financial, legal, and operational services (fl&os) volume … · financial, legal, and...

Application No.: Exhibit No.: SCE-08, Vol. 01, Pt. 1 Witnesses: A. Herrera

G. Huckaby

(U 338-E)

2015 General Rate Case

Financial, Legal, and Operational Services (FL&OS) Volume 1, Part 1 – Financial Services Department and Audit Services Department

Before the

Public Utilities Commission of the State of California

Rosemead, CaliforniaNovember 2013

SUMMARY

Exhibit SCE-08, Financial, Legal, and Operational Services Volume 1, Part 1 – Financial

Services Department and Audit Services Department is composed of the following chapters:

Chapter I – Financial Services Department

Chapter I(A) – Summary of Test Year Request

Chapter I(B) – Financial Services Activities

Chapter I(C) – Analysis of Recorded & Forecast Costs

Chapter II – Audit Services Department

Chapter III – Participant A&G and Pension and Benefits (P&B) Credits and Costs

Chapter IV – Capitalized A&G Expense

Chapter V – Capitalized P&B Expense

The table below summarizes SCE’s $90.5 million Test Year 2015 forecast for Financial Services

and Audit Services, a decrease of $30.6 million from 2012 levels. Of the $94.8 million, $73.4 million is

requested within this volume as further explained below and in Chapter I.

Summary of 2015 Forecast Expense (Constant 2012 $000)

2012 Recorded

Expense2015 Forecast

ExpenseReduction from 2012 Recorded

Financial Services $112,185 $81,872 ($30,313)

Audit Services $8,977 $8,658 ($319)

Total $121,162 $90,530 ($30,632)

Chapter I summarizes SCE’s Test Year forecast of A&G for SCE’s Financial Services

Department, which is comprised of the following groups: Controller’s, Planning & Performance

Reporting, Tax, Treasurer’s, and Business Integration Services.

Chapter I(A) discusses the business changes that affected SCE’s test year forecast.

Financial Services is requesting a total of $81.9 million in O&M expenses for Test Year 2015, a

decrease of $30.3 million from 2012 spending levels. Of the $81.9 million requested in Test Year 2015

for Financial Services, $64.8 million is requested in this Exhibit. The decrease is primarily related to

cost reductions realized from the Operational Excellence initiative. SCE is requesting $7.38 million in

capital expenditures and $1.5 million in incremental non-capitalizable O&M expenses for two software

projects to comply with regulatory requirements.1

Chapter I(B) discusses the activities of the individual Financial Services groups.

Chapter I(C) discusses 2012 recorded costs and Test Year 2015 forecast costs.

Chapter II describes the Audit Services Department’s request for $8.658 million in O&M

expenses for Test Year 2015, a decrease of $319,000 from 2012 spending levels.

Chapter III discusses participant credits and costs for SCE’s jointly owned facilities.

Chapter IV presents the calculation of our proposed Test Year 2015 capitalization rates for A&G

expenses.

Chapter V presents the calculation of our proposed Test Year 2015 capitalization rates for P&B

expenses.

1 See Exhibit SCE-05, Vol. 2.

SCE-08: Financial, Legal, and Operational Services Volume 01, Part 1 - Financial Services Department and Audit Services

Department

Table Of Contents

Section Page Witness

-i-

I. FINANCIAL SERVICES ..................................................................................1 G. Huckaby

A. Summary of Test Year Request .............................................................3

1. Operational Excellence ..............................................................3

B. Financial Services Activities ..................................................................7

1. Controller's Organization ...........................................................7

a) Accounts Payable ...........................................................7

b) Corporate Payroll and Expense Reimbursement ..............................................................7

c) Time-and-Pay Operational Support ...............................8

d) Non-Energy Billings and Payments ...............................8

e) Corporate Accounting ....................................................8

f) Regulatory Accounting and Analysis ............................9

g) Accounting Advisory and Reporting .............................9

h) Capital Asset Accounting ............................................10

2. Planning & Performance Reporting (P&PR) ...........................10

a) Operating Unit-Facing Organizations ..........................10

(1) Power Delivery ................................................11

(2) Generation ........................................................11

(3) Corporate & Shared Services ...........................12

b) Planning & Budgeting Integration ...............................12

3. Tax Department .......................................................................13

a) Tax Accounting ............................................................14


Department

Table Of Contents (Continued)


-ii-

b) Tax Analysis ................................................................15

c) Tax Filing .....................................................................15

d) Tax Auditing ................................................................16

e) Tax Regulatory.............................................................16

4. Treasurer’s Department ...........................................................16

a) Financing, Banking, and Credit ...................................16

b) Regulatory Finance, Economics, and Risk Operations & Analytics................................................18

c) Investments ..................................................................20

d) Enterprise Risk Management (ERM) and Control .........................................................................21

e) Financial Planning .......................................................21

5. Business Integration Services ..................................................21

C. Analysis of Recorded and Forecast Costs ............................................22

1. Accounts 920/921 ....................................................................24

a) Labor Costs ..................................................................25

b) Non-Labor Costs ..........................................................26

2. Accounts 923 & 930 ................................................................27

a) Outside Services...........................................................28

b) Bank Service Fees ........................................................28

c) Credit Line Fees ...........................................................29

d) Bond-Related Fees .......................................................29

e) Non-Labor Costs ..........................................................30


Department

Table Of Contents (Continued)


-iii-

3. Account 926 .............................................................................31

a) Labor Costs ..................................................................31

b) Non-Labor Costs ..........................................................32

II. AUDIT SERVICES DEPARTMENT .............................................................33 A. Herrera

A. Summary of Test Year Request ...........................................................33

B. Activities of the Audit Services Department .......................................33

1. Business Changes Impacting Test Year Forecast ....................35

a) Operational Excellence ................................................35

b) EME Bankruptcy .........................................................36

C. Analysis of Recorded and Forecast Costs ............................................36

1. Labor Costs ..............................................................................36

2. Non-Labor Costs ......................................................................37

III. PARTICIPANT A&G AND P&B CREDITS/COSTS ....................................39 G. Huckaby

IV. CAPITALIZED A&G EXPENSE ...................................................................43

V. CAPITALIZED P&B EXPENSE ....................................................................44

Appendix A Witness Qualifications ................................................................................


Department

List Of Figures

Figure Page

-iv-

Figure I-1 Financial Services Recorded and Adjusted 2008-2012/Forecast 2013-2015

FERC Accounts 920/921 (Constant 2012 $000) .................................................................................25


FERC Accounts 923/930 (Constant 2012 $000) .................................................................................28


FERC Account 926 (Constant 2012 $000) ..........................................................................................31

Figure II-4 Audit Services Department Recorded and Adjusted 2008-2012/Forecast 2013-

2015 FERC Accounts 920/921 (Constant 2012 $000) ........................................................................33

Figure III-5 Financial Services Recorded and Adjusted 2008-2012/Forecast 2013-2015

FERC Account 930 – Participant Credits (Constant 2012 $000) ........................................................41

Figure III-6 Financial Services Recorded and Adjusted 2008-2012/Forecast 2013-2015

FERC Account 926 – Participant Credits (Constant 2012 $000) ........................................................42


Department

List Of Tables

Table Page

-v-

Table I-1 Total Financial Services Expense Forecast: All Exhibits (Constant 2012 $000) ........................2

Table I-2 Total Financial Services Expense Forecast: Financial Services Exhibit

(Constant 2012 $000) .............................................................................................................................2

Table I-3 Financial Services: Savings From Operational Excellence (Constant 2012 $000) ......................6

Table I-4 Financial Services Labor Expense Forecast: All Exhibits (Constant 2012 $000) .....................22

Table I-5 Financial Services Non-Labor Expense Forecast: All Exhibits (Constant 2012

$000) ....................................................................................................................................................23

Table I-6 Financial Services Labor Expense Forecast: Financial Services Exhibit

(Constant 2012 $000) ...........................................................................................................................23

Table I-7 Financial Services Non-Labor Expense Forecast: Financial Services Exhibit

(Constant 2012 $000) ...........................................................................................................................24

1

I. 1

FINANCIAL SERVICES 2

This chapter summarizes SCE’s 2015 estimates of A&G for the Financial Services organizations: 3

Controller’s, Planning & Performance Reporting, Tax, Treasurer’s, and Business Integration Services. 4

Financial Services is estimating a total of $81.9 million in expenses in 2015, $30.3 million below 2012 5

recorded. The decrease is primarily due to the implementation of organizational changes to improve 6

operational and service excellence plus reductions due to the retirement of SONGS (San Onofre Nuclear 7

Generating Station). 8

On June 7, 2013, SCE announced the permanent retirement of Units 2 & 3 at SONGS. As a 9

result, SCE will recognize a reduction in SONGS support staff, including staff in the Financial Services 10

Department that previously supported SONGS. While neither the costs nor savings for these employees 11

are requested in this exhibit, the additional reduction is shown below in Table I-1, for illustrative 12

purposes only. Please see SCE-02, Volume 1 for testimony related to the retirement of SONGS. 13

SCE recorded $112.2 million in costs associated with financial services in 2012, and these costs 14

were appropriately recorded in FERC accounts representing the operating units receiving 15

financial-related support. Table I-1 below summarizes the 2012 recorded expenses, expense savings, 16

forecast reduction, SONGS reduction savings, and 2015 forecast related to all Financial Services 17

activities presented in various operating units’ exhibits in this proceeding: 18

2

Table I-1 Total Financial Services Expense Forecast: All Exhibits

(Constant 2012 $000)

Exhibit2012

Recorded/Adj Expense Savings

Additional Forecast

ReductionSONGS Savings

2015 Forecast

Financial Services - SCE-08 $82,765 ($8,648) ($9,355) - $64,762Customer Service - SCE-04 $4,500 ($1,306) - - $3,194External Relations - SCE-09 $1,052 ($247) - - $805Human Resources - SCE-06 $815 ($157) - - $658Information Technology - SCE-05 $4,412 ($1,858) - - $2,554Legal - SCE-08 $255 ($90) - - $165SONGS - SCE-02 $5,579 ($986) - ($4,297) $296Operational Support - SCE-08 $5,550 ($1,682) - - $3,868Power Supply - SCE-02 $2,360 ($694) - - $1,666Trans & Distrib - SCE-03 $4,897 ($993) - - $3,904

Total $112,185 ($16,661) ($9,355) ($4,297) $81,872

Table I-2 below summarizes the 2012 recorded expenses, expense savings, forecast reduction, 1

and 2015 forecast related to all Financial Services activities presented in this exhibit: 2

Table I-2 Total Financial Services Expense Forecast: Financial Services Exhibit


FERC Acct2012

Recorded/Adj Expense Savings

Additional Forecast

Reduction 2015 Forecast

920 & 921 $34,602 ($7,354) $0 27,248 923 & 930 $47,590 ($1,294) (9,355) 36,941

926 $573 $0 0 573 Total $82,765 ($8,648) ($9,355) $64,762

Financial Services is also estimating a total of $7.38 million in capital expenditures2 and $1.5 3

million in incremental non-capitalizable O&M expenses for software projects.3 4

2 See Exhibit SCE-05, Vol. 2.

3

Financial Services is responsible for essential finance functions, including: (1) maintaining 1

SCE’s accounting systems and reporting SCE’s financial statements under U.S. Generally Accepted 2

Accounting Principles (U.S. GAAP); (2) budgeting, forecasting, financial analysis, and management 3

reporting; (3) managing SCE’s credit and liquidity needs, investments, financials, and overall risk 4

management; and (4) compliance with all applicable federal and state tax codes. 5

As a regulated utility, SCE is subject to various laws and regulations at the local, state, and 6

federal levels, including many that require the tracking and reporting of SCE’s financial performance 7

and maintaining effective internal controls over financial reporting. SCE reports on various aspects of 8

its financial performance to the California Public Utilities Commission (CPUC), Federal Energy 9

Regulatory Commission (FERC), Securities and Exchange Commission (SEC), California Franchise 10

Tax Board, and Internal Revenue Service (IRS). Prudent management of the assets and employees that 11

allow SCE to provide reliable electric service to customers dictates necessary financial activities, such as 12

developing and monitoring expense and capital budgets, and managing short-term and long-term 13

financial needs. 14

A. Summary of Test Year Request 15

1. Operational Excellence 16

As discussed in Exhibit SCE-01, SCE embarked on the Operational Excellence financial 17

services initiative in late 2011 to improve business processes, increase productivity, and assess the 18

operating model and cost structure. This initiative covered finance activities being performed at the 19

company, including those that were already centralized and reported only to the Chief Financial Officer, 20

as well as those that were previously decentralized and reported directly to the various operating units. 21

SCE conducted benchmarking comparisons with other companies4 and the results indicated that our 22

costs to perform core finance activities (e.g., treasury and risk) were in the first quartile (i.e., were lower 23

than 75 percent of the other companies studied).5 However, the benchmarking results also identified 24

that our costs to perform transactional finance activities (e.g., time and pay, accounting, and accounts 25

payable) were in the third quartile and our costs to perform strategic finance activities (e.g., budgeting, 26

Continued from the previous page 3 Non-capitalized O&M expenses for software projects are recorded in Financial Services’ FERC Account 923.

