Edison International Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Sam Ramraj, Vice President, IR
• Pedro Pizarro, President, Chief Executive Officer & Director
• Maria Rigatti, Executive Vice President & Chief Financial Officer
• Steven Powell, Former CEO

Analysts

• Richard Sunderland, JPMorgan Chase & Co.
• Constantine Lednev, Guggenheim Securities
• Jonathan Arnold, Vertical Research Partners
• Paul Fremont, Mizuho Securities
• Agnieszka Storozynski, Seaport Research Partners
• Michael Lapides, The Goldman Sachs Group, Inc.
• Ryan Levine, Smith Barney Citigroup
• Julien Dumoulin-Smith, Bank of America Merrill Lynch

Presentation

[Operator]

Good afternoon, and welcome to the Edison International Fourth Quarter 2021 Financial Teleconference. My name is Missy, and I'll be your operator today. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference.

[Sam Ramraj, Vice President, IR at Edison International]

Thank you, Missy, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team.

I would like to mention that we are doing this call with our executives in different locations, so please bear with us if you experience any technical difficulties.

Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-K, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation.

During this call, we'll make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure.

During the question-and-answer session, please limit yourself to 1 question and 1 follow-up. I will now turn the call over to Pedro.

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Well, thank you, Sam. Today, Edison International reported core earnings per share of $4.59 for 2021, which exceeded the guidance range we provided on last quarter' call and was higher than $4.52 we had a year ago. We are introducing our 2022 EPS guidance range of $4.40 to $4.70 and we are reiterating our high confidence in our longer-term EPS growth target of 5 to 7% through 2025. Maria will discuss our financial performance and outlook.

In my comments today, I want to address 3 key themes that underpin the double-digit total return potential for EIX shares. I want to start with the tremendous progress and results achieved by SCE in recent years in reducing wildfire risk, and what gives us increased confidence of further risk reduction. I will then highlight our clean energy transformation that is underway and the substantial capital investment opportunities over the next few years to support the state' goals. Lastly, I will discuss our operational excellence culture that will enable us to deliver greater value for customers, investors, employees, and other stakeholders. All these initiatives, combined with our dividend yield, present an attractive total shareholder return potential and that's before even factoring the increase in our price-to-earnings multiple that we believe is merited today by SCE' wildfire risk reduction and ongoing utility and government wildfire mitigation efforts.

I am extremely pleased to say that the 2021 fire season marks the third consecutive year without a catastrophic wildfire associated with SCE' infrastructure. This is despite another severe wildfire season and intensifying drought conditions in the state. We believe this illustrates the cumulative effect of SCE' and the state' wildfire mitigation investments and practices over the last several years, as shown on Page 3 of the presentation. During 2021, the utility continued its strong execution of its wildfire mitigation plan and in many cases exceeded program goals.

In its 2022 wildfire mitigation plan update, SCE reiterated that covered conductor is one of the most effective measures to reduce wildfire and PSPS risks in its service area. As shown on Page 4, several factors contribute to our confidence in the covered conductor program. Further SCE is evaluating the potential for additional enhanced mitigation, including undergrounding in certain areas based on unique factors. Reducing wildfire risk will remain a top priority for the company and this will require significant capital investment, including $2.2 billion over the next two years through the GRC track 1 period.

Overall, SCE estimates that its mitigation work through December of last year has reduced the probability of losses from catastrophic wildfire by 65 to 70% relative to pre-2018 levels, and please note that this is an increase from the 55% to 65% we reported previously for mitigation work through June 2021. As shown on page 5, SCE expects to further reduce risk with continued grid hardening investments, including deploying an additional 1,100 miles of covered conductor this year. This encouraging risk reduction metric does not take into account significant improvements at the state and federal levels to date and in progress. The governor' proposed budget continues the trend of increased wildfire suppression and prevention investment, with CAL FIRE' headcount set to be 45% higher than just five years ago.

It also includes continued funding for aerial resources and the investments to date already have made CAL FIRE' fleet of aircraft, more than 60 aircraft, the largest civil aerial firefighting fleet in the world. The state budget would also add $1.2 billion to the previously approved $1.5 billion Wildfire and Forest Resilience Strategy to support forest health and fire prevention. We were also pleased to see the Biden Administration' multibillion dollar plan to bolster fire prevention across the West, as 57% of the forest lands in California are owned by the federal government. Protecting against the threat of extreme weather today lays the foundation for the increasingly reliable and resilient grid necessary for the clean energy transition. Through SCE one of the largest utilities in the country, Edison International is leading this transition through its thought leadership and SCE' programs to accelerate economywide electrification.

On Slide 6, I would like to highlight that Edison International has one of the strongest electrification profiles in the industry. Starting with transportation electrification, SCE has the largest programs among U.S. investor-owned utilities, and California is on the leading edge of electric vehicle adoption. In fact, 1 in 7 EVs registered in the U.S. are in SCE' service area. EV adoption will be critical to achieving California' climate goals and we estimate this could add over 50 million megawatt hours of incremental electricity consumption by SCE' customers by 2045.

Building electrification is another critical opportunity to reduce greenhouse gas emissions and it's the area of the California economy where the least amount of progress has been made to date. Last December, SCE proposed a $677 million program to jumpstart widespread adoption of electric heat pumps in buildings, and then last month, Governor Newsom' budget proposed almost $1 billion to accelerate building decarbonization. The governor' proposal is a welcome complement to SCE' plan and is a meaningful addition to help meet California' climate goals.

