nonlabor
escalation rates are based on a weighted average of labor and non-labor escalation rates. 51
The non-labor escalation rates presented in Table IX-10 and Table IX-11 below are based on the
51 Exhibit SCE-11A, pp. 64-65.
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1
2
IHS Global Insight Utility Cost Service – Operation and Maintenance Costs projection for the
second quarter of 2011. 52
Table IX-10
Palo Verde Non-labor Escalation
Table IX-11
Four Corners Non-labor Escalation
Line
No.
Year
Index
(2009 = 1)
%
Change
1 2009 1.000 2.61%
2 2010 1.025 2.51%
3 2011 1.060 3.42%
4 2012 1.086 2.46%
5 2013 1.117 2.83%
6 2014 1.147 2.73%
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5
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7
C. Capital Escalation Rates Are Based On The IHS Global Insight Utility Cost Service
Projection of Capital Construction Costs
The capital escalation rates presented in Table IX-12 below are based on the IHS Global
Insight Utility Cost Service (UCS) projection of capital construction costs the second quarter of
2011. 53
52 IHS Global Insight Utility Cost Service Second Quarter 2011 Forecast Operation and Maintenance Costs.
33

Table IX-12
Capital Price Indexes And Escalation Rates
(Based Upon IHS Global Insight Cost Trends Of Electric Utility
Construction 2012 Second Quarter Projection)
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D. Adjustment Of Capital Escalation Rates To Reflect Labor Included In Capital
Expenditures
SCE’s capital expenditures include embedded labor costs. In order to accurately calculate
the actual capital escalation rate, each department estimates the percent of labor embedded
within capital costs. We then apply SCE’s update labor escalation rate to the labor portion of
capital costs. These percentages are illustrated in Table IX-13.
Continued from the previous page
53 IHS Global Insight Power Planner Cost Trends of Electric Utility Construction: Pacific Region and IHS Global
Insight Power Planner Cost Trends of Electric Utility Construction: Plateau Region (Palo Verde Only); Second
Quarter 2011, released July 20, 2011.
34

Table IX-13
Department Weights For Labor Embedded In Capital Expenditures
Function Labor %
Transmission 55.58%
Distribution 62.90%
SONGS 44.00%
Palo Verde 44.00%
CSBU Meters Installed 0.00%
CSBU Distribution Plant 0.00%
Hydro 5.00%
Four Corners - Steam 0.00%
Gas Generation - Peakers 0.00%
Gas - Mountainview 0.00%
Generation Decommissioning projects 5.00%
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E. Updating Of Escalation Rates For SCE’s Post-Test Year Ratemaking Mechanism
These labor and non-labor escalation rates will be updated in late 2012 and late 2013 to
provide escalation factors for the November 2012 and November 2013 advice letters specified in
SCE’s Post-Test Year ratemaking mechanism. Because the wage increases for SCE’s workers
have already been determined through 2010 for all workers and 2011 for represented workers,
they will be included in the calculations as established. The remaining portion of the labor
escalation rates and the non-labor escalation rates will be updated according to the latest IHS
Global Insight Utility Cost Service projections available at the time of the updates.
35

APPENDIX A
To Chapter IX
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