4 See workpaper entitled “List of Companies Benchmarked.”

5 See workpaper entitled “Finance Benchmarking.”

4

planning, and reporting) were in the fourth quartile.6 In the past, both SCE’s transactional and strategic 1

finance activities had been decentralized and embedded within each operating unit, where they provided 2

individualized financial services and other business support. These services included managerial 3

reporting, time and pay services, internal controls, benchmarking, payment processing, and accounting 4

transactions. Our review indicated that companies with a centralized organizational model design 5

tended to be more efficient and incur lower costs than those with a decentralized model. The 6

benchmarking results of our finance functions correlate with the degree to which we are aligned with the 7

centralized organizational model. Our core finance functions, which are first quartile, are completely 8

centralized, while our strategic finance functions were completely decentralized and in the fourth 9

quartile. 10

Because the benchmarking results indicated that our core finance costs were in the first 11

quartile, we focused our improvement efforts on transactional finance and strategic finance activities, 12

since these areas provided the greatest opportunities to reduce costs. We assessed our existing processes 13

and organizational design, and identified areas of opportunity to improve efficiencies and reduce costs.7 14

Our assessment indicated that creating a centralized financial services organization would allow for 15

standardizing processes, prioritizing work, and improving overall operations. In particular, 16

centralization creates efficiencies through economies of scale, allowing us to reduce costs in our 17

transactional and strategic finance activities by standardizing processes and various management 18

reporting, such as year-end forecasts, recorded cost analysis, detailed budget variance reports, and 19

reporting of key performance indicators. 20

As discussed above, under the previous structure, strategic finance activities were 21

decentralized throughout the operating units: Customer Service (CS), Transmission & Distribution 22

(T&D), Generation, Information Technology (IT), Human Resources (HR), and other corporate shared 23

services. These decentralized finance employees worked directly with operating unit personnel to 24

develop budgets and provide budget-to-actual reporting and variance analysis. While the decentralized 25

finance model provided specific financial support unique to each operating unit, we determined that we 26

could achieve economies of scale to improve efficiencies and reduce costs by centralizing these 27

processes. In December 2012, the Planning and Performance Reporting (P&PR) organization was 28

6 Id.

7 See workpaper entitled “Operational Excellence Assessment.”

5

established to centralize strategic finance activities in order to begin realizing cost savings associated 1

with centralization. In addition, we centralized our financial services functions in December 2012 by 2

transferring employees performing finance activities within each operating unit into the Financial 3

Services organization.8 For example, in transactional finance, the majority of savings was achieved 4

based on an analysis of time-and-pay operational support. There had been time-and-pay personnel in 5

various operating units providing payroll and timekeeping support. They assisted employees with 6

activities ranging from timesheet adjustments to handling timekeeping for employees on disability. Our 7

analysis indicated that we could create economies of scale and achieve cost savings by centralizing these 8

activities. In December 2012, time-and-pay groups throughout the operating units were consolidated 9

into the Controller’s organization to begin realizing cost savings. 10

Centralization was followed by a 26 percent reduction in our Financial Services 11

headcount during the first quarter of 2013.9 Given our commitment to achieve the savings through 12

centralization, these reductions were made ahead of fully implementing all of the process changes 13

required to operating financial services with reduced staffing levels. The new centralized organization 14

continues to streamline operations by creating standardized processes and reporting in order to provide 15

the required support with the reduced staffing levels. The reduction of financial services headcount is 16

significant and will take time to stabilize as we implement the process changes required to operate under 17

reduced staffing levels. These efforts will result in a reduction of $21.4 million in total Financial 18

Services costs. 19

Although we centralized our finance organization, our costs associated with financial 20

services continue to be decentralized, and appropriately recorded to the FERC accounts receiving the 21

respective financial-related support. Therefore, the savings associated with the Financial Services 22

Operational Excellence initiative are included in various FERC accounts. Table I-3 below summarizes 23

the total savings from the Financial Services department and how those savings are provided to 24

ratepayers in the various operating units’ FERC accounts. 25

8 See workpaper entitled “Financial Services Cost Savings.”

9 See workpaper entitled “Finance Headcount Reduction.”

6

Table I-3 Financial Services: Savings From Operational Excellence


FINANCIAL SERVICES EXPENSE SAVINGS IN THIS EXHIBITFERC Account 2013 2014 2015

Labor 920/921 $4,969 $6,861 $7,354Non-Labor 923 732 1,236 1,294 Total Financial Services Expense Savings in This Exhibit $5,701 $8,097 $8,648

FINANCIAL SERVICES EXPENSE SAVINGS IN OTHER EXHIBITSFERC Account 2013 2014 2015

LaborCustomer Service - SCE-04 901 $394 $544 $583Customer Service - SCE-04 907 394 544 583 External Relations - SCE-09 920/921 167 230 247 Human Resources - SCE-06 920/921 106 146 157 Information Technology - SCE-05 920/921 818 1,130 1,211 Legal - SCE-08 920/921 61 84 90 SONGS - SCE-02 524 666 920 986 Operational Support - SCE-08 920/921 1,136 1,569 1,682 Power Supply - SCE-02 557 469 647 694 Trans & Distrib - SCE-03 568 88 121 130 Trans & Distrib - SCE-03 590 306 423 453 Total Labor Expense Savings in Other Exhibits $4,605 $6,358 $6,816

Non-LaborCustomer Service - SCE-04 901 $40 $67 $70Customer Service - SCE-04 907 40 67 70 External Relations - SCE-09 920/921 - - -

Human Resources - SCE-06 920/921 - - - Information Technology - SCE-05 920/921 366 618 647 Legal - SCE-08 920/921 - - - SONGS - SCE-02 524 - - - Operational Support - SCE-08 920/921 - - - Power Supply - SCE-02 557 - - - Trans & Distrib - SCE-03 568 52 87 91 Trans & Distrib - SCE-03 590 180 304 318 Total Non-Labor Expense Savings in Other Exhibits $678 $1,143 $1,196

Total Financial Services Expense Savings in Other Exhibits $5,283 $7,501 $8,012

FINANCIAL SERVICES SAVINGS - EXPENSE $10,984 $15,598 $16,660

FINANCIAL SERVICES SAVINGS - CAPITAL 1

2,673 3,979 4,226

FINANCIAL SERVICES SAVINGS - BALANCING ACCOUNTS 2

373 526 562

GRAND TOTAL FINANCIAL SERVICES SAVINGS $14,030 $20,103 $21,448Exhibit note:1. Capital savings projects have been added to the capital forecast to include the capital savings listed above.2. Balancing account savings will be reflected in balancing account activities.

7

B. Financial Services Activities 1

1. Controller's Organization 2

SCE’s Controller’s Organization is responsible for essential financial activities, 3

including: (1) managing the corporate disbursement functions (accounts payable and corporate payroll); 4

(2) recording and monitoring financial performance; (3) maintaining SCE’s budgeting and accounting 5

systems and records of account; (4) advising SCE’s corporate finance and other departments on 6

compliance with U.S. GAAP, including the accounting principles for rate-regulated enterprises, which 7

reflect the ratemaking policies of the CPUC and FERC; (5) identifying and designing internal controls 8

over financial reporting and monitoring the effectiveness of those controls; (6) computing rate base and 9

depreciation expense associated with SCE’s capital assets for both financial reporting and income tax 10

purposes; (7) providing timely corporate reporting of financial statements and other financial and 11

operational information to the SEC, CPUC, FERC, and other external agencies; (8) accounting for 12

regulatory balancing accounts and memorandum accounts; and (9) providing financial information to 13

SCE management and other SCE departments necessary for investments and other decisions. The 14

following groups within the Controller’s Organization perform work for SCE-affiliated companies: 15

Accounts Payable, Corporate Payroll and Expense Reimbursement, Time-and-Pay Operational Support, 16

Non-Energy Billings and Payments, Corporate Accounting, Regulatory Accounting and Analysis, 17

Accounting Advisory and Reporting, and Capital Asset Accounting. The costs for work performed 18

for any entities other than SCE and its regulated subsidiaries are subject to the affiliate credit mechanism 19

discussed in Exhibit SCE-10, Results of Operations. 20

a) Accounts Payable 21

Accounts Payable is responsible for the accurate and timely disbursement of 22

funds to pay for goods and services to vendors. This responsibility includes payment of invoices, 23

processing returned checks, and various other activities, including: (1) interpretation and application of 24

sales and use taxes; (2) managing IRS Form 1099 processing; (3) auditing vendor invoices for 25

compliance with all terms and conditions of SCE purchase orders; (4) managing credits due to SCE; 26

(5) pursuing volume and early-pay discounts; and (6) managing check cancellation and reapplication of 27

funds to proper accounts. 28

b) Corporate Payroll and Expense Reimbursement 29

Corporate Payroll and Expense Reimbursement is responsible for biweekly 30

payroll production and distribution to SCE’s entire workforce as well as processing employee expense 31

8

report payments. This responsibility includes remitting payments to outside entities (such as the IRS, 1

California Franchise Tax Board, credit unions, and labor unions) and researching uncashed checks for 2

escheatment purposes. Corporate Payroll and Expense Reimbursement is also responsible for SCE’s 3

compliance with a number of other activities required of employers by various laws and regulations, 4

including: (1) issuing year-end tax reports (W-2s and Forms 1099 to SCE employees); (2) administering 5

court-ordered wage garnishments; (3) determining and processing federal and state withholding tax 6

deposits; (4) monitoring and reconciling interim pay adjustments and replacement checks; (5) complying 7

with the Fair Labor Standards Act and the Wage and Hour Law provisions; and (6) participating in the 8

annual corporate escheatment process. 9

c) Time-and-Pay Operational Support 10

Time-and-Pay Operational Support is responsible for providing timekeeping and 11

payroll support to employees throughout the company. This includes assisting employees with 12

timesheet adjustments, changes, and related actions to ensure timely and accurate pay processing and 13

submittal to Corporate Payroll for distribution of payments to employees. Specific activities include: 14

(1) reviewing reports in advance of payroll processing to identify and correct errors; (2) processing 15

timesheet and pay adjustments; (3) handling timekeeping for employees on disability; (4) processing 16

special payments to employees; (5) processing certain aspects of employee data related to timekeeping 17

and payroll accounting; and (6) processing separations and retirements. 18

d) Non-Energy Billings and Payments 19

Non-Energy Billing and Payments is responsible for: (1) preparing various types 20

of non-energy, actual-cost billings for SCE, which include other accounts receivable (non-energy), 21

damage claims (such as a car hitting a utility pole), and U.S. Department of Energy; (2) preparing 22

joint-participant billings for costs incurred at the San Onofre Nuclear Generating Station (SONGS), 23