Additionally, energy storage will be an important part of an electric-led future to ensure reliability of the grid. As we highlighted previously, SCE is investing $1 billion to construct 535 megawatts of utility-owned storage. The CPUC has already approved this investment and the project is on track to be in service by August. These projects and programs all help to advance the vision set forth in SCE' Pathway 2045 Analysis. Underpinning the need to electrify the economy is substantial continued investment in the grid through 2045. In late January, the California Independent System Operator released its first ever 20-year transmission outlook, which estimates over $30 billion of transmission investment is needed by 2040 to meet the state' climate goals.

We see this as generally consistent with SCE' Pathway 2045 work and that identified over $40 billion of transmission investment CAISO-wide. SCE estimates that CAISO' outlook includes approximately $8 billion of transmission investments in our utility' service area, which supports the potential for continued long-term rate base growth beyond 2025. The SCE team is going to be fully engaged in the CAISO processes that lie ahead d those processes will turn this conceptual plan into real projects, and they will be focused on bringing ideas to the CAISO table that maximize the value of existing transmission lines, upgrades and new projects that will all make the clean energy transition as affordable as possible for all California ISO customers.

In upcoming regulatory proceedings, including 2021 GRC track 4 and the 2025 GRC, SCE will provide greater visibility into the near-term investments that are needed to ensure we remain on-track to help achieve the state' climate goals. To achieve our ambitious long-term goals, operational excellence is absolutely imperative and it's going to be a constant focus for our team. For over a decade now, SCE has proactively pursued cost-reduction efforts to manage affordability for its customers. This focus on cost management along with broader operational excellence improvement has allowed the utility to absorb some of the rising cost to serve customers, which in recent years has largely been by investments to reduce wildfire risk and strengthen the grid' reliability. I want to highlight that SCE' system average rate has grown less than local inflation over the last 20 years, and SCE' average rate is the lowest among the large California's investor-owned utilities.

Last year, SCE advanced its operational capabilities with new systems and new digital tools deployed across the company and these resulted in enhanced data quality, improved power line inspection and maintenance, and enriched abilities to gather and to act on customer feedback. To further our capabilities and focus on operational excellence, we launched an employee-led continuous improvement program late last year. Our employees have been wonderful and they enthusiastically provided thousands of ideas that we believe are going to have real, positive, measurable impact on safety, affordability, and on quality.

We expect the ideas that SCE will implement over the next two years will enable delivering greater value for our customers, for our investors, for employees, and for all of our other stakeholders. I'm looking forward to telling you more about the results of this program in the future.

With that, I'll turn it over to Maria for her financial report.

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

Thanks, Pedro, and good afternoon, everyone. My comments today will cover fourth quarter 2021 results, our capital expenditure and rate base forecasts, our 2022 guidance, and updates on other financial topics. Edison International reported core earnings of $1.16 per share for the fourth quarter. Full year 2021 core EPS was $4.59, which exceeded our guidance range. On Page 7, you can see SCE' key fourth quarter EPS drivers on the right-hand side. Core EPS increased year-over-year primarily due to higher revenue from the 2021 GRC final decision and income tax benefits from the settlement of California tax audits, partially offset by higher O&M expenses and higher net financing costs. The increase in O&M is due to a variety of miscellaneous items.

Net financing costs were higher primarily due to the debt issued throughout 2021 to finance the resolution of wildfire-related claims. At EIX Parent and Other the core loss per share was $0.07 higher than in fourth quarter 2020. This was primarily due to dividends on the preferred equity we issued at the parent in March and November of 2021. Now let' move to SCE' capital expenditure and rate base forecasts.

As shown on Page 8, we continue to see significant capital expenditure opportunities at SCE driven by investments in the safety and reliability of the grid. In 2022, we project the highest capital spending level in our history, which includes SCE' $1 billion investment in utility-owned storage to support summer 2022 reliability. As shown on Page 9, our capital forecast results in projected rate base growth of 7% to 9% from 2021 to 2025. We are confident in this range, which is driven by continued investment in wildfire mitigation, infrastructure replacement, and SCE' programs to accelerate electrification.

Page 10 provides an update on the 2022 cost of capital proceeding. The CPUC' scoping memo separates the cost of capital mechanism into two issues: whether extraordinary circumstances warrant a departure from the cost of capital mechanism, and if so, how to set the cost of capital for 2022. SCE recently submitted its opening testimony, reiterating that extraordinary circumstances over the last couple of years warrant a departure from the mechanism and recommending that the 2022 cost of capital components should be left unchanged.

Our earnings guidance is based on this position and in consideration of the wide range of potential outcomes in the proceeding. I will address this when I discuss our 2022 earnings guidance. Additionally, the CPUC ruled that this proceeding is limited to 2022 and directed the utilities to file their cost of capital requests for 2023 through 2025 at the regularly scheduled time, which is in April of this year.

Turning to Page 11, SCE continues to make solid progress settling individual plaintiff claims across the 2017 and 2018 Wildfire and Mudslide Events. In total, the utility has resolved approximately 78% of the best estimate of total losses. At the appropriate time, SCE will seek CPUC recovery of eligible and prudently-incurred costs. As a reminder, SCE is funding claims payments with debt that is outside its ratemaking capital structure.

Turning to guidance, Pages 12 and 13 show our 2022 guidance and the key assumptions for modeling purposes. We are initiating a 2022 EPS guidance range of $4.40 to $4.70. To address the components, let' start with rate base EPS, which we forecast at $5.34. Given the status of SCE' cost of capital proceeding, we are basing guidance on the current ROE of 10.3%. To help you better understand the sensitivity, a 10-basis point change in ROE results in a 4-cent change in EPS. After receiving a final decision from the CPUC, we will provide an update on guidance to incorporate any changes in the ROE and our outlook for the rest of the year.

Let' next discuss SCE operational variances, which add to rate base earnings. This is forecasted at a net contribution of 11 to 38 cents per share. This includes 10 cents related to the currently authorized costs of debt and preferred equity that will be addressed in the 2022 cost of capital proceeding. Consistent with our approach with ROE, the currently authorized costs of debt and preferred are reflected in guidance. As we expected, the remaining variances are not as large as we have seen in the past. Prior years benefitted from items that arent expected to recur going forward.

For EIX Parent and Other, we expect a total expense of 70 to 73 cents per share. The year-over-year increase is driven primarily by a full year of dividend expense from the $2 billion of preferred equity issued last year. Lastly, we have 32 cents per share of SCE costs excluded from authorized. The primary increase in this category is the interest expense on debt issued to fund wildfire claims payments. As we previously communicated, SCE will have a full year of interest on the debt issued during 2021 plus interest on debt issued throughout 2022 to fund additional settlements.

I would now like to provide the parent company' 2022 financing plan. Turning to page 14, we project total financing needs of $1.2 billion, including the $300 to $400 million of equity content we previously discussed. We continue to expect to issue securities with an annual average of up to $250 million of equity content from 2022 through 2025. In 2022, the amount is higher than average because of SCE' $1 billion utility owned storage investment that was accelerated into this year. However, this does not increase the total expected over the period. Additionally, we expect to refinance the $700 million of maturing parent debt with new debt issuances.

Turning to Page 15, we are confident in reiterating our 5% to 7% EPS CAGR from 2021 to 2025. This would result in 2025 earnings of approximately $5.50 to $5.90 per share. We have provided modeling considerations for 2025 EPS to give clarity behind our confidence in achieving this range. As you can see in the table on the right, we expect 2025 EPS to be driven by strong growth in SCE' rate base earnings, with offsets from increases in financing costs at the parent and costs to fund wildfire claims payments. Our earnings growth is underpinned by the capital investment opportunities at SCE that will create a strong foundation for climate adaptation and the clean energy transition.

Thank you. That concludes my remarks. Missy, please open the call for questions. [Operator Instructions]

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Jeremy Tonet from JPMorgan.

[Richard Sunderland, Analyst at JPMorgan Chase & Co.]

It's actually Rich Sunderland, on for Jeremy. Maybe starting off with the guidance drivers. You outlined the $0.10 of cost of capital financing benefits, just want to be clear on that component alone. Does that mean you're expecting more likely to have kind of a steady-state outcome in the 2022 portion of cost of capital? Or I guess, put simply not after you give that back to rate payers? Just any high-level thoughts there would be helpful.

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

Sure. Thanks for the question. So the way we developed our guidance is to base it on the current cost of capital. So basically the carryover, no trigger of the mechanism and having that continue through the end of '22 which will be a normal cycle. We know we're in the middle of a proceeding. In that proceeding, the signed commissions ruling actually really closely defined the questions that can be considered. One is, was there an extraordinary event? And then if there was, how to address the 2022 cost of capital?

At this point, we're in the middle of that proceeding itself, all of the hearings, et cetera, should be done by the end of March, and then there would be a decision sometime thereafter. So what we're really doing is really just developing it from that basis. To the extent that there are changes from the current cost of capital, we just wanted to lay out for you what the impacts might be on earnings for the year. And so we've separated that into 2 parts. One is the ROE sensitivity and one is the embedded cost of debt and preferred sensitivity. And as we get through the proceeding and we see where we stand, because there can be a really wide continuum of outcomes. It could be no impact all the way to sort of the trigger resetting or something else in the middle.

And as we get to understand what that outcome would be, then we can take another look at where we stand over the course of the year, and we can provide an updated guidance.

[Richard Sunderland, Analyst at JPMorgan Chase & Co.]

Got it. That's helpful color. And then maybe separately, the high and low end of your underground cost ranges on a dollar per mile basis. Could you parse that and maybe speak to, is that targeting a cost reduction or more representative of just the range of activity across your system?

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

So Rich, I think that's been -- what the numbers we showed have been based on prior experience. Let me turn over to Steve Powell, the CEO at SCE, to give more color there.

[Steven Powell, Former CEO at Edison International]

Yes, Pedro, you hit that right. The numbers we're showing are based on our experience over the last number of years, and it's also represented in our wild fire mitigation plan. Those costs certainly aren't things where we're doing it at scale. We are doing undergrounding over the last number of years, it's in the single digits or up to 10 miles. As we look at undergrounding, the numbers show -- our average is a little over $3.5 million per mile. I would expect if we were to do it at scale, and especially if we were looking to do a broader undergrounding plan, as we analyze potential risk reduction, the factors we're looking at there, as we look at egress and the frequency of fires and our PSPS thresholds and what the wins are in a specific location, we're evaluating probably hundreds of miles of opportunities for undergrounding that would be at least a few years out.