Mohave Generating Station, and the Eldorado transmission facilities; (3) coordinating on-site activities 24

of participant auditors and addressing/resolving any cost accounting issues for each site; (4) performing 25

inventory and appraisals of SCE properties; (5) providing capital accounting direction and contractual 26

guidance to internal parties and discussions with external parties related to added facilities and 27

interconnection facility projects; and (6) accounting for and payment of ad valorem taxes. 28

e) Corporate Accounting 29

Corporate Accounting maintains SCE’s general ledger, including the monthly 30

closing process, and is responsible for all aspects of financial accounting and reporting for utility-related 31

9

subsidiaries and the Edison International parent company (EIX). Corporate Accounting is also 1

responsible for oversight of the systems that provide financial data for both internal and external reports 2

to the financial community, SEC, CPUC, and FERC, as well as internal and external auditors, and is 3

responsible for compiling information used in internal ad hoc reporting for data requests. This division 4

maintains a comprehensive financial data warehouse for legacy data and provides financial data support 5

and training. Other duties include: (1) accounting and billing for affiliated company transactions; 6

(2) calculation, preparation, and payment of franchise fees; (3) accounting and processing of vehicle 7

fleet leasing payments; (4) accounting for SCE’s benefit plans; and (5) support related to quarterly and 8

year-end audits. 9

f) Regulatory Accounting and Analysis 10

Regulatory Accounting and Analysis is responsible for establishing and 11

maintaining regulatory balancing and memorandum accounts, accounting for fuel expense and 12

purchased power expense, and preparing energy and regulatory reports for internal and external use, 13

including CPUC filings. This division also sponsors system maintenance, enhancements, and reports 14

from the Corporate Revenue Reporting Information System, which is SCE’s primary revenue reporting 15

system for financial and regulatory compliance purposes. 16

g) Accounting Advisory and Reporting 17

Accounting Advisory and Reporting is responsible for the preparation and 18

publishing of monthly, quarterly, and annual financial statements. The group is also responsible for 19

preparing SCE’s Forms 10-K and 10-Q in accordance with U.S. GAAP and filing them with the SEC, as 20

well as preparing FERC Forms 1 and 3Q and the CPUC Annual Report. Activities of this division 21

include: (1) analysis of complex accounting issues, including the impact of proposed and issued 22

accounting standards, pronouncements, and interpretations on the utility’s operations and financial 23

results; (2) developing and overseeing the implementation strategy for new accounting pronouncements 24

and requirements set forth by the SEC, Financial Accounting Standards Board (FASB), and other 25

accounting regulatory bodies; (3) consultation with other departments on technical and regulatory 26

accounting issues, including interpretation and implementation of CPUC and FERC decisions; 27

(4) preparing to implement international financial reporting standards; (5) consultation and project 28

management for IT-related process improvement activities; (6) overseeing SCE’s overall compliance 29

with SOX-required process control documentation; and (7) working with internal auditors and the 30

independent registered public accounting firm on company-wide internal control matters. 31

10

h) Capital Asset Accounting 1

Capital Asset Accounting is responsible for maintaining SCE’s fixed asset 2

accounting in conformity with FERC, U.S. GAAP, internal accounting procedures, and regulatory 3

practices. Specific activities include providing capital accounting direction to internal parties, reviewing 4

work orders for accounting accuracy, closing work orders, and accounting for asset retirements. Other 5

activities include maintenance of the Continuing Property Records ledger and providing direction to 6

internal parties as to whether a cost is properly expensed or capitalized. Capital Asset Accounting is 7

also responsible for a variety of financial accounting, tax accounting, and regulatory requirements 8

associated with SCE’s fixed assets. Accounting responsibilities include book depreciation, nuclear 9

decommissioning, recorded rate base, tax depreciation, deferred taxes, and associated financial reporting 10

requirements. Regulatory responsibilities include plant forecasting, depreciation rate and depreciation 11

reserve analyses, working cash analyses, rate base forecasting, regulatory reporting, and rate case 12

support of fixed-asset recovery. 13

2. Planning & Performance Reporting (P&PR) 14

As described above, P&PR was formed during the Operational Excellence initiative to 15

provide centralized, consistent, high-quality financial services to the entire company. P&PR provides 16

financial services to all operating units. In addition, this organization is responsible for company-wide 17

activities including the budgeting process, long-term planning, O&M and capital forecasting, 18

company-wide O&M and capital prioritization, and coordination of benchmarking across operating 19

units. 20

P&PR consists of three operating unit-facing organizations − Power Delivery, 21

Generation, and Corporate & Shared Services − and one cross-operating unit or company-wide 22

organization, Planning & Budgeting Integration. The activities of each group are described in the 23

following sections. 24

a) Operating Unit-Facing Organizations 25

Operating unit-facing organizations work directly with operating unit personnel to 26

provide analytical support for decision making, as well as monthly and quarterly input for tracking of 27

budgets and goals. Responsibilities also include long- and short-term planning, forecasting, managerial 28

reporting, variance analysis, and decision support analysis for capital expenditures and operating 29

expenses. Personnel in this organization perform finance activities for organizations throughout the 30

11

company. Thus, the costs to provide financial services are recorded appropriately to the operational 1

FERC accounts and capital asset accounts as applicable. 2

(1) Power Delivery 3

This group is responsible for the budgets, financial performance reporting, 4

financial planning, and analysis T&D and CS management to support informed business decisions. This 5

group prepares, monitors, and reports budgets for operations and maintenance, capital expenditures, and 6

other operating revenue of T&D and CS. The group works closely with operational groups to compile 7

information, analyze trends, create reports, provide regulatory finance support, provide detailed budget 8

variance reports (including year-end budget forecasts), make spending recommendations, and adjust 9

budgets and forecasts. In addition, this group supports the development of T&D and CS financial goals, 10

cost performance indicators, and targets. To support the achievement of these goals and targets, the 11

group prepares monthly progress reports, provides business performance statistics, and reports on 12

financial and operational performance to T&D and CS management. Progress is subsequently 13

communicated throughout the operational unit to enable a line-of-sight connection to employees’ goals 14

and objectives. In addition, this group oversees projects by gathering and analyzing cost and operational 15

data to determine cost-effectiveness. Cost-control engineers work closely with project management to 16

develop detailed project schedules, monitor expenditures, and forecast expenditures throughout the 17

construction and post-construction phases of projects. Lastly, this group provides financial support for 18

the development of testimony and workpapers for regulatory proceedings. This includes providing 19

historical data analyses, preparing financial forecasts, developing cost studies, researching regulatory 20

issues, and assisting with data request responses. 21

(2) Generation 22

This group provides budgets, financial performance reporting, financial 23

planning, and analysis for the hydropower, gas, and nuclear generation groups, as well as the energy 24

trading and contracts groups. This group develops, analyzes, and reports on generation O&M expenses 25

and capital expenditures. This group also performs project-control activities consisting of planning and 26

scheduling, budget development, recorded cost analysis, performance management, financial 27

commitment tracking, resource integration, trending, and contingency management. This group 28

provides independent assurance that effective budget and cost-control practices are used by following 29

detailed budget development steps and a rigorous approval process, and subsequently tracking budgets 30

and spending. 31

12

(3) Corporate & Shared Services 1

This group provides budgets, financial performance reporting, financial 2

planning, and analysis for the corporate and shared services organizations including IT, HR, Finance, 3

External Relations, and Operational Services. This group is responsible for providing budgeting, 4

forecasting, reporting, and financial analytical support to each organization. This group also coordinates 5

the development of budgets and the alignment of budgets with corporate guidelines. This group works 6

closely with each organization providing staff support so that fundamental cost-management skills and 7

processes are in place for each organization. This group prepares regular budget variance reports and 8

forecasts that are provided at the work group and broader organization level. This group is responsible 9

for project-specific financial analysis and development of project business cases, and assessing the 10

financial impacts and merits of proposed projects. Project analysis involves gathering and analyzing 11

cost and operational data for proposed and ongoing projects to determine cost-effectiveness. The group 12

provides financial tracking and reporting services for projects, providing detailed reporting of 13

budgeted-versus-recorded costs and forecasting project spending. Performing these analytical activities 14

allows each organization’s management to have consistent and accurate evaluations of the financial 15

impacts of projects. The group is responsible for the financial work necessary to prepare for each 16

corporate and shared service organization’s showing in the General Rate Case (GRC). Its primary GRC 17

responsibilities include preparing financial workpapers and responding to financial data requests. 18

b) Planning & Budgeting Integration 19

Planning & Budgeting Integration is responsible for maintaining and monitoring 20

SCE’s budgeting system and integrated reporting. The activities of this group include: (1) developing 21

SCE’s financial strategy; (2) managing the spending prioritization processes and annual budgeting 22

process; (3) analyzing variances between recorded information and the budget, as well as variances 23

between recorded current- and prior-year information; (4) preparing SCE’s income statement and capital 24

budgets based on input provided by operating unit-facing personnel in accordance with authorized 25

amounts; (5) preparing various monthly, quarterly, and annual reports required for management 26

purposes; (6) maintaining effective internal controls over the budgeting system; and (7) providing 27

guidance to internal parties on the budgeting process and system. In addition, this group is responsible 28

for supporting SCE’s capital budgeting process by providing financial analysis for capital investment 29

projects. As part of its ongoing operating requirements in meeting customer energy needs, SCE must 30

make prudent investment decisions with respect to competing capital projects. For example, SCE may 31

13

need to evaluate a new capitalized software system or a project to automate an electrical facility 1

substation. SCE makes capital investment decisions using a rigorous and disciplined approach to meet 2

best-fit, least-cost-to-customers criteria. This division provides support to this decision-making process 3

by establishing financial-analysis guidelines and monitoring that SCE departments use a consistent 4

financial evaluation approach utilizing the same financing and cost-of-capital, interest, and escalation 5

rate assumptions, and appropriate accounting, tax, and ratemaking treatments. This group also supports 6

the development of SCE's annual goals, key performance indicators, and targets. To support the 7

achievement of the goals and targets, the group prepares monthly progress reports and performance 8

statistics for financial and operational performance to SCE management. Progress is subsequently 9

communicated throughout the operational units to enable a line-of-sight connection to employees’ goals 10

and objectives. 11

3. Tax Department 12

SCE’s Tax Department is responsible for all income tax-related functions, including: 13

(1) recording all accounting journal entries associated with income taxes (on a monthly, quarterly and 14

annual basis); (2) complying with all applicable federal and state tax codes, federal and state income tax 15

regulations, IRS guidance, court decisions, and other official tax guidance; (3) complying with all 16

applicable general accounting standards for recording, reflecting, and disclosing income tax-related 17

information and amounts for financial reporting purposes; (4) preparing SCE’s federal and state income 18

tax returns and all supporting workpapers; (5) defending SCE’s federal and state tax return positions in 19

governmental audits; (6) preparing sales and use tax returns, and defending these sales tax returns in 20

audits; (7) calculating and paying estimated income tax payments; (8) actively reviewing applicable tax 21

law and guidance to minimize tax costs, which can be passed along to customers in the form of lower 22

rates; and (9) preparing tax-related testimony and schedules that support the recovery of all income and 23

payroll tax-related costs in utility regulatory proceedings. 24

The Tax Department also performs these income tax related functions on behalf of EIX 25

and other members of the consolidated group. One of the many functions of SCE’s Tax Department is 26

to review and finalize tax returns, combine these returns into a consolidated tax return, and assist in the 27

proper tax accounting treatment associated with non-related tax subsidiaries. However, costs associated 28

with work performed for any entity other than SCE and its regulated subsidiaries are subject to the 29

affiliation credit mechanism discussed in Exhibit SCE-10, Results of Operations. This mechanism 30

ensures that ratepayers are only charged for costs related to the regulated utility. 31