In that, we'll also consider cost. So we'd be selecting ones that ideally would be lower cost, but it's really driven on the risk side. So that band you see is backwards looking. We still have work to do to figure out how much we could bring those costs down doing them in larger volumes and targeted places where we can manage the cost more effectively.

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

And Rich, one really important thing that Steve has mentioned there is that we're looking at potentially hundreds, but it's not thousands of miles. We continue to see covered conductor as the mitigation of choice for most of our territory and it's just given the terrain that we have, the geography, the specific factors, and so it's really looking at where are there some mirror applications for undergrounding would be the right choice from a risk basis. But again, it's probably hundreds, not thousands.

[Operator]

Our next question comes from Shar Pourreza with Guggenheim Partners.

[Constantine Lednev, Analyst at Guggenheim Securities]

It's actually Constantine here picking up for Shar. Appreciate the update today. And just as you're moving closer to the wildfire claims resolution and you seem to be back on pace in terms of reduction of outstanding claims. Is there anything incremental you're seeing in terms of pace of settlement? And along those lines, maybe do you have a sense of what constitutes being reasonably close to completion to start filings or discussions with the CPUC?

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Yes. Maybe I'll start and Maria, you can certainly add here. I'll probably start with something you've heard us say before and that it's really hard to forecast timing on this. Now clearly, as each quarter goes by, you've seen the continued progress we've made. So certainly, the uncertainty cone keeps narrowing here, but there's still uncertainty, and that uncertainty includes timing. These cases are not uniform. They're unique, they're case-specific. And so that says it's hard to project or give you insights around the potential pace on this.

In terms of what substantial completion might mean or enough volume of this, I don't think we can really define that, but I believe that CPUC would expect us to have pretty good visibility into what the total exposure is going to be. So I think that would mean the vast majority of the cases for a given -- for a given bundle. And so by that, I mean, you could imagine we'll see standing in its own 2 feet, seeing substantial completion of Woolsey cases and taking the Woolsey matter to the CPUC. Separately, you could imagine Thomas and Koenigstein and the mudslides as another bundle. So I don't think we need to think of this as a joint bundle of all '17 and '18 events. But what the logical collection is of cases -- for whatever that logical collection is, Woolsey or Thomas, Koenigstein then we would need to see the vast majority of cases done so we could have a good sense of total liability. Maria, anything you'd add or correct there?

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

Something to add, not correct. I'd just say maybe in addition to some of that, it's probably the case for sure that it benefits us to have more clarity as well as to what the quantum is, and just what the types of claims are that we've settled. And could bring that forward and there are fewer open or loose ends when we get to the commission, I think that helps just in terms of the proceeding once it does start. So I think we're weighing all of that as we go forward. It probably doesn't have to have every last person settled, but certainly, we think that there is a benefit to having the vast majority of them settled before we start the process. And I think it's important too to note what Pedro just said is that Thomas and Woolsey are separate events and would have a different set of facts that we would bring forward.

[Constantine Lednev, Analyst at Guggenheim Securities]

Certainly. I appreciate that detail. And as we're thinking about the tail end of your CapEx plan or kind of the non-GRC years, can you discuss the magnitude of potential upsides that you're seeing. We've seen the CPUC working on various non-GRC investments like microgrids, risk mitigation and other policy items. Just curious how that's being implemented in your plan, if at all?

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

I mean, I'll give you a very high level answer, which is, as we constructed that 5% to 7% range to 2025, we took a look at the large number of opportunities that we have in the state around electrification, around expansion of the grid, items that once we mentioned, storage. I think as you get until later years, transmission starts being more important. And all of those are supportive then at the upper end of the range. So I don't think we're at a point, certainly this early to say here things that could take us beyond the range, but rather we look at all that set of opportunities as being supportive of that 5% to 7% range.

[Operator]

Our next question comes from Jonathan Arnold with Vertical Research Partners.

[Jonathan Arnold, Analyst at Vertical Research Partners]

Just picking up on the legacy liabilities, Pedro. Is it -- I think it went down from 2.2% to 1.6%. You didn't change the overall accrual. So fair to assume you settled about $600 million in the quarter. And that's on par with the prior 2 quarters. So is there any reason I wouldn't assume that somewhere between 2 and 3 quarters from now, you would be pretty much done with this, absent some big change in the accrual?

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

I go back to the answer I shared with Constantine that -- I think your math is right. In terms of the pace we've experienced, but we don't want to use that to say precisely. So therefore, it X point Y quarters from now if you assume the same rate. Because, again, Jonathan, all of these cases are really unique and specific. And so we don't want to be extrapolating precise timing based on the history we've had. We're working hard. We're pleased with the progress that we're making, but I just can't give you that firm and answer. Sorry, I know it's a little unsatisfying.

[Jonathan Arnold, Analyst at Vertical Research Partners]

All right, I Understand. Well, maybe I'll try something that I -- that you do have some control over the timing of. When should we anticipate that you would give your '23 guidance? I know you've just given us '22, but we're now in a more sort of normal rate case cadence presumably, just what would be -- what's the new normal?

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

Yes. So Jonathan, really, what we're trying to do is kind of focus on that overall 5-year cycle, or '21 through '25 cycle and give people that visibility on that EPS CAGR over time. I think we'll give our '23 guidance, I think, in the same -- we have the same schedule to give annual guidance that we have in the past. Today is '22, in Q4, we'll give '23. We have started to provide a little bit more visibility into how we think about the long term. So when you do get a chance to look at the slides, you'll see that 2025 now we've developed some of the piece parts for folks to use so they can take that and start to do modeling out on a longer-term basis. But I think that annual look will do on the same schedule we have as in the past.

[Operator]

Our next question comes from Angie Storozynski from Seaport.

[Paul Fremont, Analyst at Mizuho Securities]

I just wanted to -- just one follow-up to that Slide 11 with the remaining claims for 2017 and 2018. When you show that there's 22% of the best estimates still outstanding. Can you tell us if it's roughly the same for Thomas and Woolsey, meaning that it's roughly the same number or percentage wise for both? Or can we expect that since one of them becomes ready for filing sooner?

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Yes. Thanks, Angie, for the question. We have not split that out in how we report it for a number of reasons. So I don't think you can extrapolate from that, which case might get to that CPUC line sooner.

[Agnieszka Storozynski, Analyst at Seaport Research Partners]

Okay. And then a bigger picture question. So I understand you're in the midst of your 2022 cost of capital proceeding. We've seen the filings by the consumer advocates with some interesting points being made about no link between the stock performance and the cost of equity, which for an equity analyst is quite an interesting conclusion.

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Just confirm that you disagree with that, right?

[Agnieszka Storozynski, Analyst at Seaport Research Partners]

Yes, I do. I hope so, at least it underpins my job, I think. But also, I mean, you guys are issuing equity to finance growth. And so that cost of equity and the affordability of equity actually plays into your customer rates, et cetera. So I think that you are in a particularly good position to demonstrate the importance of that cost of equity. I mean, we have this -- a number of new members of the commission, very few of the existing ones have gone through the cost of capital proceeding. So far, we have the position of the consumer advocate. So is there anything you can tell us to give us a sense that -- there is this sense of fairness and reasonable at the commission that will end up with a -- again, a reasonable outcome, at least of this '22 cost of capital proceeding?

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

So Angie, I mean, all the points that you just made, I think is you'd see reflected in the filings that we've already made. And now the signed Commission's ruling on the 2022 cost of capital question, really made it clear that they want the utilities to go back and file for '23 through '25. And that's, I think, our opportunity. And as you say, a lot of the commissioners haven't been through a cost of capital proceeding before. That's our opportunity to really go back. We're going to be making similar arguments to the ones we made back in August and then just recently in January, but it's really an opportunity for us to underscore how all of this really flows through to customer rates at the end of the day.

And so you really need to have a cost -- ROE that's reflective of what the real cost of equity is, but the proceeding itself really gives signal to the market around the jurisdiction itself and that ultimately, in the long term, that's important to affordability. So we are going to making all of those points. I think we probably didn't make many of the points you just made when we did our filing this in January. And we'll proceed from there. Even separately from the proceeding, of course, we have routine discussions with staff and Energy Division where we make all of those same points how costs like this, if they're not handled appropriately, if the decisions aren't appropriate, that they come back and get you at the end of the day, and it all ends up in the customer rates.

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Well, and I think even more broadly, and Maria, you got it right. But from an even broader perspective, Angie, I think we've seen now over the past number of years that this commission and more broadly, the whole apparatus of government and the state understands the need for financially healthy utilities. And that's been tested, and we've gone through some of the challenges around the wildfire cost recovery framework. We saw legislation passed maybe 10-54 that we think there's a good job addressing that. All that stems from an understanding that the taking financially healthy utilities to do the work that we need to do and ultimately, like Maria said, to minimize customer costs in the long run. And so we would hope and expect that principle will be top of mind for commissioners as they go through the cost of capital proceeding.

[Operator]

Our next question comes from Michael Lapides with Goldman Sachs.

[Michael Lapides, Analyst at The Goldman Sachs Group]

Congrats on good guidance. Just curious, speaking of the guidance. When we look out to the out years, meaning kind of 2025, just that there are a handful of things in that. I'm thinking the SCE costs excluded from authorized, that $0.35, but also the $0.20 to $0.30 SCE operating variance that's a benefit. You don't assume -- let's take the $0.20 to $0.30. You don't assume that at some point, maybe future GRC, future regulatory event that gets kind of clawed back or the $0.35 and a lot of that's executive comp, some of its interest then get added back to rates?

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

Michael, thanks for the question. So yes, digging out to 2025, and let's separate those 2 buckets, the same way you just did, the operational variances and then the costs excluded from authorized. I would say, we think about those operational variances every year when we give guidance. And it's -- it can have some discrete things in it. You saw in our '22 guidance, we called out a few things, like AFUDC, as well as shareholder cost. But really, it's a lot of different things across the board. It can be what exactly is coming into your capital plan that year in terms of the type of asset. It can be the timing of regulatory proceedings and you have to true up after a regulatory proceeding.

So we're actually doing a very, very like detailed look every year and then coming back with the number. As we move out in time, we have visibility into things that will happen over the next -- course of the next several years as well. And that's really what we're thinking about in that number. And so -- and how that might range from a lower number to a higher number. When we think about O&M savings over time, we actually -- for the very reason you said that 2025 year is the first year with a GRC cycle, really not making in a lot of O&M savings. Because we know that the work that we're doing is ultimately going to go back to the benefit of the customer.