14

The proper performance of these tax-related functions requires a staff of highly seasoned 1

tax professionals with considerable corporate tax experience and, in many cases, advanced degrees that 2

include Juris Doctor and Master’s degrees, as well as Certified Public Accountant credentials. 3

a) Tax Accounting 4

The Tax Department is responsible for the function of accounting for taxes, which 5

includes the recording, on a monthly, quarterly, and annual basis, of all accounting journal entries 6

associated with income taxes for SCE and EIX. Each month, the Tax Department must identify and 7

analyze all accounting transactions to determine the tax treatment for each transaction and then ensure 8

the correct adjustments are made to properly reflect income taxes for SCE’s and EIX’s financial 9

statements. This process entails identifying and analyzing over 200 adjustments each month, as well as 10

preparing journal entries for each of those adjustments each month. 11

SCE and EIX file quarterly financial reports pursuant to Sections 13 and 15 of the 12

Securities Exchange Act of 1934 (SEC Form 10-Q). The Tax Department is responsible for quantifying 13

all tax-related amounts reflected in the income statements and balance sheets, as well as preparing 14

tax-related footnote disclosure information and explanations. SCE and EIX also file an SEC Form 10-K 15

annual financial report that must also contain detailed tax-related financial information as well as 16

extensive footnote disclosures and explanations (prepared by SCE’s Tax Department). SCE is also 17

required to file an annual financial report (FERC Form 1) that contains extensive tax-related amounts 18

and descriptions that must be presented in accordance with FERC accounting rules. The Tax 19

Department is responsible for preparing all tax-related information for this annual filing. 20

Accounting Standards Codification 740-10, Accounting for Uncertainty in 21

Income Taxes (formerly known as FIN 48), requires SCE to evaluate each tax position taken on its tax 22

returns. The Tax Department is responsible for preparing a comprehensive analysis and evaluation of 23

each of its tax positions to determine whether it is more likely than not that the position will be 24

sustained. For positions that meet the more-likely-than-not test, a second test measures the amount at 25

which they will be sustained upon audit. SCE’s financial statements reflect the amounts anticipated to 26

be sustained. 27

The Tax Department is also responsible for maintaining the tax-basis balance 28

sheet and the analysis of all balance sheet tax accounts, including the deferred income tax accounts. 29

Additionally, it is responsible for providing recorded base-year tax amounts for regulatory rate case 30

filings. 31

15

b) Tax Analysis 1

Each year, Congress enacts numerous changes to the federal income tax code, and 2

the IRS issues a significant number of regulations, procedures, rulings, and other guidance, many of 3

which are applicable to SCE. It is the Tax Department’s responsibility to actively monitor to identify, 4

on a continuous basis: any new tax guidance, rules, regulations, and requirements; any recent tax-5

related case law developments; and various tax-related rulings in order to provide reasonable assurance 6

that SCE continues to comply with appropriate tax rules and requirements (and that it properly 7

implements any new tax rules, regulations, and procedures in its tax returns and in its financial 8

statements). The Tax Department also prepares and submits private letter ruling requests as well as 9

changes to tax accounting methods with the National Office of the IRS on such matters as nuclear 10

decommissioning expense and tax repair deductions. Tax benefits from these rulings and changes in 11

methods are passed along to customers. 12

The Tax Department is responsible for ensuring that SCE is fully utilizing all 13

applicable federal, state, and local income, sales and use, excise and other miscellaneous tax laws and 14

guidance to minimize tax costs, which can then be passed along to customers in the form of lower rates. 15

For example, as the tax rules have evolved for repair deductions, the Tax Department has monitored this 16

evolution and has made changes consistent with those rules to provide additional tax deductions that 17

have been incorporated within this proceeding and that have provided benefits to ratepayers in the form 18

of reduced revenue requirements. In addition, the Tax Department is responsible for reviewing and 19

analyzing any proposed utility transactions, and to provide tax-related research, planning, and guidance 20

to ensure these transactions are treated in the proper manner consistent with tax rules, while optimizing 21

the tax benefits or minimizing tax costs, and properly accounting for taxes in our financial statements 22

and regulatory filings. 23

c) Tax Filing 24

The Tax Department is responsible for preparing and filing all federal and state 25

corporate income tax returns for SCE and the EIX consolidated group, preparing all related workpapers, 26

analysis, and comprehensive supporting documentation. It is responsible for computing and remitting 27

the quarterly estimated tax payments related to all of the above tax return filings. It is also responsible 28

for the filing of state sales and use tax returns and prepayments, federal and state excise tax returns, 29

business activity tax returns, federal and state benefit plan trust returns, and the preparation of all tax 30

forecasts on a monthly basis. Tax Department personnel analyze major transactions and their impact to 31

16

the company’s income and sales tax returns, including reasonableness reviews and reconciliations for 1

major discrepancies, as necessary. 2

d) Tax Auditing 3

The Tax Department is responsible for the audit defense of all federal and state 4

tax returns filed by SCE, including income, sales and use tax, payroll, excise, electronic energy 5

surcharge, Forms 5500, benefit plan trust returns, and Forms 1099. Because of SCE’s large size, both 6

the federal and state governments audit all of SCE’s tax returns. The IRS audit team assigned to SCE’s 7

case generally numbers from 15 to 20 auditors. These individuals are located on-site and communicate 8

with Tax Department personnel on a daily basis. SCE submits thousands of pages of supporting 9

documentation to the IRS in response to hundreds of data requests issued in each audit cycle. The Tax 10

Department is responsible for coordinating the resolution of all issues raised by IRS and state auditors 11

either at the field audit level, in the appeals process, and with the IRS National office or, if necessary, 12

through litigation. 13

The Tax Department is also responsible for coordinating and submitting 14

affirmative claims to the taxing authorities, which can result in reduced tax liabilities for the company. 15

The Tax Department analyzes and quantifies potential tax-savings opportunities and then works with 16

authorities to reach the most beneficial outcome to SCE and ratepayers as feasible. 17

e) Tax Regulatory 18

The Tax Department is responsible for preparing and sponsoring all tax testimony 19

and amounts to be included in any CPUC or FERC regulatory proceeding, as well as other rate matters 20

in which taxes are at issue, such as this GRC proceeding and the nuclear decommissioning cost triennial 21

proceeding. In regulatory proceedings, Tax Department personnel review testimony and rebuttal of 22

other interested parties to the proceeding, as well as respond to numerous data requests and, in many 23

cases, participate in evidentiary hearings. The Tax Department is also responsible for ensuring that the 24

proper tax amount and the proper tax flow-through or normalized treatment are reflected in the filings. 25

4. Treasurer’s Department 26

The Treasurer’s Department performs activities necessary for the prudent financial and 27

risk management and governance of SCE: 28

a) Financing, Banking, and Credit 29

The Financing, Banking, and Credit Organization includes Cash Management, 30

which performs cash, banking, and liquidity management services for SCE, including short-term 31

17

investing and borrowing to meet working cash needs. In the course of its normal operations, SCE has 1

general working capital and liquidity requirements primarily related to timing differences between the 2

receipt and payment of cash revenue and expenses. SCE typically actively invests or borrows funds to 3

meet its cash requirements, objectives, and obligations. 4

Cash Management negotiates and manages credit facilities with commercial 5

banks. SCE uses these credit facilities to provide liquidity support to meet periodic needs for short-term 6

cash requirements and for letters of credit primarily required to support energy procurement 7

commitments and needs. Cash Management also negotiates and manages bank fees for necessary 8

services such as deposits, disbursements, automated clearing house,10 electronic data interchange, funds 9

transfer, and information and investment/custody services. Cash Management performs banking 10

operations and management including processing electronic fund transfers, recording accounting entries 11

for cash transactions, and the escheatment filing process. 12

The Capital Market Financing Organization performs capital structure 13

management of SCE’s balance sheet (common equity, long-term debt, and preferred equity) as 14

authorized through the CPUC’s cost-of-capital proceedings. As needed, this division raises capital 15

through issuance of new long-term financial securities to fund capital needs for investments in electrical 16

facilities and maturing debt. During periods of declining or low interest rates, SCE may provide liability 17

management services, such as redemption of previously issued higher-cost debt or preferred equity and 18

replacement with lower-cost debt or preferred equity to provide lower financing costs to customers. 19

During periods of rising or high interest rates, SCE manages the liability structure of its debt and 20

preferred equity portfolio including adjusting terms of financings to maintain the lowest possible cost to 21

its customers. In performing its responsibilities, this division utilizes experts at financial institutions 22

(both investment and commercial banks) to provide reasonable assurance that SCE is obtaining the most 23

advantageous rates and terms for the financial securities that are being issued. The Treasurer’s 24

Department is also responsible for communication and presentation of SCE’s financial condition and 25

business strategy to credit-rating agencies and lending institutions. 26

Credit Risk and Collateral Management (CRCM) is responsible for managing and 27

reporting counterparty credit risk and collateral management, implementing credit policy, monitoring 28

10 The automated clearing house is an electronic network for financial transactions in the United States that processes large

volumes of credit and debit transactions.

18

regulatory initiatives, managing corporate-wide credit policies and procedures, and monitoring 1

regulatory and other issues raised at FERC, CPUC, and the California Independent System Operator 2

(CAISO). 3

In addition to the day-to-day credit and collateral management functions, CRCM 4

supports the Treasurer’s Department in developing short-term forecasts of SCE’s collateral posting 5

requirements. CRCM’s other duties include: negotiating credit terms in enabling agreements (for 6

regular traded transactions as well as long-term structured transactions); performing counterparty credit 7

reviews; and monitoring collateral. The group is also responsible for developing and monitoring the 8

controls for Request for Offer and Request for Proposal solicitation processes. 9

Counterparty credit review and monitoring involves the review of prospective and 10

existing counterparties, vendors, insurance companies, guarantors, banks issuing letters of credit, and the 11

ongoing monitoring of counterparty creditworthiness. Collateral management is the daily process of 12

determining the amount of collateral counterparties need to provide SCE, making the collateral requests 13

to each counterparty, and verifying that the receipt of the required collateral is within predefined posting 14

periods, as well as determining the amount of collateral SCE needs to provide each counterparty. 15

Collateral analysts manage all forms of collateral instruments, including: (1) letters of credit; 16

(2) guarantees; (3) bonds; (4) insurance certificates; (5) escrow accounts; and (6) cash. Collateral is 17

managed for a number of organizations throughout SCE. 18

b) Regulatory Finance, Economics, and Risk Operations & Analytics 19

Treasurer’s Department personnel are responsible for filings and testimony with 20

various regulatory agencies. The Regulatory Finance, Economics, and Risk Operations & Analytics 21

division supports many regulatory proceedings by developing financial and economic projections, 22

analyses, and testimony pertaining to cost-of-capital, escalation rate forecasts, productivity, and 23

financial analyses. Specifically, the Regulatory Finance group manages SCE’s cost-of-capital 24

applications at the Commission and the cost-of-capital portion of SCE’s transmission owner tariff 25

applications at the FERC. The division also provides extensive expert testimony in these cases. The 26

group also co-manages SCE’s nuclear decommissioning contribution applications and provides expert 27

testimony. 28

In SCE’s last GRC, the division supported the analysis of 10 topics: the AFUDC 29

rate; regulatory incentives; O&M escalation; capital escalation; customer deposits; return on specific 30

assets (legacy electromechanical meters and Mohave Generating Station); post-test year ratemaking; 31

19

productivity; analysis of headcount reductions due to intervenor proposals; and employment effects 1

resulting from SCE’s capital investment program. During the past five years (2008 through 2012), the 2

division has supported between seven and 11 regulatory matters per year.11 3

The Economic Services group is responsible for organizing and maintaining 4

corporate financial and economic assumptions. It provides projections for regulatory proceedings and 5

corporate business operations. These projections support work in four major areas: regulatory 6

applications; operational and capital investment decisions; project labor and non-labor escalation; and 7

design and evaluation of procurement contracts. The group also provides analyses of specific economic 8

questions and historical economic data. 9

The Risk Operations group of the division assists the epRMC12 in the 10

development, enforcement, and maintenance of SCE’s Risk Policy for Power Supply’s trading and 11

contracting activities. The Risk Policy provides the key parameters of those transactions and activities, 12

including approved products, roles and responsibilities, risk limits, and procedures. The Risk Policy is 13

one of the tools used by the Treasurer’s Department to oversee Power Supply’s procurement activities. 14

Risk Operations monitors SCE’s energy procurement trading activities to ensure that those transactions 15

are with approved counterparties and are allowed under the Risk Policy’s products, terms, and volumes 16

for that trader. 17

The Risk Operations group also supports SCE’s regulatory filings, such as: 18

(1) providing price data for SCE’s Quarterly Compliance Report (QCR) advice letter filings13 and 19

Energy Resource Recovery Account (ERRA) forecast-versus-actual analyses calculating mark-to-market 20

on SCE energy-related trades and structured transactions used in margining counterparties and for 21

financial reporting; (2) supporting Dodd-Frank Act-mandated historical deal reporting and calculating 22

gross notional value of all transaction limits; and (3) responding to internal and external audit requests. 23

The primary functions of the Risk Operations division include: 24

(1) mark-to-market valuation; (2) market data collection and forward curve development; (3) deal 25

11 In some instances, a regulatory application may extend over several years; it is generally counted in all of these years.

12 The epRMC is a committee consisting of the following four voting members of SCE executives: (1) President; (2) Executive Vice President, External Relations; (3) Senior Vice President and General Counsel; and (4) Senior Vice President and CFO.

13 Within 30 days of the end of each quarter, the state’s three investor-owned-utilities are required to file a QCR with the CPUC’s Energy Division, via advice letter, of all the transactions executed within the previous quarter. See D.02-10-062 at 47, OP 8, as modified by D.03-12-062 at 78.

20

confirmation; (4) risk system administration; (5) limit monitoring and reporting; (6) risk and position 1

reporting to the epRMC; and (7) Dodd-Frank Act project support. 2

The Risk Analytics group of the division reviews and validates Power Supply 3

models and supports the Secretary of the epRMC, all part of the Treasurer’s Department’s oversight role 4

of Power Supply’s procurement. This oversight reduces the risk of procuring products that do not meet 5

SCE’s needs to manage ratepayer risk and supply reliable power. 6

The Risk Analytics group provides analytical support staff for the epRMC by 7

performing independent reviews and validations of procurement-related processes, modeling tools and 8

analytical techniques, and supporting the Vice President and Treasurer as the Secretary of the epRMC. 9

In addition, the Risk Analytics group is responsible for examining key analyses brought before the 10

epRMC and developing an independent opinion or recommendation of the results. 11

The Risk Analytics group develops and maintains an inventory of the modeling 12

tools and analytical techniques used by the various groups within Power Supply. It performs an 13

independent and verifiable review of key processes, modeling tools, and analytical techniques. The 14

inventory allows Risk Analytics staff to prioritize each modeling tool or analytical technique based on 15

its importance in identifying and managing power procurement-related risks. The reviews of a model 16

include an examination and evaluation of the inputs, outputs, assumptions, calculation methodologies, 17

use and application of the model, and relationships with other models. 18

c) Investments 19

As discussed in Exhibit SCE-06, Volume 2, SCE provides employees with a 20

pension plan and 401(k) plan. Funds in these plans are subject to various laws, including the Employee 21

Retirement Income Security Act of 1974 and the Internal Revenue Code. The investment division 22

provides administrative, technical, and managerial support to SCE’s Trust Investment Committee, which 23

is responsible for overseeing the prudent management of investment funds. These duties and 24

responsibilities include researching and managing investment portfolio managers, analyzing investment 25

options and opportunities, monitoring the performance of investments, and recommending investment 26

management operations and policy changes to SCE’s Trust Investment Committee as required to meet 27

fiduciary requirements and investment goals. This division also manages the investment processes and 28

policies for Postretirement Benefits Other than Pensions and provides technical and investment 29

managerial support to the SCE’s Nuclear Facilities Decommissioning Trust Investment Committee to 30

21

provide reasonable assurance that funds are prudently managed according to the Committee’s policies 1

and the CPUC’s investment parameters. 2

d) Enterprise Risk Management (ERM) and Control 3

ERM provides enterprise-wide risk assessment, analysis, and reporting to 4

appropriately manage the broad spectrum of risks facing SCE. This program maintains SCE’s financial 5

stability, allowing it to deliver on its obligations for reliable power and meet its regulatory requirements. 6

The ERM program is expected to maintain SCE’s cost of capital by addressing rating agencies’ 7

requirements and providing stewardship of SCE’s assets. 8

ERM provides a mechanism to identify, treat, and report major risks. This work 9

supports SCE’s credit ratings, which impact SCE’s ability to raise money from the capital markets. In 10

order to provide an enterprise-wide view of opportunities and threats, ERM must conduct risk 11

assessments throughout the company. Risk analysis is conducted and reports are generated at the 12

departmental, operating unit, and enterprise levels. ERM requires an ongoing effort and continual 13

updating, monitoring, and reporting. 14

ERM provides the structure to manage risks inside SCE and report those risks to 15

the Board of Directors as part of corporate governance. This process socializes the major issues that 16

SCE faces and ensures adequate mitigation plans are in place and are being acted upon. The ERM work 17

includes nurturing and maintaining a culture in SCE that actively identifies and manages risks. This 18

work provides value to ratepayers by ensuring that the risks in running an electric utility are managed to 19

provide a safe and compliant work environment to our workforce and to the public, while maintaining 20

reliability and reasonable electrical rates. 21

e) Financial Planning 22

The Financial Planning group prepares long- and short-term financial analyses, 23

including capital structure, cost-of-capital, and financial statement forecasts. SCE uses these financial 24

analyses for financial-management purposes and to support various regulatory and legal filings or 25

reviews by external agencies in support of other treasury functions. 26

5. Business Integration Services 27

The Business Integration Services Organization provides business services to all 28

organizations within Financial Services. These services include: (1) leading the organization to 29

promote a strong safety culture; (2) coordinating employee performance goals and assessments 30

according to HR annual calendars; (3) acting as liaison to the Safety, Security, and Compliance 31

22

Organization for business resiliency and business continuity programs and exercises; and (4) managing 1

compliance training activities for the organization. 2

C. Analysis of Recorded and Forecast Costs 3

The analysis of recorded and forecasted costs in this section is organized as follows: 4

Accounts 920 & 921: Labor and non-labor expenses related to the operations of Financial 5

Services (Controller’s, P&PR, Tax, Treasurer’s, and Business Integration Services); 6

Accounts 923 & 930: Non-labor expenses related to outside services and fees; and 7

Account 926: Labor and non-labor expenses to administer employee benefit plans. 8

As discussed previously, SCE expects to realize reduction of labor and non-labor expenses in 9

Financial Services through its Operational Excellence initiative. Although SCE has centralized its 10

finance organization, the accounting for labor and non-labor expenses continues to be decentralized 11

across FERC accounts, so that costs are appropriately reflected. The following set of tables show the 12

operating units where these labor and non-labor expense reductions are reflected and their respective 13

exhibits in this proceeding. 14

Table I-4 below summarizes where the labor reductions and historical recorded labor costs are 15

appropriately reflected in the operating units’ exhibits: 16

Table I-4 Financial Services Labor Expense Forecast: All Exhibits


Exhibit

2012 Recorded/Adj

LaborExpense Savings

SONGS Savings

2015 Forecast -

LaborFinancial Services - SCE-08 $31,703 ($7,354) $0 $24,349Customer Service - SCE-04 $3,588 ($1,166) $0 $2,422External Relations - SCE-09 $992 ($247) $0 $745Human Resources - SCE-06 $810 ($157) $0 $653Information Technology - SCE-05 $3,340 ($1,211) $0 $2,129Legal - SCE-08 $255 ($90) $0 $165SONGS - SCE-02 $5,459 ($986) ($4,069) $404Operational Support - SCE-08 $5,287 ($1,682) $0 $3,605Power Supply - SCE-02 $2,360 ($694) $0 $1,666Trans & Distrib - SCE-03 $1,541 ($583) $0 $958

Total $55,335 ($14,170) ($4,069) $37,096

23

Recorded labor expenses, labor savings, and expense forecast are covered under each operating 1

unit’s respective exhibits. Table I-5 below summarizes where the non-labor reductions and historical 2

recorded non-labor costs are appropriately reflected in the operating units’ exhibits. 3

Table I-5 Financial Services Non-Labor Expense Forecast: All Exhibits


Exhibit

2012 Recorded/Adj

Non-LaborExpense Savings

Additional Forecast

ReductionSONGS Savings

2015 Forecast - Non-Labor

Financial Services - SCE-08 $51,062 ($1,294) ($9,355) $0 $40,413Customer Service - SCE-04 $912 ($140) $0 $0 $772External Relations - SCE-09 $60 $0 $0 $0 $60Human Resources - SCE-06 $5 $0 $0 $0 $5Information Technology - SCE-05 $1,072 ($647) $0 $0 $425Legal - SCE-08 $0 $0 $0 $0 $0SONGS - SCE-02 $120 $0 $0 ($228) ($108)Operational Support - SCE-08 $263 $0 $0 $0 $263Power Supply - SCE-02 $0 $0 $0 $0 $0Trans & Distrib - SCE-03 $3,356 ($410) $0 $0 $2,946

Total $56,850 ($2,491) ($9,355) ($228) $44,776

The 2012 recorded labor expense, savings, and expense forecast for Financial Services are 4

covered in this exhibit, as summarized by FERC accounts in Table I-6 below: 5

Table I-6 Financial Services Labor Expense Forecast: Financial Services Exhibit


FERC Acct

2012 Recorded/Adj

LaborExpense Savings

2015 Forecast - Labor

920 & 921 $31,135 ($7,354) $23,781923 & 930 - - -

926 568 - 568 Total $31,703 ($7,354) $24,349

24

Table I-7 below summarizes 2012 recorded non-labor expense, savings, and expense forecast for 1

Financial Services covered in this exhibit, as summarized by FERC account: 2

Table I-7 Financial Services Non-Labor Expense Forecast: Financial Services Exhibit


FERC Acct

2012 Recorded/Adj

Non-LaborExpense Savings

Additional Forecast

Reduction2015 Forecast -

Non-Labor

920 & 921 $3,467 $0 $0 3,467 923 & 930 47,590 (1,294) (9,355) 36,941

926 5 0 0 5 Total $51,062 ($1,294) ($9,355) $40,413

1. Accounts 920/921 3

The amounts recorded in Accounts 920/921 for Financial Services include the salaries 4

and office supplies and expenses related to the operation of the Controller’s, P&PR, Tax, Treasurer’s, 5

and Business Integration Services organizations. 6

25

Figure I-1 Financial Services

Recorded and Adjusted 2008-2012/Forecast 2013-2015 FERC Accounts 920/921


a) Labor Costs 1

As shown in Figure I-1 above, labor increased by 12 percent from 2008 to 2009. 2

There are three primary reasons for the increase. First, labor costs for the Treasurer’s Department 3

increased primarily due to a net increase of 19 new employees supporting risk-control activities. This 4

increased staffing was necessary to support greater workload resulting from significant changes in the 5

energy markets during that period. These changes included: (1) the new energy market design related 6

to the CAISO’s Market Redesign and Technology Upgrade; (2) the introduction of new products such as 7

SO2 emission credits; (3) regulatory requirements related to the Renewables Portfolio Standard (RPS); 8

(4) an increased focus on credit issues as a result of the 2008 worldwide financial/credit crisis; (5) the 9

management of out-of-state renewable energy resources, including related transmission-planning issues; 10

(6) the development of new procurement methodologies for energy products; and (7) new regulatory 11

requirements such as energy auctions related to new generation procurement or CPUC data requests 12

concerning SCE trading. Due to these market changes, the Treasurer’s Department had to oversee 13

matters of significantly greater scope and complexity. 14

26

Second, labor expense increased from 2008 to 2009 due to the ERP 1

implementation project. SCE began to use the new ERP system for its core financial processes and 2

financial reporting on July 1, 2008. During the implementation of the project, a portion of Financial 3

Services’ staff was temporarily assigned to key ERP development tasks such as: data conversion and 4

mapping to new accounts; FERC account translation; consolidation system development; and training. 5