Same thing on the flip side in terms of the cost excluded from authorized. Look, we're going to make our arguments in every general rate case around things that should get recovered in rates that at least the past key rate cases haven't and recovered in rates. But we're going to push on that for the next rate case, but we're not presuming that that's going to happen. Also, that -- those costs not recovered and authorized, you're right, some of it's legislatively driven. Some of it's the fact that we're the SCE is paying interest expense on those claims payments, as well for claims payments. And we're not making any assumptions right now that, that would go away. We will certainly make claims to recover the cost, but we're not making the assumption right now that we would -- that, that would occur.

[Michael Lapides, Analyst at The Goldman Sachs Group]

Got it. Okay. Super helpful. And then, Pedro, one for you. Just trying to think about it, how do you think about the role of hydrogen versus hyper electrification of industrial customers, kind of how you think about the -- I don't want to call it a battle, but it's really going to be a discussion that happens in the state of what's the right way to decarbonize the larger users in the state.

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Yes. It's a great topic. And I'll start with our Pathway 2045 work, right? If you go back to that, you might recall that -- in that we talk about with the largest part of the emissions reductions coming from clean electricity and using that electricity across the society. But we do point out there that there will be some hard to electrify applications where we will need low carbon fuels like hydrogen. And by the way, that's not all hydrogen, it's the same, right? We're talking about hydrogen made from a clean source and so therefore, probably not from ([Indecipherable]) unless you're assuming carbon capture, which -- my sense is that we also assume there will be some level of carbon capture, but the availability of that probably will -- should be dedicated for places we absolutely need to be using fossil fuels.

So with hydrogen, I think it's a lot of excitement about being able to drive down the cost of production from electrolysis. You have the Hydrogen Earthshot at DOE, you have a number of other announcements on that. We are engaged in the work that -- the joint 5-year project that the Electric Power Research Institute and the Gas Technology Institute have going on. It's called the LCRI, the low carbon resources initiative, and that's digging deep into what's the potential for low carbon fuels like hydrogen. And what are some of the technical issues to actually help them work? How do you think about the metallurgy of pipelines, for example, and how much hydrogen can they accommodate and what changes you need for that?

So that's kind of a backdrop, to get to the core of your question, I don't think you can sit here and tell you it's going to be these applications that go fully electric and these applications go hydrogen. I think in general, probably some of the heavier duty, more heat consuming processes, industrial processes would be more likely to benefit from hydrogen, perhaps some long-haul transport would be another application that would lend itself to hydrogen. I think when you're looking at applications like light-duty vehicles, that -- it's hard to see that really making sense for hydrogen, because electricity, particularly as battery advances continue, it's just such a much better vehicle, no pun intended for those.

So we definitely see some role. Final point to make is just to maybe pick a little bit on your -- I think you used the word competition between the 2. I'm not sure I see as quite as much competition in the sense that if the hydrogen is going to be clean, then chances are, it's going to need to be coming from clean electricity through electrolysis. And so therefore, there's an important role for the electric grid in delivering what may likely be massive amounts of electric power to electrolysis plants that can then deliver the hydrogen into a pipeline. So I think there's still a role for a robust modern grid, and that's the business we're in. So we think it's necessary in the hydrogen side as well.

[Operator]

Our next question comes from Ryan Levine with Citi.

[Ryan Levine, Analyst at Smith Barney Citigroup]

What portion of the $8 billion of potential electric transmission highlighted in the prepared remarks, does Edison have right of ways to potentially use? And are there any initiatives today underway to enable those opportunities?

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

I'm going to give you a quick answer, but turn it over to Steve Powell. This is a conceptual plan. It needs to get translated into projects. So I don't think there's a specific as -- or to answer specific as your question, but Steve, take me on that.

[Steven Powell, Former CEO at Edison International]

Yes. No, Pedro, that's right. The conceptual plan, in a lot of cases, is identifying general paths of where projects would end up. As you look at the mix of projects that are identified in there, it is heavily based on new projects that largely wouldn't be followed within the sort of right of first refusal for utilities, given the current framework. There is a lot more work to be done for those sort of conceptual projects and plan to be translated into resource planning processes that are upstream of this, but really into the CAISO's 10-year plans as we move forward. So a lot more work to be done to understand if more and more of the existing system that we own and would have right of first refusal around can be -- how much of that can be managed through upgrades versus how much is going to be new.

But I think -- looking back at just the overall opportunity, I think it's important that it really reinforces what our pathway has shown is a large opportunity out there. And now it's a matter of figuring out the most cost-effective ways to deliver it for customers.

[Ryan Levine, Analyst at Smith Barney Citigroup]

Okay. So no right of way is existing, so you have to procure those independently. Am I hearing that correctly?

[Steven Powell, Former CEO at Edison International]

It would depend on the ultimate projects and paths that these translate into. And so some of them may be close to some of our existing right of ways, but there is a lot more work to do to bring more clarity to what those projects ultimately will entail.

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

And that financial, we don't know yet, Ryan. But some of it may be accessible to upgrades.

[Ryan Levine, Analyst at Smith Barney Citigroup]

Appreciate that. And then one clarifying question from earlier. Are there potential undergrounding a few hundred miles in place of or in addition to the current cover conductor miles?