The Controller’s organization did not fill vacancies during this period to facilitate the realization of ERP 6

cost savings and to permit time to evaluate reorganization options in the post-ERP environment. The 7

labor increase in 2009 reflects the return of staff assigned to the ERP project to the Controller’s 8

organization. 9

Third, labor increased from 2008 to 2009 due to the filling of six positions 10

authorized in SCE’s 2009 GRC decision to meet increasing workloads in support of the capital 11

investment plan and power procurement transactions. 12

Labor remained relatively flat from 2009 through 2012. The Financial Services 13

forecast of labor in Accounts 920 and 921 is based on recorded 2012 costs. Given that labor costs have 14

been relatively flat since 2009, the last recorded year is an appropriate base estimate. From that base, 15

we have reduced our forecast by $7.4 million to reflect savings from the Operational Excellence 16

initiative, resulting in a Test Year 2015 forecast of $23.8 million. 17

b) Non-Labor Costs 18

As shown in Figure I-1 above, during the period 2008 through 2012, non-labor 19

costs increased in 2009, remained relatively flat in 2010, and decreased in 2011. The increase in costs 20

from 2008 to 2009 was primarily due to increased agency staffing costs in Accounts Payable to assist 21

with the transition to the SAP-based invoice processing system. The declining cost in 2011 was due to 22

reductions in the need for temporary staffing in support of the transition to ERP. In 2012, non-labor 23

costs remained relatively flat. 24

The forecast of non-labor in Accounts 920 and 921 is based on recorded 2012 25

costs. In D.04-07-022 and D.89-12-057, the CPUC stated that if costs have shown a trend in a certain 26

direction over three or more years, the last recorded year is an appropriate base estimate. Non-labor 27

costs in this account increased from 2008 to 2010 and decreased in 2011 and 2012, so the base year 28

costs provide our base estimate for Test Year 2015. 29

27

2. Accounts 923 & 930 1

In addition to labor, a variety of externally provided services are required to support 2

Financial Services activities. In the Financial Services exhibits for previous GRC applications, SCE 3

provided separate testimony and workpaper packages for FERC Accounts 923 (Outside Services 4

Employed) and 930 (General Advertising Expenses and Miscellaneous General Expenses). Although 5

we account for these various services separately to comply with the accounting requirements, we do not 6

manage or forecast these non-labor costs strictly by FERC account. FERC Account 923 costs generally 7

represent non-labor costs paid to third-party firms or individuals for services such as consulting for 8

capital software projects, auditing, accounting, tax, and consulting. FERC Account 930 costs generally 9

represent non-labor costs paid to third-party firms or individuals for credit-rating services and agency 10

services for the issuance of SCE’s commercial paper and maintenance of credit lines. This also includes 11

lender-commitment fees and legal fees associated with renewals for SCE’s credit facilities as well as 12

bank fees. We have consolidated the testimony and workpaper packages for Financial Services for the 13

non-labor related services in these two FERC accounts into one activity to better align with how we 14

manage these costs and to reduce the complexity of our testimony and workpapers. Consolidating 15

FERC Accounts 923 and 930 into one activity reduces the effort required to prepare and review our 16

costs for all parties by eliminating unnecessary breakdown of testimony and workpapers. Figure I-2 17

below shows the services recorded in Account 923 and 930 for 2008 through 2012. 18

28




a) Outside Services 1

SCE uses outside consultants for accounting- and tax-related services, and retains 2

such consultants on an as-needed basis to handle specific tasks when it is more cost-effective than 3

developing and maintaining such expertise on a permanent basis in-house. Expenses for CPUC- and 4

SEC-mandated audits and fees for SCE’s independent registered public accounting firm are charged to 5

this account. In addition, EIX provides investor relations services and insurance risk management 6

services to SCE, as these are functions that do not exist at SCE. 7

b) Bank Service Fees 8

The diverse nature of SCE’s cash transactions requires the use of multiple banks 9

to provide numerous services, including balance reporting, check processing, electronic funds transfers, 10

and depository services. Fees for bank services are negotiated on a bank-by-bank basis, including 11

volume-based fees and fixed monthly fees. Because of the large number of banking transactions, the 12

fees are volume-discounted. 13

29

c) Credit Line Fees 1

SCE maintains multi-year credit lines to meet its cash needs. In February 2007, 2

SCE negotiated a $2.5 billion, five-year credit facility that was used to support energy procurement, 3

ERRA balancing account under-collections and general-purpose borrowing needs. A syndicate of banks 4

provided the total credit committed under this facility. Any borrowings under this credit facility were 5

allocated to either the ERRA balancing account undercollection or general purposes needs with fees 6

recorded in Account 930. 7

In May 2012, SCE negotiated a $2.75 billion, five-year credit facility to replace 8

its existing facilities. Forty-five percent of this facility is allocated to ERRA and 55 percent is allocated 9

for general purpose uses with fees recorded in Account 930. 10

The cost of credit lines included in Account 930 includes only the fees for 11

general-purpose borrowing. Up-front costs paid to upsize and/or amend the terms on the five-year credit 12

facility are amortized over its five-year life. General-purpose up-front costs amortized in 2012 were 13

$0.7 million. SCE maintains approximately $1.5 billion in general-purpose credit facility capacity due 14

to ordinary fluctuations in cash flows resulting from the timing of payments, such as debt maturities, 15

taxes, capital expenses, and other large non-recurring payments. The total recorded credit facility costs 16

in Account 930 (including facility fees, annual arrangement/agency fees, amortized up-front fees and 17

legal fees) for $1.5 billion of general-purpose borrowing capacity were $2.5 million in 2012. 18

d) Bond-Related Fees 19

Bond-related fees reflect expenses associated with the ongoing administration of 20

SCE's outstanding capital markets securities. These expenses include charges for bond trustees, bond 21

insurers, and broker-dealers. The bond trustees administer all the recordkeeping and payment 22

responsibilities for SCE's outstanding debt securities and some preference securities. They maintain 23

ownership records for all securities, pay interest and principal when due, process tax statements, and 24

respond to investor inquiries. The trustee fees are payable throughout the lives of the securities. 25

The bond insurers issue insurance policies guaranteeing the payment of principal 26

and interest on certain tax-exempt SCE bonds. For those particular bond issues, market conditions at the 27

time made it more cost-effective to purchase the bond insurance and pay the lower interest rate 28

associated with an AAA bond rating than to issue the bonds on SCE’s own credit. These insurance 29

premiums are payable annually throughout the lives of these bonds. Due to the crisis in the financial 30

markets that began in 2008 and which had significant adverse impacts on these insurers, the credit-rating 31

30

agencies downgraded most of these bond insurers to below-investment-grade status, thereby effectively 1

eliminating the prior value in using such bond insurance. The Account 930-related bond-related fees in 2

2012 were $0.7 million. 3

e) Non-Labor Costs 4

As shown in Figure I-2 above, costs associated with services for FERC Accounts 5

923 and 930 fluctuated significantly from 2008 to 2012 as various initiatives needed to support Financial 6

Services were started and ended. Costs increased from 2008 to 2009 by $16.1 million primarily due to 7

an increase in tax consultants to assist SCE with numerous contested tax issues. The tax consultants 8

were hired to conduct tax research and perform analyses in support of SCE’s tax position. Costs 9

decreased in 2010 as the number of outstanding contested issues declined. 10

Non-labor costs remained relatively flat from 2010 to 2011. From 2011 to 2012, 11

non-labor costs increased by $12.9 million primarily because management consultants were hired to 12

support SCE’s Operational Excellence initiative to improve business processes and increase productivity 13

across the company. Consultants were used to assist in benchmarking against other companies and 14

improving the company’s existing processes. It is more cost-effective for SCE to hire consultants for 15

certain accounting, banking, tax, and management advice than it would be to develop and maintain such 16

expertise in-house. Our historical spending levels indicate we face challenges from year to year that 17

require additional services, such as new tax laws, FASB pronouncements, and audit requirements. For 18

example, the adoption of the proposed change from the Public Company Accounting Oversight Board 19

requiring mandatory rotation of auditors would cause significant disruption to the current framework of 20

SEC-required audits and would therefore result in a material increase in outside services costs. Also, 21

provisions in the Tax Relief Act and the subsequent IRS Revenue Procedures on bonus depreciation, as 22

well as new tax rulings and procedures regarding repairs deductions, are complex and require additional 23

expertise to implement. Because it is reasonable to expect changes in the tax codes, accounting 24

standards, and financial reporting requirements that would have a material financial impact on SCE, we 25

expect we will continue to need outside assistance in those matters. 26

In D.04-07-022 and D.89-12-057, the CPUC stated that if costs have shown a 27

trend in a certain direction over three or more years, the last year recorded costs are an appropriate base 28

estimate. Recorded costs in this activity have fluctuated over the five-year historical period, so we chose 29

the five-year average of recorded expenses as the appropriate forecast method. The 2015 forecast was 30

31

reduced by $1.3 million to reflect savings from the Operational Excellence initiative, resulting in a Test 1

Year 2015 forecast of $37.4 million. 2

3. Account 926 3

The amounts recorded in Account 926, Employee Pensions and Benefits for Financial 4

Services, include expenses to administer benefit plans and other employee plans within the Controller’s 5

Organization. Additionally, this account is credited with the amount of pensions and benefits expenses 6

charged to other utilities and construction as discussed below in Section IV, Participant A&G and P&B 7

Credits/Costs, and Section VI, Capitalized P&B Expense. 8


Recorded and Adjusted 2008-2012/Forecast 2013-2015 FERC Account 926


a) Labor Costs 9

As shown in Figure I-3 above, from 2008 through 2012, labor costs varied due to 10

adjustments to the pension and benefits accounting staff. From 2008 to 2009, there was a decrease of 11

$52,000 due to a vacancy. This vacancy was filled in 2010, which increased costs by $72,000. Costs 12

remained relatively flat from 2010 through 2012. 13

32

The forecast of labor costs in Account 926 is based on recorded 2012 costs. 1

Given that labor costs have been relatively flat since 2010, the last recorded year is an appropriate base 2

estimate. 3

b) Non-Labor Costs 4

As shown in Figure I-3 above, from 2008 through 2012, non-labor costs remained 5

relatively flat. 6

The forecast of non-labor costs in Account 926 is based on recorded 2012 costs. 7

Given that labor costs have been relatively flat since 2008, the last recorded year is an appropriate base 8

estimate. 9

33

II. 1

AUDIT SERVICES DEPARTMENT 2

A. Summary of Test Year Request 3

The Audit Services Department (ASD) is estimating O&M expenses of $8.658 million in Test 4

Year 2015, a decrease of $319,000 from 2012 spending levels (in constant 2012 dollars). ASD’s Test 5

Year forecast reflects the level of expense necessary to continue performing its core activities while 6

accounting for ongoing business changes. ASD expects additional work driven by the centralization of 7

Sarbanes-Oxley Act (SOX) manual key-control testing, but less work due to the bankruptcy of Edison 8

Mission Energy (EME). Figure II-4 below shows recorded costs for the years 2008 through 2012 and 9

the forecast costs for the years 2013 through 2015. 10

Figure II-4 Audit Services Department



B. Activities of the Audit Services Department 11

ASD provides independent, objective assurance services pertaining to risk management, 12

governance, and controls, including systems of internal controls. In addition, ASD provides consulting 13

services requested by management to improve the effectiveness and efficiency of the Company’s 14

operations. 15

34

ASD’s objective is to determine whether SCE’s processes and systems for the management of 1

risks, governance, and controls, as designed and represented by management, are adequate and 2

functioning so that: 3

Risks are appropriately identified, understood, communicated, controlled, and managed 4

consistent with established policies; 5

Interaction with the various governance groups occurs; 6

Significant financial, managerial, and operating information is accurate, reliable, and timely; 7

Employees’ actions comply with established policies, procedures, standards of conduct, and 8

applicable laws and regulations; 9

Applicable laws and regulations are followed; 10

Resources are acquired economically, used efficiently, and adequately protected; and 11