[Steven Powell, Former CEO at Edison International]

Yes. So right now, as we're looking at that, we're focused on the places where we haven't already installed cover conductor. So we've got approximately 3,000 miles of covered conductor installed. As we look forward, we believe that there's thousands more miles that need to be hardened one way or another. And as we do that evaluation, we're going to be looking to figure out where undergrounding might make sense. So the focus right now is on those places where we haven't currently installed covered conductor, because there's a lot more of that need to do.

[Operator]

Our next question comes from Julien Dumoulin-Smith with Bank of America.

[Julien Dumoulin-Smith, Analyst at Bank of America Merrill Lynch]

So first, just a little detail here. You've got about a diamond there that talks about financing benefits associated with 2022 cost of capital proceeding. Can you elaborate on that what that is? Just -- I understand the COC proceeding. Just what is the $0.10 there?

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

Sure, Julien. So typically, the cost of capital proceeding covers a 3-year cycle. You make an estimate at the beginning of that 3-year cycle as to what the cost of debt will be and what the cost of prep will be. Certainly, a whole bunch of that is debt that's already been issued, but you're also using a forecast when you start a 3-year cycle. Over the course of that 3-year cycle, you can start to see those costs diverge from the original forecast. And so it's the benefit that you get, because the actual embedded cost of your debt once you get to sort of the tail end of the cycle is less than what you anticipated at the beginning of the cycle.

[Julien Dumoulin-Smith, Analyst at Bank of America Merrill Lynch]

Got it. All right. Excellent. And then just if I can, going back to like a high-level question here, just -- as you've answered a lot of the detailed pieces, but I'm just curious, as you look at especially accelerating EV penetration, for instance, amongst other factors. What is the bill inflation percentage that you all are contemplating through the forecast period? And then what is your ability to mitigate that, especially cognizant of the NEM resolution here, et cetera. But really, just sticking with that line of sight of trying to amortize across more kilowatt hours.

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Yes. I'll give you a couple of thoughts. First, I don't think we've provided any sort of firm estimate out there over the long run of what that inflation will look like or that the bill pressure would look like. We commented that we certainly continue to see some overall pressure in the next few years as we get to the largest bow wave of the wildfire mitigation work. And we do see then our path to returning to a more or call "normal" path in terms of system rate increases and bill increases. That's one part of the answer.

The other part of the answer, though, Julien, is that you alluded to, which is that with the push on electrification, that will bring in more kilowatt hours. In my remarks, I mentioned the extent of kilowatt hours that we get at it just from electric vehicles alone through 2045, right? And that -- as you know, we don't earn on those because we have decoupling, which is a good thing. But adding those kilowatt hours to the system will just help reduce rate pressure overall for all customers.

So the final part of the answer there, and this is a really important one in policy space. We need to consistently remind our customers and policymakers broadly, that the journey we're on here is not just an electric utility journey. It's an economy-wide journey to get to net 0 carbon. And the benefit of work like our Pathway 2045 analysis is that it showed that the cheapest way for the economy to get there is by using more clean electricity, making more investments in the grid, to move that power around to electrify a lot of the economy. That will put upward pressure on bills, right? And that's not just a pressure coming from the investments being made, maybe offset some by the electrification benefit, but the bill themselves will go up, because consumers will be using more electricity for more things in their life. At the same time, we'll be reducing the amount of gasoline you are using, maybe zeroing that out. You'll be reducing the amount of natural gas that you're using.

So you might remember, we mentioned before that we see the average customer spending 1/3 less across your entire energy bill in 2045 in real terms than they do today. They spend more on electricity, they'll spend less on other forms of energy and overall, that's the cheapest way for society to get to net 0. And so that means the conversation around affordability needs to migrate from one that's, frankly, very narrowly focused right now on the electric bill to one that is more thoughtful when looking at the total cost across society and the total cost for the customer to decarbonize. And that may mean that we may need to see some bill increases there a little bit above inflation in the long run in order to have the cheapest approach to get to the net 0 target, which is so important.

One other place where this has come up and the -- you might recall, the oral arguments that the prior SCE CEO, Kevin Payne, made last year in the GRC proceeding. He pointed out that affordability also includes not just the climate mitigation part, but climate adaptation, right? And so the costs that are putting pressure on the electric bill now around wildfire mitigation are, we believe, helping us avoid the cost for the whole economy of the aftermath of a catastrophic flyer, right? And so that's also a cost reduction or a benefit to all society that's getting captured through some increase in today's electric bill. I know I went a little farther in the aperture than your question, but I think that's all are interrelated.

[Julien Dumoulin-Smith, Analyst at Bank of America Merrill Lynch]

Indeed. And just even within that, the effort on covered conductors, do you think that you can bring that to a place in which it doesn't meaningfully contribute to customer bills just given the offsets from insurance or just reduced costs over time?

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Yes, you heard us say we'll continue to work on all pieces of the puzzle here, right? I know Steven is being more focused on how do they continue to deploy covered conductor and possibly some undergrounding as well at the lowest cost possible. We're focused on our operational performance, right? And driving operational excellence and continuing the pathway that we've set for a long time, improving our operations, that means higher reliability, I mean higher, better customer experience, more safety. It also means lower cost, right?

And so I think our cost position relative to our peers in California speaks for itself. So we're not just starting a new initiative here. We are continuing a long journey for us that also contributes to being able to do all this as affordable as possible for the customer. But again, as we look at the types of investments that will be needed over the long run for both primary mitigation and climate adaptation, that may well lead to rate increases that are at or maybe even a little bit above -- somewhat above inflation. Hopefully, not the levels we've seen for the last couple of years, those were extraordinary just given the big bow wave of wildfire investment data.