Plans, goals, and program objectives are achieved. 12

Additionally, to support the annual certification required under SOX Section 404, ASD conducts 13

design evaluations and operating-effectiveness tests of company-level controls and all significant 14

process-level controls over financial reporting. ASD also reviews the general information technology 15

controls testing performed by IT Compliance. 16

Approximately 48 percent of SCE’s internal auditors hold advanced accounting, business, or 17

engineering degrees, and approximately 88 percent have professional licenses and/or certifications such 18

as Certified Public Accountant, Certified Internal Auditor, Certified Information Systems Auditor, 19

Certified Fraud Examiner, Certified Professional Environmental Auditor, and Certification in Risk 20

Management Assurance. These professional designations enable SCE’s auditors to apply a number of 21

tools to fulfill their roles in evaluating the adequacy and effectiveness of SCE’s processes and systems 22

for internal controls and compliance with applicable laws and regulations. These tools include: 23

(1) analytical review of procedures; (2) review of financial and operating data using trend analysis, 24

budget-to-actual comparisons, and industry ratios; (3) interviews of SCE management and personnel; 25

(4) risk assessment, which entails the quantification and ranking of risk associated with activities based 26

upon known or anticipated internal and external business and environmental factors; (5) general ledger 27

and accounting review; (6) data analysis using various IT software applications; (7) protocols for 28

investigating ethics helpline calls (ASD provides subject matter experts to support Ethics & Compliance 29

in investigating allegations involving audit, conflicts of interest, and internal control issues); and 30

(8) compliance review of environmental, health, and safety laws and regulations. 31

35

ASD performs additional activities, such as monitoring the efficient use of SCE’s physical and 1

human resources, through a combination of financial auditing, operational auditing, contract auditing, 2

internal consulting, environmental, health, and safety auditing, information technology auditing, and 3

responding to management requests. ASD also supports SCE’s role in external routine audits conducted 4

by numerous federal, state, and local agencies (e.g., FERC and the CPUC). ASD’s support activities 5

include (but are not limited to) responses to data requests, agency interviews with SCE personnel, and 6

preliminary reviews of audit findings. 7

Further, ASD assesses SCE’s compliance with various standards, rules, and requirements. This 8

includes: (1) reviewing applicable procedures and supporting documentation for selected North 9

American Electric Reliability Corporation Critical Infrastructure Protection Standards; (2) evaluating 10

compliance with various CPUC requirements through review of administration of multiple programs 11

over multiple plan years, such as California Alternative Rates for Energy, Demand Response, and the 12

California Solar Initiative; (3) reviewing SCE’s compliance with various tariffs and rules; and 13

(4) regularly reviewing compliance with selected affiliate transaction rules.14 14

1. Business Changes Impacting Test Year Forecast 15

Due to the business changes resulting from Operational Excellence and the EME 16

bankruptcy proceeding, the department’s overall 2015 Test Year forecast was reduced by $319,000 (3.6 17

percent) from 2012 recorded spending levels. 18

a) Operational Excellence 19

SOX Section 404 requires management to report on an annual basis its evaluation 20

of internal control over financial reporting. This process is designed and maintained by management to 21

provide reasonable assurance regarding the reliability of financial reporting and the preparation of the 22

financial statements for external purposes in accordance with U.S. GAAP. It encompasses the following 23

procedures: maintenance of records that accurately reflect the company’s transactions; preparation of 24

financial statements and footnote disclosures for external purposes; providing reasonable assurance that 25

receipts and expenditures are appropriately authorized; and prevention and prompt detection of 26

unauthorized acquisitions, use, or disposition of the company’s assets that could have a material effect 27

on the financial statements. 28

14 The costs for work performed for any entities other than SCE and its regulated subsidiaries are subject to the affiliate

credit mechanism discussed in Exhibit SCE-10, Results of Operations.

36

In prior years, ASD assisted management with SOX Section 404 compliance by 1

performing tests of entity-level controls and the high-risk manual key controls and related spreadsheets 2

and system-generated reports. Low- and medium-risk manual key controls were tested by the process 3

owners, whose work was reviewed and approved by ASD. IT general computer controls were tested by 4

IT Compliance, a division of IT. 5

Beginning in 2013, SOX Section 404 testing of all manual key controls (low- to 6

high-risk), in addition to the entity-level controls, will be conducted by ASD. IT general computer 7

controls will continue to be tested by IT Compliance. Although additional work is being absorbed by 8

ASD, the resources consolidated into ASD are funded through existing rates. ASD is not requesting 9

additional funding. 10

b) EME Bankruptcy 11

EME’s bankruptcy proceeding in December 2012 had a significant impact on 12

ASD. At the request of EME, ASD completed a few outstanding audits, and discontinued the remaining 13

audits on the 2012-2013 audit plan. Future audit plans will not include services performed on behalf of 14

EME.15 15

C. Analysis of Recorded and Forecast Costs 16

The amounts recorded and forecast in Accounts 920/921 include salaries, office supplies, and 17

other expenses. Figure II-4 above shows ASD’s recorded 2008-2012 labor and non-labor costs for 18

Accounts 920-921 and the Test Year 2015 forecast. 19

1. Labor Costs 20

Labor costs steadily decreased from approximately $9 million in 2008 to $8 million in 21

2012, generally due to attrition and employees on extended leaves of absence. For the 2015 labor 22

forecast, ASD selected the last recorded year method. In D.89-12-057, the CPUC stated that if recorded 23

expenses in an account have shown a trend for three or more years, the last recorded year is an 24

appropriate base estimate. In addition, the 2012 amount was reduced by $858,000 to reflect the 25

discontinuation of audits performed for EME. As a result, ASD’s total 2015 labor forecast is $7.156 26

million. 27

15 Because ASD costs are allocated between EIX and SCE, EME costs are not passed on to SCE ratepayers. See the

discussion of the affiliate credit mechanism in Exhibit SCE-10, Results of Operations.

37

2. Non-Labor Costs 1

Non-labor costs fluctuated significantly from 2008 to 2012. From 2009 to 2010, costs 2

increased due to additional training and contract labor expenses. Incremental training conducted in 2010 3

included fraud, IT risks and controls, conflict management, business writing, career management, 4

internal quality-assessment reviews, and accounting overview of financial and management accounting 5

in the SAP environment. Additional contract labor expenses were incurred during 2010 to supplement 6

audit work in the following areas because staffing turnover resulted in eight vacant positions during the 7

year: (1) energy-efficiency program audits; (2) the FERC Form 1 adjustment process; (3) common-8

cause analysis of environmental, health and safety issues; (4) the SONGS work-order control process; 9

and (5) ERP Release No. 3. From 2010 to 2011, costs increased primarily due to additional training and 10

contract labor expenses. Incremental training conducted in 2011 included advanced auditing for 11

in-charge auditors, decision making (Thinkers Workshop), ACL (data analysis audit and reporting 12

software), Visio, and Excel Analytics. Additional contact labor expenses were incurred during 2011 13

driven by staffing turnover and seven vacancies, which resulted in supplemental audit work in the 14

following areas: (1) SOX; (2) data center maintenance support; (3) environmental, health, and safety at 15

substations and service centers; (4) confined-space work practices; (5) environmental licensing and 16

permitting processes; and (6) transmission and distribution maintenance and inspection. The significant 17

reduction in 2012 expenses was caused by conservative spending due to the uncertainty around the 2012 18

GRC decision and EME’s reduced demand for audit services. From 2011 to 2012, we experienced 19

lower contractor, travel, and training costs. All contract spending was curtailed, except for some 20

assistance with IT SOX testing. 21

ASD selected the five-year average forecast method for estimating 2015 non-labor costs. 22

In D.89-12-057, the CPUC stated that for those accounts which have significant fluctuations in recorded 23

expenses from year to year, an average of recorded expenses is appropriate. Recent five-year recorded 24

non-labor expenses in this account have fluctuated significantly from year to year, so an average is an 25

appropriate forecast. This is due to a number of variables, such as: fluctuations in supplemental staffing 26

levels; changes in the audit plan, which drives the type of training required during the year; the need to 27

travel; the need for contractors; and fluctuations in travel costs (e.g., airfares, lodging, and meal 28

expenses). 29

As noted earlier, the 2012 non-labor expense level was an anomaly, and is therefore not a 30

good starting point to use as a base year in determining the forecast. Use of a five-year average, which 31

38

provides an increase of $589,000 over 2012 expenses, is more appropriate due to the additional expenses 1

that ASD is forecasting. To that base, ASD recognized a savings of $50,000 in non-labor expenses 2

related to the reduction of work for EME. 3

Additional expenses that were deferred in 2012 will include: 4

The use of contract auditors with IT and cybersecurity expertise to add breadth and 5

depth to the scope of audits, and transfer knowledge and expertise to SCE’s internal 6

auditors in the following areas: 7

o Supervisory Control and Data Acquisition (SCADA) systems 8

(functionality/performance and security); 9

o Comprehensive network and device reviews; 10

o Automated secure codes reviews; 11

o Vendor contract management (for outsourcing and cloud computing); and 12

o Assessments of SCE-led, enterprise-wide, cybersecurity projects/initiatives. 13

Training related to cybersecurity and other IT activities/processes: 14

o SCADA systems (security, functionality, and safety); 15

o Databases (data structures, performance, and security); 16

o Smart Grid technologies and security around meter-to-cash data processes; 17

o Cloud computing and other IT outsourcing strategies/activities; and 18

o Automated tools and techniques for more comprehensive reviews/analytics. 19

The increase and sophistication of destructive and disruptive cybersecurity activities and 20

threats requires that ASD employees have the skills to assess the risk and provide management with 21

appropriate recommendations to mitigate those risks. Cyber-attacks have dramatically increased in the 22

past few years, while the growth of state-sponsored cyber-warfare/terrorism requires utilities to have 23

greater expertise to address the heightened risk.16 Likewise, state and federal regulatory requirements in 24

the areas of cybersecurity, data protection, and systems reliability have increased.17 The pace and 25

complexity of new regulations requires ASD auditors to acquire the expertise to support management’s 26

assessment of compliance with these regulations. 27

16 Staff of Congress Members Edward J. Markey and Henry A. Waxman, Electric Grid Vulnerability: Industry Responses

Reveal Security Gaps, (May 21, 2013), 2, http://markey.house.gov/sites/markey.house.gov/files/documents/Markey%20Grid%20Report_05.21.13.pdf.

17 See Exhibit SCE-07, Vol. 4 for a discussion of NERC CIP requirements.

39

III. 1

PARTICIPANT A&G AND P&B CREDITS/COSTS 2

SCE is the operating agent and majority owner of the San Onofre Nuclear Generating Station 3

(SONGS), the Mohave Generating Station (Mohave, a coal-fired station), and the Eldorado transmission 4

facilities (Eldorado). SCE owns 78.21 percent of SONGS with San Diego Gas & Electric (SDG&E) and 5

the City of Riverside sharing in the remaining 21.79 percent.18 SCE owns approximately 56 percent of 6

Mohave with Nevada Power Company (NPC), Salt River Project (SRP) and the Los Angeles 7

Department of Water and Power (DWP) co-owning the remaining approximately 44 percent. SCE owns 8

approximately 60 percent of Eldorado with NPC, SRP and DWP co-owning the remaining 9

approximately 40 percent. On June 7, 2013, SCE announced the permanent retirement of SONGS Units 10

2 & 3. The SONGS participant credits forecast was significantly reduced and is consistent with SCE’s 11

forecasted spending for plant shutdown.19 Mohave ceased operation on December 31, 2005. In June 12

2009, the owners of Mohave announced the decision to decommission the station and remove the 13

generating facility from the site. The Mohave participant credits reflect the costs to decommission the 14

facility. The participant credit forecast is consistent with the Mohave Operations and Maintenance 15

expense (O&M) forecast. 16

Since SCE is the majority owner and operating agent in the SONGS, Mohave, and Eldorado 17

facilities, SCE bills the minority participants for their share of A&G costs and pension and benefits 18

(P&B) costs to operate these facilities. SCE records the A&G amounts billed to the participants as 19

credits (i.e., contra expenses) to Account 930. SCE records the P&B amounts billed to the participants 20

as credits (i.e., contra expenses) to Account 926. 21

The amount of A&G and P&B costs billed to the participants are based on contractual A&G and 22

P&B rates as set forth in the respective Operating Agreements. SCE has applied the currently effective 23

contractual A&G and P&B rates to the 2013 through 2015 O&M forecasts for SONGS and Mohave to 24

derive the 2013 through 2015 forecast of Participant A&G and P&B credits.20 SCE is also a 25

non-operating agent and minority owner in the Palo Verde Nuclear Generating Station (PVNGS) and the 26

18 On December 29, 2006, SCE acquired the City of Anaheim’s 3.16 percent ownership share of SONGS 2&3 resulting in

a revised SCE ownership share of 78.21 percent as adopted in D.06-11-025.