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

Actually, Julien, may be just on one thing because you had one specific, I think, question in there about like can we offset some of the costs of the capital plan with lower O&M, specifically insurance. Certainly, our hope is that as we move through time and we can demonstrate to insurance carriers that our risk has been mitigated down, we will see benefit, which would flow directly through to the customer. We're out right now marketing for our next policy year, so we'll see. But we have seen one, we didn't see quite as high a trajectory as we thought perhaps we were going to see when we -- if we went back to the forecast that we put together in 2018 and what we're realizing today.

So that's a good thing. And actually, is lower than the forecast we had for now, but it's still high. Our rate online is about 41%. So that's $0.41 on the dollar when we buy insurance. The other thing we're doing around that is not just waiting for the insurance companies just to see the demonstration of risk reduction, but we're also pursuing customer-funded self-insurance, which as we mitigate risk would allow us to take premiums for 1 year and roll them into the next. Basically, the customer would not be out-of-pocket premiums if there were no losses. So we're doing all of those things as well to try and sort of the parallel to the covered conductor cost is potentially the reduction in some of the other risk mitigation efforts.

[Operator]

Our next question comes from Paul Fremont with Mizuho.

[Paul Fremont, Analyst at Mizuho Securities]

I guess my first one is, when I look at your equity and rate base assumptions, are they assuming a certain amount of regulatory recovery of wildfire expenses or are they assuming that anything that you've written off is going to be excluded from those assumptions?

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

And when you say wildfire expenses, you mean the liabilities?

[Paul Fremont, Analyst at Mizuho Securities]

Yes, yes.

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

Yes. We do not assume here that we will be getting recovery on those wildfire liabilities. However, I want to reiterate what I said earlier, we will be filing for a recovery. So for all of the prudently incurred costs that we have, we will go back and ask the commission to allow us to recover that in rates. We have not built that into the forecast.

[Paul Fremont, Analyst at Mizuho Securities]

Okay. So that means anything that would be recovered then, I would assume that would be upside then to your rate base numbers?

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

That wouldn't be rate base, Paul. That would -- do you think about recovery -- again, I'm just making sure we're talking about the same thing. You mean recovery of the wildfire liabilities that we've been paying out. That would not typically be something that would be a rate base asset that -- if you think about it's kind of like O&M. It is a big number, depending on what level of the commission is comfortable allowing us to recover. So we would have to think through ways to mitigate customer rate impacts, language in legislation right now that we think would allow us to potentially securitize that over time if we were to recover it. But it's -- I don't think about it as a rate base asset at this point.

[Paul Fremont, Analyst at Mizuho Securities]

I'm just thinking, but it would be earnings accretive or would it be earnings neutral, if you were to recover a portion of that liability through regulatory pursuit?

[Maria Rigatti, Executive Vice President & Chief Financial Officer at Edison International]

If we were to recover a portion of that, like right now, for example, we have interest expense coming through in core earnings associated with the debt that's being used to finance the payment of those claims. So if we were to recover that, then that would come through earnings. You would reverse that and it would come through earnings in the future. The actual liability itself that we wrote off, we wrote that off to noncore.

[Paul Fremont, Analyst at Mizuho Securities]

Great. And then the other question I have is, I think part of the strategy that is being used by your northern neighbor, in terms of undergrounding is trying to use O&M savings that it believes it would be able to achieve on the vegetation management side as an offset to the cost of actually undergrounding its system. Do you see potential O&M savings with your more limited plans to underground?

[Pedro Pizarro, President, Chief Executive Officer & Director at Edison International]

Yes. And let me both turn it over to Steve for this one as well, but let me start by saying this is another place, Paul, where it's really important to remember the difference in terrain and geography. And I think Patti and the team have been very open about just the significant amount of veg management cost to the have PG&A. And so the terrain is much more forced. Our terrain is more grasslands. They have more concerns with trees falling into line. We have more concerns with contact from objects blowing in, right? So that's where the math has still towards cover conductor in our case. But Steve, what else would you say there?

[Steven Powell, Former CEO at Edison International]

Pedro, the difference is between the terrain and the risk that we face from the types of ignitions that each of us have in our different territories is that huge driver of why the plans look so different. To the extent that we are doing -- that we end up doing more undergrounding, I would expect where we're undergrounding, we would get some O&M savings in those specific areas for not having to do vegetation management and potentially changes to the inspection approach for undergrounding as well. But it would just be for those places where we were doing undergrounding.

On the covered conductor side, we still need to keep trees and vegetation. We need to be doing that work because trees falling into covered conductor, if they could take it down, if they are large trees, would be an issue. So over time, we'll learn more about how our O&M and vegetation management practices can evolve and potentially have savings with cover conductor, but we're not just at that point yet.

So I'd say that the cover conductor is really cost effective for us and has been -- it's been great to get it out so quickly to reduce the risk upfront. And we'll have opportunities for more undergroundings.

[Operator]

That was the last question. I will now turn the call back to Mr. Sam Ramraj.

[Sam Ramraj, Vice President, IR at Edison International]

Well, thank you for joining us. This concludes the conference call. Have a good rest of the day and stay safe. You may now disconnect.