19 See Exhibit SCE-02, Generation, for a discussion of the SONGS Units 2 & 3 shutdown and spending forecasts.

20 The last recorded year (2009) was used for Eldorado, since it reflects current participant rates.

40

Four Corners Generating Station (Four Corners, a coal-fired station). SCE owns approximately 16 1

percent of PVNGS with Arizona Public Service (APS), El Paso Electric, PNM (formerly Public Service 2

Company of New Mexico), SRP, and DWP owning the remaining approximately 84 percent. SCE also 3

owns 48 percent of Units 4 and 5 of the Four Corners facility with APS, PNM, SRP, Tucson Electric 4

Power, and El Paso Electric sharing in the remaining 52 percent. APS owns 100 percent of Units 1, 2 5

and 3. In November 2010, SCE entered into an agreement to sell its ownership interest in Units 4 and 5 6

of the Four Corners facility to APS.21 As a result of being the minority owner and non-operating agent 7

of the PVNGS and Four Corners facilities, the majority owner (APS) bills SCE for the A&G and P&B 8

costs to run these facilities. SCE records these costs as debits to Accounts 930 and 926, respectively. 9

SCE has applied the currently effective contractual A&G and P&B rates to the 2013 through 2015 O&M 10

forecasts for PVNGS and Four Corners to derive the 2013 through 2015 forecast of Participant A&G 11

and P&B credits. 12

Figure III-5 below shows 2008 through 2012 recorded billings/costs and the forecast for 2013 13

through 2015 for Account 930 (Participant A&G). The effective A&G rate increased in 2009 and 14

resulted in higher SONGS participant A&G credits in years 2009 to 2012. The 2010 increase in SONGS 15

participant credit was partially offset by a $2.176 million refund to SONGS co-owners for over-billings 16

in prior years. In 2012, participant costs increased due to higher A&G costs billed by APS, the Palo 17

Verde majority owner. 18

21 See Exhibit SCE-02, Generation, for a discussion on the sale of Four Corners and forecasted spending.

41

Figure III-5 Financial Services

Recorded and Adjusted 2008-2012/Forecast 2013-2015 FERC Account 930 – Participant Credits


Figure III-6 below shows 2008 through 2012 recorded billings/costs and the forecast for 2013 1

through 2015 for Account 926 (Participant Pension and Benefits). The Palo Verde and Four Corners 2

participant P&B rate increased in 2009, resulting in higher P&B costs for years 2009 to 2012. 3

Participant P&B costs were offset by a refund to SONGS co-owners for operating years 2008 to 2010 4

for over-billing. 5

42

Figure III-6 Financial Services

Recorded and Adjusted 2008-2012/Forecast 2013-2015 FERC Account 926 – Participant Credits


43

IV. 1

CAPITALIZED A&G EXPENSE 2

This chapter provides SCE’s estimated capitalization rate for A&G expenses.22 Capitalized A&G 3

is calculated by multiplying the A&G capitalization rate by the A&G expense in Account 920 (A&G 4

Salaries), a portion of Account 921 (Office Supplies and Expenses), and Results Sharing. SCE records 5

the amount of capitalized A&G as a credit to Account 922 (Administrative Expenses Transferred) and a 6

debit to Account 107 (Construction Work in Progress), and ultimately includes it in Plant-in-Service. 7

SCE performs an A&G Effort Study to determine the A&G capitalization rate for costs that are 8

not already directly recorded to capital work orders.23 This study was conducted in accordance with 9

FERC Electric Plant Instruction No. 424 and the National Association of Regulatory Utility 10

Commissioners’ (NARUC) interpretation of that instruction.25 Each department that incurred expenses 11

charged to Accounts 920 and 921 estimated the portion of their A&G costs that support construction 12

activities. Estimates were developed by reviewing employees’ time and expenses related to construction 13

activities and by reviewing the relationship of departmental functions and activities associated with 14

construction activities. 15

Based on these departmental estimates, a company-wide composite weighted average A&G 16

capitalization rate of 20.0 percent was computed. This is the same methodology proposed and approved 17

in SCE’s 2012 GRC decision.26 SCE has applied this rate of 20.0 percent to the Test Year 2015 forecast 18

of Account 920 and 921 A&G expenses.27 19

22 To properly reflect the total costs of construction, administration and general costs supporting construction activities that

are not directly charged to construction work orders must be included in capital (and simultaneously removed from expense).

23 See workpapers accompanying this exhibit for a copy of the A&G Effort Study.

24 See workpapers accompanying this exhibit for an excerpt of 18 C.F.R. § 101, Plant Instruction No. 4.

25 See workpapers accompanying this exhibit for an excerpt from NARUC’s interpretation.

26 See D.12-11-051.

27 See Exhibit SCE-10, Results of Operations, for the amount of A&G expenses to be capitalized in Account 922.

44

V. 1

CAPITALIZED P&B EXPENSE 2

This chapter provides SCE’s estimated capitalization rate for P&B expenses. SCE uses this 3

capitalization rate to establish the amount of P&B expenses that will be capitalized.28 Capitalized P&B 4

cost is calculated by multiplying the P&B capitalization rate by the estimate of P&B expenses to be 5

recorded in Account 925 (Injuries and Damages) and Account 926 (Employee P&B), before recording 6

the credit mentioned below. The amount of P&B expense to be capitalized is recorded as a credit to 7

Account 926 and a debit to Account 107 (Construction Work In Progress) and ultimately included in 8

Plant in Service. 9

P&B expense is correlated with labor expense. That is, as labor costs are incurred, P&B costs 10

are also incurred. Therefore, the rate of P&B capitalization follows the rate of labor capitalization. The 11

total 2012 recorded wages paid for construction divided by the total 2012 recorded wages paid by SCE 12

(excluding below-the-line wages) results in a P&B capitalization rate of 39.8 percent. Using the 13

methodology adopted in SCE’s 2009 and 2012 GRC decisions, SCE is proposing to use 39.8 percent for 14

the Test Year 2015 forecast of P&B capitalization.29 15

28 To properly reflect the total costs of construction, these P&B costs associated with construction labor must be included

in capital (and simultaneously removed from expense).

29 In its decision on SCE's 2009 GRC application, the Commission adopted TURN's proposal to assign P&B costs below-the-line before the capitalized P&B rate is applied to this net amount. SCE has incorporated this adjustment into its 2012 Account 925 and 926 forecast. The capitalized P&B rate authorized in the 2009 GRC decision was 33.2 percent. See D.09-03-025.

Appendix A

Witness Qualifications

A-1

SOUTHERN CALIFORNIA EDISON COMPANY 1

QUALIFICATIONS AND PREPARED TESTIMONY 2

OF ALEX HERRERA 3

Q Please state your name and business address for the record. 4

A. My name is Alex Herrera, and my business address is 2244 Walnut Grove Avenue, Rosemead, 5

California 91770. 6

Q. Briefly describe your present responsibilities at the Southern California Edison Company. 7

A. I am the Managing Director of the Audit Services Department. I direct and oversee the 8

following activities: 9

Development of a comprehensive and flexible audit plan. 10

Implementation of the audit plan, including, as appropriate, any special tasks or projects 11

requested by management or the Audit Committees. 12

Performance of consulting services. 13

Maintenance of a quality assurance program. 14

Evaluation of the organization’s risk management processes, including environmental, 15

health, and safety risks. 16

Assistance to management in the deterrence of fraud. 17

Evaluation and assessment of the controls, including systems of internal controls, 18

surrounding due diligence processes. 19

Participation in due diligence processes consistent with the direction of the Chief Executive 20

Officer or Chief Financial Officer. 21

Involvement in investigations of suspected inappropriate activities within the Company and 22

notification to management and the Audit Committees of the conclusions, as appropriate. 23

Issuance of reports to the Audit Committees summarizing results of audit activities and 24

significant observations and providing information on the status of the audit plan, sufficiency 25

of ASD resources, and staff qualifications. 26

Recruitment and training of a professional audit staff. 27

A-2

Development and monitoring of the department budget. 1

Q. Briefly describe your educational and professional background. 2

A. I hold a Bachelor of Science degree in Accounting from the University of Southern California, 3

and I am a Certified Public Accountant. I have worked for SCE for over 12 years. Prior to 4

assuming my current position as the Managing Director of the Audit Services Department, I was 5

the Director of Financial and Contract Audits. Prior to my positions in the Audit Services 6

Department, I held management positions in Revenue Accounting, Energy Accounting, and 7

Enterprise Risk Planning (SAP Finance). Additionally, I have 9 years of public accounting and 8

internal audit experience prior to joining SCE. 9

Q. What is the purpose of your testimony in this proceeding? 10

A. The purpose of my testimony in this proceeding is to sponsor a portion of Exhibit SCE-08, 11

Financial, Legal, and Operational Services Volume 1, Part 1 – Financial Services Department 12

and Audit Services Department, as identified in the Table of Contents. 13

Q. Was this material prepared by you or under your supervision? 14

A. Yes, it was. 15

Q. Insofar as this material is factual in nature, do you believe it to be correct? 16

A. Yes, I do. 17

Q. Insofar as this material is in the nature of opinion or judgment, does it represent your best 18

judgment? 19

A. Yes, it does. 20

Q. Does this conclude your qualifications and prepared testimony? 21

A. Yes, it does. 22

A-3

SOUTHERN CALIFORNIA EDISON COMPANY

QUALIFICATIONS AND PREPARED TESTIMONY 1

OF GEORGETTE HUCKABY 2

Q. Please state your name and business address for the record. 3

A. My name is Georgette Huckaby, and my business address is 2244 Walnut Grove Avenue, 4

Rosemead, California 91770. 5

Q. Briefly describe your present responsibilities at the Southern California Edison Company. 6

A. I am the Director of Finance, Support Organizations and I have responsibility for the centralized 7

financial interface with Information Technology, Human Resources, Operations Support, and 8

External Relations. 9

Q. Briefly describe your educational and professional background. 10

A. I graduated from California State University, Dominguez Hills in 1995 with a Bachelor of 11

Science degree in business with an accounting concentration. My experience prior to joining 12

SCE includes 11 years at Northrop Grumman Corporation. At Northrop Grumman, I held the 13

positions of financial analyst and accountant in Overhead Administration, General Accounting, 14

and Accounting Systems. I joined SCE in 1995 as a business analyst and was promoted to 15

Manager of CSBU Finance in 2000 where I was responsible for the development of CSBU’s 16

O&M, capital, and Other Operating Revenue forecasts and financial support in the 2003 and 17

2006 GRC proceedings. In 2009, I was promoted to CSBU Director of Finance and 18

Administration. In late 2012, I assumed my current position. 19

Q. What is the purpose of your testimony in this proceeding? 20

A. The purpose of my testimony in this proceeding is to sponsor the portions of Exhibit SCE-08, 21

Volume 1, Part 1, entitled Financial, Legal, and Operational Services - Financial Services 22

Department and Audit Services Department, as identified in the Table of Contents thereto. 23

Q. Was this material prepared by you or under your supervision? 24

A. Yes, it was. 25

Q. Insofar as this material is factual in nature, do you believe it to be correct? 26

A-4

A. Yes, I do. 1

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